Tag Archives: alternative

Should Apple Investors Time The Market?

Summary You’re not always dumber, or unluckier, than every other investor. Neither am I nor any other group, manager, or fund. The irregularity of market prices makes it a near certainty that we all get fooled from time to time. Remember, someone else is on the opposite side of each trade. Odds of making profitable investments, along with their rate of gains, net of losses, is what counts. One target is above market averages. Another is above your goals; that’s success. Look at Apple as an example, over the past 5 years. Can it be timed? Does it need to be? Only your goals may answer that question. Let’s be real careful about measuring results. That means preventing the cherry-picking of favorable time periods to start and end with. If we look at every day as a start, and every day as an end, that problem is largely resolved. Largely, but not entirely. The holding-period that may be involved needs to be considered, as well. And the measurement units and manner of calculation matter. When it comes to combining gains and losses in one or more holding periods, you probably are aware (hopefully not from direct experience) that a 50% gain after a 50% loss does not return an investment to its starting point. That is why geometric mean averaging must be used to resolve the computational problem properly, rather than simple arithmetic summation and averaging. The holding period problem is resolved by calculating Compound Annual Growth Rates (CAGR). What the CAGR does is to find the average growth in each unit of the holding period, and then restate those holding period “grains” into a standard 1-year whole “loaf” of performance. Because each unit grain is represented by 1+the unit’s change, those pieces can be properly reassembled into a geometric mean. The CAGR of a 3-year, 4-month, and 5-day holding period (for example) measured by its beginning and ending points, will produce the same result as a series of those 3 years, 4 months, and 5 days of single day changes geometrically compounded day by day. Then when each are annualized by taking the 1/(number of days) root of that compounding, and raising it to its 365th power, minus 1, they will show the same CAGR. So if we took the CAGRs of 13-week periods (just for example) starting daily for 9 months, we should have a near-perfect measure of the annual rate of change for the data being examined during that year. Our Example of Apple We have a computer program tool that does exactly that kind of measuring. It was written originally over 40 years ago, back when the same kinds of measurements of stock performance were also needed. Figure 1 shows the result of it being applied to the last 5 years of stock price data for Apple (NASDAQ: AAPL ). Figure 1 (click to enlarge) It uses the daily closing prices of AAPL from 11/3/10 to 11/4/15, all 1261 of them to perform CAGR price-change measurements in progressively longer holding periods of from one week (5 market days) to 16 weeks of 80 market days, indicated by the yellow column footers. The average CAGRs during the whole 5 years are shown in the blue row marked at left by the RWD:RSK cryptic ratio title of 1 : 1. It contains all 1256 starting days possible to compute the 5-day holding periods averaged in the first data column, of 22 (%). Each column in that row contains 5 fewer days of CAGRs of 5-day longer holding periods than the column to its left, out to 1176 (count not shown) examples of 80-day long periods. It is a fair conclusion to reach that AAPL stock’s average annual rate of growth during the past 5 years has been 21% ~ 22%. Our last bullet-point question in the introduction to this article above may have its answer in this blue row of Figure 1 data. If the investor’s personal objective of investing in AAPL is to outperform the market, timing the purchase and sale of AAPL stock seems not to be necessary. On the other hand, if the investor’s goal is to compete successfully with the most productive equity investment managers, a 22% rate of gain might be inadequate. If so, the other question of “Can AAPL be timed?” may be worth exploring. What evidence exists of successful AAPL timing? That evidence exists in the upper rows of Figure 1. They contain the CAGRs of those days following forecasts that are implied by the hedging actions of the market-making (“MM”) community. Actions as they sought to protect their own firm capital that was necessary to be put at risk temporarily while helping big-dollar fund-clients adjust their portfolio holdings of AAPL. Those implied forecasts contained price ranges believed possible to be encountered during the time following the volume (block) trade that necessitated each capital risk exposure and its protection. A time necessary (up to a few months) to unwind the derivatives contracts involved in providing the hedge protections. The MM beliefs producing the price ranges of the forecasts are the products of well-informed depth research of publicly-known fundamental economic, competitive, and political surroundings, plus possible advantages of personal and professional contacts among industry and corporate sources. Plus appraisals of current market influences from other interested investors seen by “order flow” among the community of market-making professionals. The price range forecasts, split by the market quote at the time of the trade, provide an upside-to-downside price change potential balance of reward-to-risk proportions. That changes from day to day. The extent of its imbalance is indicated in the upper row RWD:RSK captions and the frequency of its presence, (or more extreme) is shown in the column headed #BUYS. Pure logic suggests that there should be no days where buyers might be found during periods where knowledgeable appraisals indicated larger downsides than upsides. But it does exist, perhaps due to less well-reasoned appraisals among the public than among the market pros. But during this 5-year period that has not happened. Instead, there have been 47 days that prompted professional analysis suggesting practically no downside price change prospect for a buyer of AAPL. Those 47 days were followed by periods of up to 80 days in which the subsequent price of AAPL stock rose at rates of as much as CAGRs of 70%. Another 18 days joined that 47 where AAPL price drawdowns from the forecast-day quotes were seen to be a trivial 1/50th as large as the upside prospect. Combined, those 65 days averaged CAGRs of as much as 60% or more. Should timing be tried? Now, is this enough of an incentive to attempt the timing of AAPL purchases? The excess returns above the blue-row average are +40% to +50% rates above the usual AAPL gains. And they have occurred in about 5% of the days – one out of every 20. With 21 market days a month, that’s almost one a month. But these are overall averages among the 65 days. How good are the odds of hitting a winner? Are there just a few big payoffs involved here? Figure 2 shows what percentage of the 65 produced gains. Figure 2 (click to enlarge) Say, not bad! With 7 out of every 8 instances a winner, that looks a lot better than the blue-row average of 2 out of 3. But how bad might that 8th experience be. Could it kill four of the others? Figure 3 addresses that question. Figure 3 (click to enlarge) Whoa! Lose nearly a quarter of my money? No way, Way. Easy does it. This table show the single worst case price drawdown – at any point in the holding period. Figure 2 tells what proportion of all the exposures have recovered from the drawdowns during their periods after the forecast, and those that have not may have recovered some, so their positions at this time of measurement may be a lot better than the worst possible. But you would have to struggle past that -24% worst case, if it recurred during your adventure, and simply being aware that it could happen, even once, no matter when, if that is scare enough, then the answer is no, you shouldn’t try to time AAPL buys. Still, be aware that drawdown (or worse, -30%) could have happened any time an AAPL buy might have been held as long as 65 market days (13 weeks, or 3 months). And you would have had to live through that. Maybe you did, like a lot of folks. At least 2/3rds of them, maybe 7 out of 10, are back in the win column. There’s a reason that AAPL is the biggest market cap in the game. Conclusion With good guidance many stocks can be effectively timed, in comparison with simply buying and holding them. Even good growers like AAPL. In fact few stocks have 5-year records of over +20% CAGRs. Those with slow growth, high dividend yields (4-6%) often have price ranges each year that are in the 50% to 100% low to high experience. One adequately-timed purchase and subsequent sale often can result in a year’s payoff that is double or even triple what the buy & hold year would produce. But it requires a mind-set that can accommodate the awareness and presence of temporary price risks. That is more than many investors can stand, and they are limited to single-to-low-double-digit returns from their investments. With adequate capital resources, that may be all they need, and so they are fortunate. The failure of market averages to show much of any growth over the past 15 years suggests that there are many passive market index investors not so fortunate, losing all that time, with little to show for it.

Why I Still Like DoubleLine Total Return As A Core Bond Holding

Summary Certain bond funds, and fund managers, have proven to be successful navigators in the complex environment of security selection, duration, and risk management. I am a staunch advocate of ETFs and believe that they are one of the best tools in an investors’ arsenal. However, you simply can’t find this unique bond strategy in an ETF at this time, which is why we have continued to stick with the marginally more expensive mutual fund. Long time readers of our blog know that we are proponents of active management in the fixed-income world . Certain funds, and fund managers, have proven to be successful navigators in the complex environment of security selection, duration, and risk management. For that reason, we continue to recommend to our clients that they step outside the confines of a benchmark index to seek greater returns or reduced volatility as a result of interest rate fluctuations. One long-term core holding in our Strategic Income portfolio has been the DoubleLine Total Return Bond Fund (MUTF: DBLTX ). This actively managed mutual fund is governed by Jeffrey Gundlach, who has risen to fame as one of the premiere fixed-income experts in the world. DBLTX invests more than 50% of its portfolio in mortgage-backed securities, but can also hold assets like Treasuries, corporate bonds, and cash when needed. Over the last year, Gundlach and his team have added a significant measure of alpha over a diversified bond index such as the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ). For an accurate comparison, I have also over laid a sector-specific mortgage index in the iShares MBS ETF (NYSEARCA: MBB ) as well. DBLTX has returned nearly double the gains of AGG and has also significantly outperformed the dedicated mortgage index over the last 52-weeks. If we widen the time frame to 3 years, you can see how substantial this performance gap has become. I am a staunch advocate of ETFs and believe that they are one of the best tools in an investors’ arsenal. However, you simply can’t find this unique bond strategy in an ETF at this time, which is why we have continued to stick with the marginally more expensive mutual fund strategy . The manager has earned that higher fee through superior performance, which is just what you want to see when you are paying a premium versus cheaper passively managed indexes. Now the question becomes – how much more juice can a fund like DBLTX squeeze out in relative performance versus its benchmark moving forward? It’s important to remember that DBLTX is not a “go anywhere, do anything” strategy. It’s going to behave like a bond fund, not like a stock fund or alternative investment strategy. The manager has guidelines that allow a certain degree of flexibility, but it is ultimately going to be directed by the interest rate and credit environment in any given year. While the timing is difficult to ascertain, there will almost certainly be periods of sharply rising interest rates on the horizon. I believe that this is where the managers of active mutual funds such as DBLTX can add the most value versus passive indexes. Treasury and investment grade-heavy benchmarks with intermediate term durations are going to underperform in a rising rate environment. The longer the duration or higher quality the bonds, the greater volatility that index will endure. However, an actively managed fund that can lower its duration and adjust its holdings to coincide with pockets of value or momentum will likely continue to earn its keep and outpace the competition. The Bottom Line Doubleline has been in the right places at the right times over the last several years. However, that doesn’t make them infallible to an incorrect call on interest rates or underperformance as bond market trends change. As with any active strategy, it’s important to regularly monitor the fund’s performance versus its peer group and benchmark to ascertain that they are achieving returns in line with your goals and realistic expectations.

FFC: A CEF Specializing In Preferred Shares Paying 8% Monthly

Summary FFC has been paying $0.13 monthly for 5 years. FFC uses leverage to increase dividends. FFC is a fund that is highly sensitive to interest rates. Flaherty & Crumrine Preferred Securities Income Fund Incorporated (NYSE: FFC ) is a United States based diversified, closed-end management investment company. FFC’s objective is to provide a high yield while preserving capital by using preferred securities. (TD Ameritrade) Flaherty and Crumrine serves as the investment advisor to the CEF. The 5 year chart below shows how successful this CEF has been in meeting these objectives: (click to enlarge) Source: Interactive Brokers The chart shows that FFC has consistently paid the current $0.13 monthly dividend for 5 years. At the end of each year the company adjusts the payout to match its annual earnings and consequently the December payout is often less than $0.13. The share price modulates somewhat but the median price over the past 3 years has been about $19.00 per share. For those of us that need and/or like to have dividends delivered to us monthly, Flaherty & Crumrine Preferred Securities Income Fund might be the right ticket. This closed end fund recently released its quarterly letter and offered the statistics shown below: Source: FFC Shareholders Letter dated 9/22/15 with statistics as of 8/31/15 Source: FFC Shareholders Letter dated 9/22/15 with statistics as of 8/31/15 Source: FFC Shareholders Letter dated 9/22/15 with statistics as of 8/31/15 Currently FFC is selling at a premium to NAV by about 3% since NAV is about $19.06 and the current price is around $20.10 per share. At this share price the CEF is offering an 8% return and about 8.5 % on NAV. FFC is able to offer this high yield because it uses leverage of around 35%. (Information from Morningstar) That means the fund borrows money to buy more shares over and above what it could buy with only its own cash. Operating expenses for FFC including interest for leverage are running at 1.39% of NAV. Excluding interest operating expenses are running at 0.87% of NAV which is relatively reasonable when compared to most other specialized mutual funds. (Taken from FFC’s Form N-Q filed for the 3rd quarter) Conclusion: As a matter of principle I normally don’t invest in a CEF when it is selling above NAV. You can see that at the end of August FFC was selling below NAV and was an opportune time to buy. Since the fund is currently selling above NAV, I recommend waiting until the fund is selling at or below NAV if you see this as a desirable vehicle for steady monthly income.. Be advised that this CEF is highly sensitive to interest rate changes and one should consider the direction of interest rates when buying this CEF. As interest rates rise, the cost of leverage increases which translates into higher expenses for the fund. Furthermore the value of the preferred shares is likely to decline as interest rates escalate hence NAV will drop as well. Capital losses could be excessive in an environment where interest rates are rising rapidly.