StockTakers 2012 Q1 bite on DJI

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February 2012 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited. The author does not provide investment advice. In order to use reproduce or convey the material herein,

in any way, written agreement must be obtained from the author or its agent Architypes Inc.

StockTakers Limited is an Alberta corporation providing information on “likeables” equities.

StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.

Man Bites Man! StockTakers’ 2012Q1 bite on DJI.

The following Table 1 shows which companies in the Dow Jones Industrial Index11 we either bought or held (B) or sold or avoided altogether (N) and that each such decision was in effect for the entire quarter (three months) between early 2009 and the end of 2011 (three years). The extension into January February and March 2012 is also correct and will remain that pending new information as the year unfolds.

Table 1: (B) Buy or Hold - (N) Sell or Avoid

1 The Dow Industrial Companies, Dow Transports, Dow Utilities, S&P TSX Companies, NASDAQ 100, and S&P 500 NYSE

Companies are registered trademarks of well-known companies and organizations with which we have no connection or are in any way connected to StockTakers Limited which is a registered company in Alberta, Canada.

Our primary goal in portfolio management is not opportunism but systematic and pragmatic risk aversion. Our results are obtained using the simple and essentially free mechanisms of the market illuminated by our theory and put into practice where stock price is greater than our Risk Price.

In our view, an “investment” is simply (just and only) a deliberated purchase of risk as for any other purchase. There is a “price of risk” that we may provably discover from the firm. Retail investment is gambling in absence of provably proactive discipline of risk aversion we provide.

In this article, we provide our current view of just the DJI. Also we showi in detail our results of 16% average from 2009 to date, based solely on our Risk Price analysis of balance sheets. That result is 3% better than the market. Our result is also five times better than provided or can be expected by standard methods. We use or own unique methods, by theory proven.

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For example, we bought Alcoa Inc in early 2009 and held it for the next fifteen months, selling the entire holding in the second quarter of 2010 (marked (N)) and re-acquiring it three months later in the third quarter of 2010, and finally selling it again during the second quarter of 2011 (marked (B)) and the beginning of the third quarter (N); we have, moreover, not bought it since and don't hold it now.

In general, we don't really care at what price the stock was bought though typically buy decisions are made early in the quarter in which the company is first indicated (B)2 and sell prices are determined in the quarter preceding an (N) as in a (B)- to (N)-transition; sell decisions (and profit taking) are generally more complicated than buy decisions and explained in the Appendix.

This portfolio returned 58% over three years or 16% per year (compounded) plus dividends which added another 2%-3% per year to our returns; transaction costs were for fifty-one buy decisions including twenty-six in the first quarter of 2009 and thirty-seven sell decisions in subsequent quarters in each of which the entire holding of one or more of the companies was sold because (and only because) of a (B)- to (N)-transition or change.

During that time the Dow Jones Industrial Index gained 39% or 12% per year but the Index at various times (three times in three years) dropped 10%-15% in one quarter or less, and, of course, Index-oriented investors do not generally have any “free cash” unless they sell or redeem some of their holdings uniformly. In contrast, our portfolio never lost money but for a decline of less than 1% in the second quarter of 2010 and again in the third quarter of 2011 and the cash position remained positive at all times. The amount of cash available for re-investment (or other uses) approached the original investment during the last six months of 2011 – there were just no more opportunities for us in the Dow at that time and such monies could be allocated to buy more of what we have (fourteen to seventeen companies, currently) or used in other markets such as the TSX, NASDAQ, or S&P 500 companies in which we have many new opportunities.

Disclaimer

The table and our methods require some description which we'll provide below but, first of all, and most importantly, nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock of any of these public companies at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we also know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

Appendix:

Table 2: Stock Prices Effective By Quarter

2 Our Price Table is in the Appendix and we also discuss the exact logic of our buy/sell decisions; the same logic applies to any and all the

companies and does not depend on any special knowledge about the companies or even what they do.

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For example, Alcoa Inc closed at $11 in December 2008 and, based on our analysis effective as of the end of 2008, was a (B) in the first quarter of 2009; we bought it at $7 (please refer to the Table 2) and then held it for most of the the next thirty months, finally selling our entire holding at $16 in the second quarter of 2011 because (and only because) of a transition from (B) in the second quarter of 2011 to (N) in the third quarter of 2011 (Table 1).

The “timing” of the buy is unremarkable and, generally, we have no control or insight into what the stock price is or was or will be, even days in advance – nor does it really matter because the companies that we buy can be expected to be in our portfolio for long periods of time (typically, fifteen months) and a current “low price” or “high price” is only marginally relevant to that decision. Any company that actually demonstrates an (N)- to (B)-transition – which is a “state change” rather than a mere “price change” - is eligible for inclusion in our portfolio (at any price) but those companies may also have different expected price and dividend behavior that could become a factor in our objectives for portfolio management and what we might buy (although that is not the case in Table 1 which simply records the calculated (B)- or (N)-state of the companies at that time).

The “sell decision” is more complicated because we could take reasonable profits while still holding a residual balance in the stock; for example, we bought Alcoa at $7 and might have sold half of our holding at $13 or $16 six months later and also established a zero cost base for the residual. Sell decisions are also typically enforced by an automatic stop/loss that is executed by our broker and which we calculate in a simple way based on the current stock price (while still in (B)) and our estimate of the downside that might be expected and due only to volatility.

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The same calculation can be used to buy reasonable long-dated puts in order to protect the price and keep the company in our portfolio regardless of the future stock prices, particularly those that we might deem affected only by volatility. Our primary goal in portfolio management is not opportunism but systematic and pragmatic risk aversion using the simple and essentially free mechanisms of the market.

Postscript

A picture is often worth a thousand words and the chart below (Exhibit 1) shows the actual portfolio value (in $000) divided between the equities and the cash account (exclusive of dividends) and the behavior of a notional portfolio consisting of the entire Dow Industrial Companies (all thirty companies) at the same prices:

Exhibit 1: The Perpetual Bond and the Dow Jones Industrial Companies (2009-2011)

It is, first of all, nearly unheard of that a portfolio of equities (The Perpetual Bond, so named for good reasons) can be crafted systematically to outperform the Dow - yet we have 16% per year versus 12% per year in the Dow over a three period and we understand completely how that was done and how we can expect to continue to do it in the future – for decades if we like, being constantly in the market and seldom out of it.

Our portfolio began with a cash investment of $1,153,000 in early 2009 and simply bought blocks of 1,000 shares in each of the twenty-six companies designated (B) in Table 1 at the prices in Table 2, and it is now (February 2012) a portfolio of seventeen companies in the Dow worth $1,130,000 (light band) at the current prices and a cash account of $689,000 (dark band) which is presently unallocated.

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An investor with nerves of steel and no need for cash could simply have bought all thirty companies in the Dow for a similar cash outlay of $1.2 million in early 2009 and would now have a portfolio worth – randomly, so to speak - $1.7 million but still no cash other than dividends worth approximately $25,000 per year, a large part of which we would also be earning in The Perpetual Bond and adding to our cash hoard in addition to the capital gains that are shown in the above chart.

Every investor has their own view of the market and which equities they are motivated to buy and sell; we have nothing to say about that and there is a vast industry of investment technology, data, opinions, and news services that – by our choice – we have nothing to do with and pay no attention to, particularly forward looking prognostications.

Our method is based on the simple observation that investors are not in the market in order to lose their money but expect to maintain and even increase their real capital by obtaining a hopeful return that exceeds inflation, whether Consumer Price Inflation or Producer Price Inflation, nor do we care what those numbers are because we have no influence or insight into the future; we merely expect that the companies themselves will do what they can to deal with the factors of production and sales, and to stay in business, and that retail investing is essentially a passive activity akin to gambling in the absence of a provably proactive discipline of risk aversion.

In our view, an “investment” is simply (just and only just) a deliberated purchase of risk because there is a “price of risk” that we may provably discover from the firm balance sheet. Based on our Risk Price a company gets a (B)-rating from us if and only if the current and prevailing stock price (despite volatility) appears to be above that price of risk. Otherwise it gets an (N)-rating. Our reasons for having any equity in our portfolios are clear, concise and consistent. The equities we hold are “likeables” tending to gain 67% of the time. We do not make stock prices but can reasonably respond to stock price tendencies, by our knowing the price of risk, the downside, and buying and holding accordingly. That is new fundamentals from theory we have put into policy obtaining 29% IRR average. Know What You Have. Have What You Know Our view is risk averse. Of course we require a fee for doing that. Call us for our help. Ernst and Hans Goetze, Architypes Inc and StockTakers Limited

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StockTakers 2012 Q1 bite on DJI

Economy & Finance

Transcript of StockTakers 2012 Q1 bite on DJI