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written by reader Just For the Record


By theblindsquirrel, February 20, 2014

[Ed. note: Today we have another article from Jim Skelton, the Blind Squirrel, who is sharing his experiences as a financial advisor with us. He has agreed to our trading restrictions, the opinions he expresses are his own, and we haven’t reviewed, approved or screened his ideas. His previous articles can be seen here.

Hello, fellow GumShoers! The Blind Squirrel here once again to share some thoughts and musings I hope you may find help you become even more successful investors.

This month’s article is entitled “Just for the Record.” I’m going to explore some of the many methods I observed investors using to keep good and accurate records of their investment transactions, the way they held their portfolios so as to give them deeper and faster insight as to what was working and what was not, and how they understood what they owned and why they owned it. I found there are about as many ways to go about this as there are individual investors. Some help. Some don’t. I learned by observation that a lot of people simply don’t do enough to keep themselves fully informed and aware of portfolio performance.

To start, I’d like to quote from two of my all-time favorite investment gurus, Peter Lynch and Malcolm Forbes, Sr. In the 1980’s I always loved reading what Lynch had to say about this process we call “investing.” For those of you who were investing in, say, baseball cards or cats-eye marbles instead of tech and telecom stocks back then, Peter Lynch is the guy who ran the Fidelity Magellan Fund in a single-manager format and wove his way through the financial jungle making awesome picks along the way. Investors in the Magellan Fund that held on through all the financial noise of the 80’s made astounding returns for a mutual fund. His style was rather simple and forthright, his writings and advice easy to follow. And he had a knack for stating a complicated thought in a way that was easy for us much lesser mortals to grasp. The quote from him I always keep in mind is: “Know what you own, and know why you own it.” Sounds simple enough, elementary even. But you’d be amazed at the number of people who don’t follow that simple rule.

As for Forbes, Sr., he was fond of repeating a verse that actually comes from the Bible, chapter and verse I forget. He would say, “with all thy getting, get understanding.” He intended that as a life statement, but also as a way to view investments. You must understand what you own and why you own it.

Taken together, these two quotes tell you the same thing in different ways. If you subscribe to the idea that you ought know what you own, why you own it, and understand the reasons behind it all, you may then ask, “OK, Squirrel, so how can I maybe improve my understandings? I do my due dilligence to the best of my ability already. I read and consider the thoughts of other investors about whatever it is I’m considering. I use screening methods to ween out companies that don’t meet my criteria. I look at both fundamental and technical data before picking an entry point when all else gives me the go light. What else is there to do?”

That “what else” can be answered in a single word: records. Keeping good records, that is. Meaningful records of transactions considered, transactions discarded, transactions completed. Meaningful records of the positions you currently hold that give you insight into your positions taken both individually and as a whole. Records that take very little time to compile (we all get weary of doing things that are complex and difficult), records that are based on simple metrics that are easily tracked, and records that, at a glance, tell us important things we might not know as well as we sometimes think we do. Keeping good records of your business will serve you well in the present and the future. And since I just used the word “business,” let me add this thought: If you are serious about becoming a successful investor, building a portfolio that works for you as you would like to see it do, and wind up in your Golden Years living a good life from the income and capital gain that portfolio has created, you must began to view the process as a real business, not a sideline or some sort of hobby. A real business requires discipline, attention, and a plan. Not just a hit-or-miss approach where simple hope is the primary driver. I’ll have a lot more to say about that in some future article. I am passionate about the importance of this subject. But now, back to today’s topic of “records.”

During my career as a Financial Advisor I got to see literally hundreds of accounts as prospects became clients. And if all clients seemed to have one thing in common, it was that they almost always transferred in two accounts: one was the general purpose, taxable, account (held in joint name if married); and the other was an IRA (two IRA’s if a spouse was involved). Two accounts. Holding all manner of investments accumulated over time, intermixed, and the resulting impact each of them had on overall portfolio performance getting lost in the shuffle. From novice to war-worn investor, few could give me a coherent and rational explanation of how and why they came to own some of these positions, and why they continued to own them. If asked, most replies were on the order of, “well, it’s done well for me over the years” or something like that. If I dared press the issue and inquire as to what “done well” actually meant in dollar or percentage returns, things got real fuzzy, real fast. It became apparent to me that, as portfolios grew in size and number, the ability for the investor to really understand what was happening and why decreased in inverse proportion.

But that was back in the day, the days of cash accounts where reporting statements were about as basic as you can get. You just got a paper statement once a month (or maybe only once a quarter) that showed you the name of the position, its current price per share, the number of shares, and the current value. Nothing at all about cost basis, gain/loss, etc. The investor had to keep all those records for herself or depend on her Financial Advisor to do it for them. And if they depended on the Advisor to do so, then later transferred the accout to another broker or firm, those records were generally lost to her. Trying to calculate cost basis and gain/loss was an accountant’s worst nightmare.

But things gradually changed. Brokerage firms began to improve reporting, and from the mid-1980’s, with Merrill Lynch’s introduction of the revolutionary Cash Management Account (CMA), right through today, the statements investors now get are light years better than what came before. And you can get it all online, updated by the minute, not the month. I tell you true, those of you readers who have entered the market in the last few years have no idea at all how great you have it when it comes to information and research abilities. When on occasion I reflect on how much has changed due to the internet and personal computers, I wonder how in the world we ever got anything at all done using pencil, paper, and the post office.

Anyway, I was as guilty as anyone when it came to that two-account arrangement up until a year or so ago. I had my general investment account where I held ready cash and a few stocks, mostly high-risk, potential high-return types. The objective was simple: use this account to buy the things that made my life easier and more fun, and to provide a ready reserve of cash to meet unexpected major expense like the new fridge I had to get last month. And to give me a little latitude to satisfy that part of my personality that likes living on the edge, seat-of-the-pants, speculation that at my age I really ought not be involved in anymore but can’t resist.

But the IRA was a very different situation. Very. While money came and went from the personal account due to different life-altering factors, the IRA changed only due to contributions and investment performance. I had opened it in the late 1970’s with a $1000 contribution and built on that as time and finance allowed. Starting in the early 1990’s I had the opportunity to add much larger sums to it as I changed firms three times and rolled over 401(k)’s. Plus the fact that for the most part I was investing during the Bull Run that was the 80’s and 90’s and benefitting from that circumstance, the IRA had grown quite a bit. After all that time I had stopped using mutual funds as investment vehicles as well as fixed income vehicles (bonds). I was 100% in equities of one kind or another, and, by late summer of 2013, had amassed a total number of 62 positions in the IRA. Now, don’t go gettin’ all excited here. That’s a lot of positions, sure. But most are small in terms of dollars invested. I have “enough” (I hope), but am no seven-figure investor. Hardly. And I finally realized I needed to get a much better grasp of what I owned and why, just as I mentioned when I began this article. I was exactly like the clients I once had.

When I recognized that need to become better organized in order to achieve Forbes’ concept of “Understanding,” I came to the conclusion that what I needed to do was in some way classify my positions so as to be able to group like with like. Once that was done I could then compare results from each category against one another. That way I could tell what was actually driving my overall results, what percentage of my assets were devoted to what classifications, and therefore have an idea of where to redeploy money or employ cash raised from sales. My starting question became: what is a “classification” and how can you separate positions easily into those? What criteria is to be used to create these classifications and how will you separate holdings so the results and performance data for each is easily seen?

What I’ll now show you is the actual process I used and where it led me. I recognize that the way I went about it was appropriate and meaningful to me. If you choose to adopt some similar approach and apply it to your investment positions, you may well use different criteria, different classifications, etc. There is no “right” way to do this, other than what is right for you.

Creating Classifications

Step one in creating these classifications is to determine what metric(s) you want to use to differentiate one company from another. Being a simple kind of guy, I wanted to employ that age-old K.I.S.S. principle of, yes, keeping things simple. I thought through what aspects of an investment were important to me and arrived at an answer that would allow me to segregate one type from another easily and quickly. That primary criteria is yield, with a secondary consideration of growth potential. I repeat – these are the criteria important to me at my stage of the game. Yours may be quite different. Use what works for you.

Since I am now more dependent than ever on the income my investments provide me, yield is an important factor. Not only that, but I know, as you probably also do, that stocks which have a solid, rising dividend tend to give better and more stable long-term results. Not the biggest results, mind you. Just more dependable. Many studies have verified that dividends contribute from 30% to 50% of the overall return on equity investments over time. I, for one, don’t want to miss out on that component. So yield became my primary data bit to start classification with.

But I can’t stop trying to grow value. Running out of money before you run out of time is perhaps the worst thing thing can happen to a person. I don’t intend to let that happen if Mr. Market will allow it.

Now that I knew what my criteria would be, I had to set some limits to see where on the scale I devised a stock would fall. And I had to create the classifications I would use to place those stocks once I determined where they belonged in my universe. To begin, the classifications I came up with are labeled as:

  1. Income
  2. Income and Growth
  3. Aggressive Growth
  4. Special Purpose Portfolios.

I decided to leave out the positions held in my General Purpose taxable account. Since I am constantly moving money in and out of it, and I trade the very speculative positions it holds on a fairly frequest basis, tracking returns is quite difficult what with all the adjustment calculations that would be necessary. So I simply track each individual position in it using the data provided by my brokerage firm, Fidelity Investments. Once again, employing the K.I.S.S. principle so as not to get too bogged down in minutia.

Now that I had named my portfolios I needed to set the parameters that would determine which each position belonged in. Yield was my chosen metric, and I used the following scale:

Income Portfolio

To make the cut for this portfolio a stock had to have a minimum yield at time of purchase of 5.00%. In fact, in order to give a little wiggle room on that rate of return that could be caused by a quick change in either price or dividend, I tried to keep the entry point at ~5.50% or so. That way if the price per share went up rather fast after purchase, or the dividend got cut, the position would still be in the proper portfolio. I also made a mental note of what I suppose is something of a sub-category within these companies. These are companies with a current yield of 8.00% or higher. I think of them as “Turbo-Payers,” companies with an inordinately high yield that might be a result of a large price decline with the dividend holding steady, or a big bump in the dividend due to some extraordinary earning event. Yes, these Turbo Payers do exist in areas such as the mREIT’s, a few energy companies, some MLP’s, leveraged ETF’s, etc. Buyer beware.

As for my expectations in this portfolio – and your expectations may vary from mine – I decided that with income being such an important factor here, it wasn’t likely that I could also expect big swings in price. The dividends were the main focus of these holdings, not necessarily capital gain. In fact, I don’t want to see a lot of volatility here. This portfolio is assumed to be a sort of anchor of stability for the rest of my more aggressive holdings. So, for no particular reason other than simplicity (are you seeing a trend in the way I think yet?), I set a range of + or – 10.0% from my initial buy price. I don’t expect – or even hope – that this range will be violated. If it is on the upside, happy day! If on the downside, a big red flag goes up and the position will be re-evaluated as to why this occurred, and can I expect recovery? Do I hold, buy more, or sell? For example, currently I have two positions in the Income Portfolio with gains that exceed 10%: Northern Tier Energy (NTI) up 29.16% and Raytheon Co. (RTN) up 20.27%. None of the 16 positions in the portfolio at present are down more than the 10.0% benchmark (four positions are currently in the red), with the worst being Awilco Drilling PLC (AWLCF), down (5.56%). The portfolio as a whole is now up 7.10%, not including dividends. This portfolio represents 37% of total assets.

Note: this minimum 5.00% yield requirement I currently use is a moving target. As you know, interest rates aren’t static. So, over time, this 5.00% I now use can, and probably will, become out-of-date at some future time. To make adjustment, I consider the yield on the 10-year treasury my benchmark. I want an income position to have a current yield of at least twice that so I am getting paid for the increased risk. As of today, with the 10-year around 2.65%, I am getting close to having to make a change in this thought process. If the treasury yield gets to 3.00% or higher and holds that for at least six months, I’ll reconsider and adjust accordingly.

Note: for my purposes I use the forward-looking yield calculation method where I take the most recent quarterly (or monthly) dividend, back out any return of capital or special payout amounts, then multiply by four (or 12). This assumes that the payment an investor just got remains constant over the coming year. I considered using the Trailing Twelve Months (TTM) approach but decided I wanted to be forward-looking in my calculations, not looking at what was, but what could be. You decide which method you prefer – one can not be said to be more appropriate or accurate than the other.

Income and Growth Portfolio

With the upper level of yield in place at 5.00%, the yield on companies in this portfolio was self-evident. A stock had to have a yield of 0.50% to 4.99%. I set the lower end at 0.50% simply because anything less than that is going to be insignificant in terms of creating much additional return or providing a cushion against decline. But the companies had to have a dividend to make it into this area, no exceptions. Growth potential alone won’t do it.

Expectations for these positions changed somewhat. I look for increasing dividends over time. And I expect reasonable capital gain over time. “Reasonable” to me within this universe of companies would be tracking the S&P 500 in a plus or minus 10.0% range, measured annually. One can pretty much assume that, with a dividend level of this size, the companies have moved out of the small-cap, fast-mover categories and more into a maturing business where shareholder value creation is taking solid root, there are real and sustainable earnings, YoY sales increases and market share is growing, actual products/services being offered and sold, and a dynamic business model with good management to execute it.

So here I seek growth with an income component that helps boost that overall return and provide a little something to fall back on when the overall market trend is to lower prices.

As example of companies and returns in the Growth and Income Portfolio: I am holding Gaslog Ltd. (GLOG), up 45.16% and Exelis Inc. (XLS), up 23.97%. On the downside I have URS Corp. (URS) down (21.42%) and Tal International Group (TAL) down (9.23%). Of the 14 positions in this portfolio, four are at a loss and 10 are profitable.

Taken as a whole the portfolio is currently up 7.97% excluding dividends. This portfolio represents 30% of total asset value.

Aggressive Growth

Having created these first two classifications based on yield I was left with just one other option: create a final class that had no yield at all and whose primary objective was growth and growth alone. The only small limitation I mentally placed was that these positions would be in something a notch above what might be called “Highly Speculative” in nature, although getting a handle on the difference is sometimes a really thin line. Nevertheless, all stocks which remained in the starting portfolio were placed here.

My expectation for these investments was to show results in a much shorter time frame than the other two classes. I want to see positive results within the first 12 months at the most. At times even six months seems an eternity and can bring into question whether or not the decision to buy was sound. I keep a close eye on developments at these companies and, if losses are mounting to exceed 20% below entry levels, that will in many cases cause me to sell, unless I can find a compelling immediate reason to hold. The old market advice of “cut your losses short and let the profits run” applies.

Of the 10 positions I currently have in this classification, the best performer is ARCAM AB NPV ISIS (AMAVF), up 40.50%. It is followed by 3D Systems (DDD), up 32.53%. The losers are Opko Health Inc. (OPK), down (14.29%) and Ascent Capital Group Inc. (ASCMA), down (12.77%).

Taken as a whole, this portfolio is up 6.14%. This portfolio represents 20% of total asset value.

Special Situation

This final classification is probably somewhat unique to my needs and may not apply to you. That’s because the positions in this portfolio are run under a strict set of guidelines where no variance is permitted. It is, one might say, a “managed” account that actually requires little management. I just follow the dictates of a particular strategy and the stock picks are done for me.

What is this? You all know it as the “Dogs of the Dow” theory of investing. A person buys equal dollar-weighted positions in each of the 10 highest yielding stocks in the DJIA on January 1st of each year. Hold those ten positions without adjustment until January 1st of the next year. Run the yield calculations for the DJIA component issues, compare the then highest yielding stocks to the list of those you own. If something you own isn’t on the new list, sell it. Use the proceeds to buy whatever company it is that replaced it (there can be more than just one, sometimes as many as three in my experience). Then hold for the coming year and repeat over and over and over.

I discovered this process in 1989 when I read the book Beating the Dow by Michael O’Higgins. I didn’t believe the claims he made. Wall Street had not discovered this process or endorsed it at all. But, in 1991, when I was seeking something solid to offer clients and prospects that would set me apart from other Financial Advisors, I remembered this book and dug it out for further study. Long story short, I adopted this process as a way of giving clients a quasi-managed account with very low fees and excellent results when measured against the benchmark of the DJIA year-over-year. It became the single best prospecting tool in my bag and, measured by dollars invested, the biggest position in my book of business.

So it’s only natural that I continue to use it for myself given the success it provided my clients over the years.

But it not only is a solid investment idea that has a long history of outperforming the Dow in good years and also – maybe even better – showing less decline in bad ones – it gives me one other thing. It gives me a benchmark against which I can measure my own talents in picking stocks. And I can’t avoid the hard light it shines on those abilities or lack thereof. In other words, it keeps me honest with myself.

The best performer is Merck (MRK), up 14.49%. The worst is Chevron (CVX), down (9.75%) . Taken as a whole, the portfolio is up 1.43% YTD.

In the case of this portfolio, dividends are included. I have all positions set up on DRIP plans so they are used when paid to purchase full and fractional shares of the underlying security. This portfolio represents 13% of total asset values.

Now – For the Records

Now that I had all these classifications defined and the stock I own appropriately placed in them, I had one final thing to do to make all this meaningful. I had to create a way to see these portfolios individually, not lumped together in one unwieldy account. So I called Fidelity customer services, opened three new IRA’s (the original one was left as is but holding only the positions I classified as “Income”), and gave the representative instructions as to which positions were to be transferred over into which of the three new accounts. I had them nicknamed according to the classification and viola! – I had what I was seeking. A way to see my investments grouped by like kind and then compare the performance of each group against the others with ease.

From that ability I can now tell unerringly what type of investments are outperforming others. This can help guide me in making choices for future investment. It keeps me informed (once I do some basic math calculations) as to what percentage of my overall holdings are devoted to what type of investments. I measure that against a scale of my own device showing what percentage I want to stay within in each classification so as not to get over or under weight in any particular category. This helps me manage risk.

To gather together all this information and make it simple and easy to use, I take one final step.

On the 15th day of each month and on the last business day of that same month, I print out the five position reports that Fidelity provides on a daily basis. This shows me basics such as position, current value, cost basis, and gain/loss in dollars and percentage for each individual position and for the portfolio as a whole. I take those and go really old school. Using a blank piece of paper, a ruler, a pencil, and a little calculator, I draw up a cover sheet for these reports. It’s entitled “Account Summary Statement a/o (date of close of business).”

On the left half of the paper I enter the name of each portfolio, each one being about 2″ below the previous. I leave about 3″ of space at the bottom blank. To the right of each I make columns for “$ Value a/o (whatever), “$ Value a/o (whatever previous reporting date),” and “Change in Value, $ and %.” I get the values from the Fidelity reports and enter them under the proper heading. I calculate the change in dollar value and then as a percentage change from the previous period and enter those. Then, in the space I have under the Portfolio titles on the left I make brief note of any significant changes I made in that portfolio during the current time period. Things like “sold CVX, bot MSFT” or “tsfrd $2500 to GP a/c.” Anything I might want to remember as it could relate to valuation changes. And just to the right of the portfolio name I enter the percentage of total value that portfolio represents at the time of calculation. I have set mental allocation values for each, upper and lower, and compare those parameters to the actual results. From this I can see where adjustments may be warranted.

At the bottom of these portfolio listings I do a summary total value calculation so I can see at a glance what direction the portfolios as a whole took and to what extent in both dollars and as a percentage.

Last, in the space at the bottom I left available, I record a few data points for reference. Things like the DJIA level at the end of the previous report and what it is now, then calculate the % gain or loss for this period to compare to my own. Maybe a short note on the spot price of oil, gold , silver, etc., the 10-year treasury bond yield. You can see what I’m getting at.

I then take this cover page and staple it to the individual portfolio reports from Fidelity and I have a handy-dandy little booklet, a summary guide of all my holdings, classified by type according to my own specifications, and held together so I can measure results, one class against another, with no guesswork involved. It gives me Understanding. And it helps me know what I own and why I own it.

Mission Accomplished!

So, after all this effort, what do I now know that I didn’t really understand before? Several things, actually. I know exactly what percentage of each my classification represents. This I now use to direct me in which areas I may need to increase allocations and which to reduce. This helps manage risk. I know which type of stocks are currently leading others in the area of capital gain. I can see clearly what areas are lagging, and this helps me make decisions once again on where to deploy available assets. I have measurable benchmarks that I can compare my own results against so as to remain honest with myself on my skills – or lack thereof. Is there more needed to justify the effort? I think not.

My hope this month is that I have given some of you a few ideas to think about and consider, where the way you hold your investments is concerned, and how you classify and compare them. Yes, it takes some time initially to get set up. Once that is done, however, the bi-weekly stuff takes me less than 30 minutes. But this is your business, remember. Not a hobby, not an idle game of entertainment. Your future security and well-being may be riding on the outcome, so treat it as such and, of all you invest, be willing to invest time in the management and supervision of these assets.

Next month I’m currently planning to take this record-keeping process a little further and show you what I do in addition to what I’ve outlined here. Without those records I’d be lost. If you aren’t doing at least some of the things I’ll be covering – and I suspect you already are – then you may be missing out on a lot of information you once had but either lost or forgot. And will probably someday wish you had. I’ll show you how to stop that from happening easily. Forewarning – get ready to buy three-ring binders. A lot of three-ring binders! :0)

Until then, happy hunting for those elusive acorns. They are out there – you just gotta get up and go find ’um!


I am long NTI, RTN, AWLCF, GLOG, XLS, URS, TAL, AMAVF, DDD, OPK, ASCMA, and CVX. I will not trade in any of those positions for a period of at least 72 hours following the release of this article.



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8 years ago

Jim, any relation to Red? : )