Breaking the silence, as a melt up ensues
Breaking the silence, as a melt up ensues
And, the YARP™ portfolio has its first 100% gainer
I realize that after a flurry of nearly daily updates on the Sungarden Institutional portfolio during June, not receiving any posts in 10 days is a lot. That’s investing, especially in a portfolio that has as its centerpiece the YARP™ dividend portfolio. As a portfolio manager, there are some days and weeks where it is all about making adjustments. At other times, it is watching those decisions either payoff or merit a warning flag.
Fortunately, the past couple of weeks have been more of the former, less of the latter. And while I am willing to be as active as needed in pursuit of total return, sometimes, the best thing to do is nothing. It is in part a reward for the positioning work that occurred during May and June.
It also reflects the fact that the first month of every calendar quarter tends to be light on ex-dividend dates, and heavy on earnings reports. The YARP process aims to grab as much dividend income as is prudent, while steering clear of major risk. Earnings season is a time of major risk, because modern markets treat these quarterly announcements like professional wresting events.
Sure, a stock holding may spike on earnings, but any stock can also get crushed and throw back months or quarters of hard work earning income and appreciation. The losses impact me more than the gains do. That’s the basic philosophy of the YARP approach. So it is more likely for things to be quieter in July, busier in August and quite active in September, as per the quarterly timing of ex-dividend dates and earnings announcements.
While there have not been any transactions since late June, here are a few updates on each of the 3 sub-portfolios:
CORE
This is a strategy I have run in various forms since the late 1990s. And even though we just started this service a couple of months ago, since it has a long track record, I figured I’d point out patterns and trends I observe. For instance, the “long” side of the current portfolio is all profitable, and every completed long position since last September has been profitable.
As a narrow part of the market sprints higher, in a continuation of what we have seen multiple times since last year, I am looking at potentially narrowing the focus. Bottom line: the stock market is feast or famine, and there are times (like now and during the dot com bubble) where embracing the mania, while acknowledging it is probably fleeting, can be a healthy approach.
Core is up 11.2% the past 12 months, versus 4.3% for the AGG bond index. That is just a snapshot in time. But what should be helpful to investors in the strategy is that the standard deviation over that time is a mere 2.5%, versus 6.7% for AGG. Translation: bonds were volatile and not productive over that time, as has been the case for about a decade. Core continues to show (me, at least) that in a very changed environment for bond investing, a better path is preferring bond-like returns without relying specifically on bonds. That standard deviation over the past year, and since the return of inflation, is my evidence. Emma and I are putting together more on Core to help subscribers better understand the process and performance in more detail.
MACRO TRAXX
It is nice when a plan works right out of the gate. That’s the case with this new strategy, which is currently 80% in 1-year T-bills and invests the other 20% in a rotating tactical mix of more aggressive investments. That’s easier to do with that T-bill cushion locking in a minimum return for the strategy.
That smaller, aggressive segment of this portfolio just completed its first month, and is up 4.2% in my account over that time, via a mix of bullish and bearish positions. Long Nasdaq / Short Bitcoin via ETFs has been a key driver here. The market we have currently could be quite favorable to MacroTraxx, since moves are shorter-term and sharp in magnitude, which fits the style of this cushioned “swing trading” portion of my portfolio.
YARP
As noted in the headline of this note, we had our first “2-bagger” if you will. As of today’s close, the call option position I use to try to add return “around the edges” of this conservative, dividend stock portfolio. The impact on the portfolio so far is modest in the big picture, adding about 40 basis points (0.40%) to the total account return so far, but that’s like having a 4% stock position go up 10%. So I’ll take it for a few weeks’ time invested.
That position is still open, as is the put option position that is naturally dragging returns a bit. We had a good question from a subscriber about the call option, and I figured I’d respond to it here so all can see. The question:
The market is getting close to reaching the strike price on the call option, and that option still has a while until its expiration date. That’s why it has doubled in price in a short amount of time. The question: what do I do with that. Answer: every situation is different, and the move, if any, factors in what the market looks like now, what alternatives (other indexes or ETFs to own calls on instead), and how big the position was and is. In this particular case, I am more likely than not to exit the position sooner rather than later, but have not done so yet. This is as rare a market condition as we can expect to see, and among the potential next steps may be to “take the big win” on that position, pocket the initial investment, and use the profit amount as the “budget” to go out and buy something very out of the money, and essentially “dare” the market to reward me much more.
I describe it this way because the rest of the portfolio is in the part of the stock market that tends to lag these huge Nasdaq blasts higher. There’s no such thing as a Magnificent 7 stock with a big dividend yield. So a way to grab a piece of that in YARP is through a small investment in call options, defining my max loss up front but with unlimited upside. This is just one way to approach it, and this scenario will be the type of thing we’ll discuss live on both the upcoming options session and YARP session. And maybe even the third session too, since we get a lot of questions on options strategy.
Finally, some quick updates from the “less exciting” part of YARP, the one in which most of the capital is invested! That’s the dividend stock portfolio. We are at 39 holdings since I sold one last month and have yet to replace it. We had one position spike up 18% since July 5, in what was obviously a late Independence Day fireworks display LOL. But that epitomizes the yin and yang of YARP (nice alliteration, Rob). The price gain was nice, and it was on top of a gain I already had. However, it was a 1% position because the earnings report that drove it is the type of “event” that I tend to let happen with underweighted positions in my stocks. Because earnings in modern markets are a total “crapshoot” so I tread lightly in many cases. So a big gain on a small position? I’ll take that any time.
As subscribers will come to realize and hopefully to appreciate, the YARP strategy is NOT built for excitement. Sure, some of the existing positions are up 20%+ but several others are off a bit. The most important thing to me is that the dividend cash flow is coming in steadily, and the longer the market stays buoyant, the easier it is to yield-gather. That’s the priority here, along with not losing big along the way.
I will also be adding another 10 stocks as what I’d call “wildcard” positions. What’s that? I won’t require the portfolio to hold at least 1% in those stocks at all times, as I do with the other 40. But my analysis determined that by adding another 10 stocks to the mix with the choice of whether to own them and how much to own of them during each quarter, I can pick up more yield, especially during that first month or so of the calendar quarter where there’s a dearth of dividend ex-date activity. Since I have more than my fair share of stocks that go ex-dividend during the last month of each quarter, know that the 10 adds will all be stocks that either go ex in the first or second month of the quarter. This smooths out the income earned and cash flow.
What’s on your mind?
There’s a lot of info here, as it is intended to educate “on the fly” if you will, using live examples of what I’m doing with my own accounts, while avoiding using specific tickers and position sizes since this update has been made available to free subscribers, and we always want to protect the value provided to the paid users of the service. But whether you are in the Sungarden Institutional portfolio offering, considering it, or just here to learn from someone (me) who’s “been around the block” as they say, questions, comments and feedback are ALWAYS welcome!
See you soon!
Emma and I look forward to discussing these and many other current investing topics with our audience in the 3 upcoming live sessions, which start next week. We have already sent a notice about them over at ETFYourself.com, but we will do so again there and here again shortly.
Best regards,
Rob Isbitts
Founder, Sungarden Investment Publishing