August thus far has been a nothingburger for traders. But are we witnessing the re-emergence of the long dormant buy-and-hold investing strategy? Benjamin Graham redux?
WASHINGTON, Aug. 10, 2016 – We’re back in D.C., a bit groggy and trying to get our heads back to Eastern Daylight Time from Mountain Daylight Time. Should we ever decide to retire to America’s southwest, we’ll have to learn to get up earlier in the morning, as trading begins at 7:30 a.m. in that time zone. That could be tough.
What’s also tough, as we look at today’s market action, is that we seem to be in the midst of a narrow trading range that could persist indefinitely. The market seems frightened once again of a Federal Reserve interest rate boost in September. From a commonsense standpoint, that’s fiscally unlikely. But in today’s Washington environment, nothing illogical is ever off the table, provided it makes the rich richer and gets Democrats re-elected so this situation can persist.
In the meantime, we have what we have. At 3 p.m. EDT, an hour before the market’s closing bell, all three major averages, the DJI, S&P 500 and the NASDAQ, are off between 0.25 and 0.5 percent—nothing to write home about.
In politics as in investing, life is getting ever more complicated. Information, as such, is more plentiful than ever. But the truthfulness of that information—not so much. Whether we’re in the voting booth, or looking to buy or sell an investment online, we’re all basically on our own now, trying to glean as much truth as possible from the vast quantity of internet flapdoodle floating through the media 24/7. We’ll get through it, of course. But with great difficulty.
Trying to get “re-orientated” (our latest favorite term mis-use) with August’s market inaction after our excellent New Mexico road trip, we find that the kind of bargains we’re looking for are few and far in-between. Stocks, in our view at least, are overpriced for now in terms of likely future earnings. Yet there’s nothing much else out there for income-starved investors to buy.
Believe it or not, things have gotten so boring that we’re beginning to notice something that the sell-side CNBC blow dries have failed to see, at least publicly: Perhaps, at long last, we are returning ever so cautiously to the buy-and-hold strategy that almost always seemed to work since Benjamin Graham more or less invented it back in the first half of the 20th century.
This approach hasn’t really worked very well since mid-to-late 2007. But we’ve been trying it selectively lately, and we’re doing better with it than we have been with our faster trades.
Examples: In our most active trading account, we’re up roughly 13 percent in both Blackstone Group (symbol: BX) and KKR (KKR) since gradually re-acquiring both positions back in May. We’d earlier sold earlier positions for a profit and bought them back at a better price that month. Their fluctuating but still-attractive dividends have made holding on to them worthwhile, even though they get blasted every time the financials do. We will continue to hold indefinitely, as holding stocks for three months scarcely qualifies (yet) as “buy and hold.”
Ditto our large position in Allergan Preferred Class A (AGN/PFA, symbol different at some brokerages). That stock took a hit a couple of trading days ago when parent company, drug manufacturer Allergan (AGN), reported improved earnings that were, however, based on lower revenues.
Irrationally, investors dumped the preferred stock even as they battered the common, indicating some machine-trading shenanigans were involved. The preferred stock:
- Currently pays out a 6.17 percent yield on a 5.5 percent coupon since the preferred currently trades at a significant discount; and
- The preferred is set to be redeemed at par ($1,000) on March 31, 2018.
In other words, you buy it now at a discount (it trades at $895 as we write this), collect $13.75 per share quarterly until March 31, 2018, and then collect an over $100 per share long term (tax favored—for now) capital gain when the shares are redeemed at $1,000 per share.
Yeah, this one is expensive for little guys like you and the Maven. But we’ve gradually acquired a substantial position—for us at least—by picking up three shares each time irrational traders beat it down. Our average purchase price thus far is in the low $800 range. We’re disinclined to pick up any more right now, primarily because our already large position makes our portfolio diversification… well, rather undiversified.
Yet this preferred stock, along with BX, KKR and others yet to be found, are the closest things we’re finding in this market to the bond situation we profited from enormously back in March 2009, when we bought deeply-discounted, BB+ rated bonds at nearly 50 cents on the dollar in that month’s ultimate bond-dumping climax. Effective yields at those prices were close to 10 percent, even for munis, and we enjoyed that effective interest rate until each and every one of those bonds were called (redeemed) early at par ($1,000) giving us the kind of capital gain you can only dream about in the bond world.
For us, the Holy Grail is a situation where all the smart guys in the market fail to recognize truly asinine bargains in neglected sectors, allowing us little guys to sneak in first and scoop them up. Granted, this doesn’t happen very often, but when it does, you take a gulp of Maalox, get in there and buy this stuff up ASAP before the bigwigs figure it out.
Could we get hurt doing this? Yep. Nothing in the market is guaranteed. But odds favor the continuing survival of Botox-maker Allergan and robber barons Blackstone and KKR even in the worst of environments, so we’ve decided to take our chances here.
All three holdings, BTW, will need to stay in our portfolios longer term—hence, the creeping possibilities of getting back to buy-and-hold. Next territory for this game—selective buying of REITs, as we’ve been suggesting now for at least a month or two. They’re largely under pressure now, due to changing government regs (as usual) plus those Fed interest rate hike fears.
On the other hand, come mid-September, REITs will be hived off from financials to become their own S&P investment sector, compelling indexed S&P and sector ETFs and mutual funds to load up in this area. That means they’ll have to increased in price due to effectively mandatory buying. We’re already seeing some of this, but more will continue as the September happening approaches. Best to get in early to avoid the price-increasing September rush.
Yes, depending on circumstances, this could be a trade rather than a long-term hold. But, lest we forget, REITs tend to offer above average yields in a yield-starved environment, which makes them easier to hold in a downturn. So, on balance, we’re selectively acquiring some holdings here. We currently own New Residential (NRZ) and Two Harbors (TWO), both of which have diversified somewhat from purely real estate investments into some loan servicing arrangements.
We’re also looking to get back in to our one-time holding, Independence Realty (IRT) on any selloff. Unlike many mostly mortgage-holding REITs, IRT actually owns apartments—lots of them—and rents them out for a profit. What a concept. Yield is currently a decent 7.5 percent, give or take.
Another possibility is REM, an ETF that holds a batch of high-yielding REITs. Granted, the price trajectory of this ETF itself has been lousy for at least two years, given Fear of the Fed. But the yield has remained juicy throughout, with the added plus (for IRS-beleaguered investors like the Maven) that you don’t have to deal with a bunch of K-1 forms, which you do when investing in traditional ETFs.
REM is taking another hit today, and we’d love to start acquiring some if it drops back down below $10 per share. (It trades right now at $10.87).
Finally, for lower yield but greater capital gain potential, we’ve been gradually nipping back in to Schwab’s REIT ETF, symbol SCHH. No commish for this one if you trade with Schwab. That’s persuasive, as is its decent track record and modest yield. You can get similar deals with Fidelity and Vanguard ETFs, depending on your brokerage, BTW, and over the longer term, Vanguard’s REIT ETF, VNQ, has tended to be a stellar performer.
That’s it for now. But, barring a Wile E. Coyote-style market cliff dive—always a possibility—or some massive Federal Reserve interest rate hike, we’re slipping REITs into our portfolio in advance of that September S&P 500 adjustment.
Just a final reminder—we’re telling you what we’ve done, contemplate doing or dreaming about in our own portfolios. We’re not registered investment advisers (although we used to be back in the day). So do plenty of research before you move. As we learned in registered rep training many years ago, absolutely nothing is “guaranteed.” If you ever hear that word from an investment adviser, do a 180 and start sprinting in the opposite direction.Click here for reuse options!
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