The Capricorn Effect and May Sell-off

[freedom]

Time, to retail investors, is their best advantage. Institutional fund manager normally can't sit through 2-3 years, hence at a bear market, they might tend to either switch to defensive stocks or have less unhedged exposure to the market (0% net).

For retail investors, if they are able to find good quality companies at a cheap price, why move to dividend yielding stocks so as maintain paper profitability. Of course, it is subjected to one's risk appetite. If he/she is able to stomach through volatile times, then it will be better to switch out from dividend yield to move to those cheap and good companies.

what you have said is more for young people. for people who are older, cash flow sometimes is more important than growth/prospects. e.g. sudden loss of jobs, unexpected large bills, children's school fee. Dividends can help a lot in cash flow perspective.

[dzwm87]

what you have said is more for young people. for people who are older, cash flow sometimes is more important than growth/prospects. e.g. sudden loss of jobs, unexpected large bills, children's school fee. Dividends can help a lot in cash flow perspective.

yes you're absolutely right. I missed out that point too. Not only risk appetite but also stages of lives..in that case, then dividend plays is definitely more important.

my bad. had a subtle assumption.

[KopiKat]

what you have said is more for young people. for people who are older, cash flow sometimes is more important than growth/prospects. e.g. sudden loss of jobs, unexpected large bills, children's school fee. Dividends can help a lot in cash flow perspective.

yes you're absolutely right. I missed out that point too. Not only risk appetite but also stages of lives..in that case, then dividend plays is definitely more important.

my bad. had a subtle assumption.

Ah... but there are many ways to skin a cat (no offense to cat lovers, I'm one myself).

I used to maintain a tiny discipline in following what liitle I understood from Benjamin Graham's book to maintain some Bond : Equity mix in my portfolio. But, after reading what Peter Lynch had to say in his books (with Mathematical example), I'm now fully into equity. What he say, I may have wrongly understood and applied to my approach...

Although Dividends does contribute to a better degree of certainty to cash flow, especially important to older folks, it doesn't mean you can't get the cash flow from selling some of your stocks. Even if they are having losses, why not? What's so different from holding a Dividend Stock (suffering from Paper Losses) and waiting for the dividend payout for the 'predictable' cash flow?

In some cases, I may even sell a smaller loss-making stock in order to buy one that'd dropped a lot more in % terms. When the market do finally recover, guess what? As long as you'd made your decisions based on valuations, the money placed (switched to) in a more under-valued stock ultimately leads to a bigger improvement to portfolio performance. The problem is... how accurate is your valuations??

[freedom]

dividends as a predictable cash flow can help offset everyday expense in the case of job loss or unexpected larger expenses e.g. one more kid. if you were to sell a counter for such cash flow problem, normally, you would not have a chance to buy it again or switch to another counter because the proceed would have been spent.

Essentially, what dividends really help is buying time for a recovery in your portfolio so that you don't have to sell at the bottom of the market.

I believe what Ben Graham described the distribution between fix-income security and equity still applies, especially for people who has retired or has no stable income. just like any company, you need cash to pay for everyday expense and you surely don't want to sell your equipments and machinery for cash flow problem.

[dzwm87]

In some cases, I may even sell a smaller loss-making stock in order to buy one that'd dropped a lot more in % terms. When the market do finally recover, guess what? As long as you'd made your decisions based on valuations, the money placed (switched to) in a more under-valued stock ultimately leads to a bigger improvement to portfolio performance. The problem is... how accurate is your valuations??

Yes indeed. The key is not the amount of 'paper profit/paper losses' but the opportunity cost available. An investor should be more aware of its opportunity cost and not simply be concerned about how much its portfolio is currently making - that can be deceiving to one's emotions and in worse cases, may just be temporary paper profit.

Personally, for small capital portfolio (anywhere below $50K), I will prefer a very concentrated approach. Better to focus your attention on the 1 to 3 eggs in a basket than having a diversified approach in both stock holding and your due diligence. Of course, one may argue a concentrated approach can have a lot of risk. But, for myself, I believe that such 'risk' can be mitigated via a disciplined margin of safety approach - you don't go for stocks with only 20-30% gain but those which potentially can hit 80-100%. So even when bad times hit, your losses can be minimal or your gain can be reduced to only 20-30%. Same logic as 'aim for the stars, even if you fail, you will land on the moon'.

[KopiKat]

dividends as a predictable cash flow can help offset everyday expense in the case of job loss or unexpected larger expenses e.g. one more kid. if you were to sell a counter for such cash flow problem, normally, you would not have a chance to buy it again or switch to another counter because the proceed would have been spent.

Essentially, what dividends really help is buying time for a recovery in your portfolio so that you don't have to sell at the bottom of the market.

I believe what Ben Graham described the distribution between fix-income security and equity still applies, especially for people who has retired or has no stable income. just like any company, you need cash to pay for everyday expense and you surely don't want to sell your equipments and machinery for cash flow problem.

In my IDEAL factory, I'd maintain enough 'Working Capital' for normal operations + some extra for unforseen circumstances (in the more than ideal situation, I'd even have extra for unusual circumstances to acquire other factories at a good discount). The FCF generated would ideally be ever growing so as to qualify me as a 'Growth' biz under normal circumstances and allow me to at least have enough even under poor biz conditions.

In such a case, I'd be having more 'Equipments & Machinery' than required (to maintain a minimal FCF). During extraordinary times, if I see better 'Equipments & Machinery' that are more efficient which happens to be selling at a huge discount, I'd dip into my excess cash to buy them. Assuming I'd run out of cash, it's not unforeseeable for me to sell some of my less efficient 'Equipments & Machinery', even at a loss (based on Cost / Book Value, depending on your own accounting recognition) to swop for the better ones.

Even in a less well managed factory where I run out of excess FCF, I'd still go ahead and sell some of the excess 'Equipments & Machinery' to swop for the better ones, as long as the discount is attractive enough. The more efficient 'Equipments & Machinery' would after all result in more FCF.

Under the situation where I don't have any excess 'Equipments & Machinery' and the FCF generated is just barely enough for my 'Working Capital' then ya, your are right!

Personally, for small capital portfolio (anywhere below $50K), I will prefer a very concentrated approach. Better to focus your attention on the 1 to 3 eggs in a basket than having a diversified approach in both stock holding and your due diligence. Of course, one may argue a concentrated approach can have a lot of risk. But, for myself, I believe that such 'risk' can be mitigated via a disciplined margin of safety approach - you don't go for stocks with only 20-30% gain but those which potentially can hit 80-100%. So even when bad times hit, your losses can be minimal or your gain can be reduced to only 20-30%. Same logic as 'aim for the stars, even if you fail, you will land on the moon'.

I had a concentrated portfolio of 5-8 stocks for a long time, way beyond the $50k level. The key is to be able to have the time and energy to be put into knowing the stocks well. The main risk comes from ignorance ie. the less you know about the stocks, the higher the chances of 'surprises' and losing money! Unfortunately, now, with young kids around, short of locking them out of my life, I went on a diversification approach to mitigate the risks of not doing enough to know all I ought to know about my stocks...

[freedom]

dividends as a predictable cash flow can help offset everyday expense in the case of job loss or unexpected larger expenses e.g. one more kid. if you were to sell a counter for such cash flow problem, normally, you would not have a chance to buy it again or switch to another counter because the proceed would have been spent.

Essentially, what dividends really help is buying time for a recovery in your portfolio so that you don't have to sell at the bottom of the market.

I believe what Ben Graham described the distribution between fix-income security and equity still applies, especially for people who has retired or has no stable income. just like any company, you need cash to pay for everyday expense and you surely don't want to sell your equipments and machinery for cash flow problem.

In my IDEAL factory, I'd maintain enough 'Working Capital' for normal operations + some extra for unforseen circumstances (in the more than ideal situation, I'd even have extra for unusual circumstances to acquire other factories at a good discount). The FCF generated would ideally be ever growing so as to qualify me as a 'Growth' biz under normal circumstances and allow me to at least have enough even under poor biz conditions.

In such a case, I'd be having more 'Equipments & Machinery' than required (to maintain a minimal FCF). During extraordinary times, if I see better 'Equipments & Machinery' that are more efficient which happens to be selling at a huge discount, I'd dip into my excess cash to buy them. Assuming I'd run out of cash, it's not unforeseeable for me to sell some of my less efficient 'Equipments & Machinery', even at a loss (based on Cost / Book Value, depending on your own accounting recognition) to swop for the better ones.

Even in a less well managed factory where I run out of excess FCF, I'd still go ahead and sell some of the excess 'Equipments & Machinery' to swop for the better ones, as long as the discount is attractive enough. The more efficient 'Equipments & Machinery' would after all result in more FCF.

Under the situation where I don't have any excess 'Equipments & Machinery' and the FCF generated is just barely enough for my 'Working Capital' then ya, your are right!

ideally, one should just maintain enough working capital instead of excess working capital. certainly, in this way, there would be problems when difficulty situation arose, but as long as cash flow is okay, you can go through without much difficulty. In this way, it is morel logical and efficient.

Or would I say in another way, seldom people are preserving excess capital for Armageddon (in extreme), because it could well never happen.

[KopiKat]

ideally, one should just maintain enough working capital instead of excess working capital. certainly, in this way, there would be problems when difficulty situation arose, but as long as cash flow is okay, you can go through without much difficulty. In this way, it is morel logical and efficient.

Or would I say in another way, seldom people are preserving excess capital for Armageddon (in extreme), because it could well never happen.

In my case, I guess I'm not savvy enough. The only bonds I'm familiar with is SGS. In that case, I don't see a lot of difference between having excess cash vs SGS Bonds, at most a couple of % p.a. Thus, I see it as equally inefficient to maintain too much excess cash / SGS Bonds. Perhaps someone would be kind enough to teach me how to get better returns with other kind of Bonds? Which even results in much superior returns in a depressed stock market (as described in Benjamin Graham's books).

My approach (I blame on Peter Lynch) is to invest most of my excess cash in yet more 'Equipments & Machinery'. Yes, Make Hay while the Sun Shines. Usually, when an Armageddon-like event does finally comes along, the NBV (after dividends collected) wouldn't result in too huge a loss (maybe even profit if Armgeddon-like event took it's own sweet time to come) and less painful to sell (if I need the cash).

[CityFarmer]

I had read Peter Lynch book. He has a slightly different approach vs WB. Although he endorses "value investing" as WB, but he uses different approach with different type of stocks. Dividend stocks typically fall under his "Slow Growers" and "Stalwarts" categories. His way is to "rotate" Slow Growers and Stalwarts stocks to achieve higher gain.

After digested Peter Lynch approach, one feasible way is to sell if sufficient gain achieved. You can buy back other "Slow Growner" and "Stalwarts" stocks when their price is right. There is no rule saying you have to buy back the very same stock.

With sufficient number of Slow Growner and Stalwarts stocks in your watch-list, it is more likely to buy back stock ready with the right price to avoid lose of fixed income via dividend

Just my 2 cts

[Temperament]

i am a retiree(64+). All retirees worry about running out of cash before running out of gas. So all of us aim ideally to have enough IGAs generating more income than expenditure per month. i think for new retiree per year will be more accurate. If i am all alone i love to put all my IGAs mainly in dividend income stocks, especially if the dividends generated is more than enough to cover my annual expenditure - no matter bear or bull markets. It is even best, if IGAs in the market are accounted for 1 or 2 counters which may turn rotten unexpectedly(Dream on). Alas, i can not do it.

So i have to do assets allocation. One lot in CPF/CPFIS,(as bond cum emergency fund for anything), one lot in property(shoe box for rental), one lot in the market for dividends + capital income(hopefully), one "cash lot" for daily living and all other miscellaneous lots which i hope i don't ever need to call upon. Next year, on my 65 birthday, i may start to withdraw monthly "allowance" from my CPF's RA.
All opinions for a better assets allocation or money management are welcome.
i just love to learn from a better idea person than me.