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Seeking Alpha On Day 1

Summary How should a new investor begin? How can you get the fullest use out of Seeking Alpha? What have I learned in over 900 days of writing for Seeking Alpha? Seeking Alpha – Completely Unofficial User’s Guide* *See comment section for someone asking if this is an official user’s guide. Welcome to Seeking Alpha. If this is your day one using this site, here is an unofficial welcome along with my thoughts and encouragement as someone who has written on it over the course of the past few years (day 1,000 coming up shortly). You can use it as a guide with the caveat that it is simply what worked for me. My one overriding message is to think for yourself. That message holds true here as well as elsewhere on the site. Approaching The Start Line Seeking Alpha is largely about the topic of security selection. This is an interesting, important, and often fun topic. However, it is not the most important topic and does not come first. To be ready for day one investing and to get the fullest use out of the ideas on security selection, there are eight steps that are crucial to have taken. They include: paying off any bad debt, setting a careful and frugal budget, setting up any tax-advantaged accounts that you can access, funding an emergency fund, funding a down payment for a home, setting up a brokerage for taxable investments, funding your healthcare, and simplifying each aspect of your financial life. If these are not first taken care of, the topic of individual security selection is premature. Once you have taken those steps, then you are ready to approach the starting line. Protecting You From… You It is good to learn from your mistakes, but far better to learn from others. So, while you are new, it is probably best to be thoughtful about how much you are willing to expose your financial life to the ideas – even the best ideas – that you read about on Seeking Alpha and other similar sites. Some articles are designated as “Top Articles” and others as “Editors’ Picks,” but you can never safely outsource thinking for yourself or managing your own risk. How much should you risk on your favorite ideas? This is a question that you should ask yourself before you get enthused by something you read here or on similar sites. In particular, you can protect your financial life from amateur (or professional) errors by diluting the amount of resources that you give yourself access to. I fully (maybe even over-) fund the following, diverting a substantial amount of resources away from what I put to work on Seeking Alpha ideas: life insurance, cash, pre-purchasing appreciating assets that I eventually want, education for my kids, and additional capital for my kids’ investments and entrepreneurship. After those five priorities are funded, I am left with a substantially reduced amount of capital for my own ideas. This reduction protects me from me. Besides taking money off of the table to reduce my downside to an acceptable outcome, it also reduces the daily stress to have less at risk. I don’t mind if I risk turning my 21st century life into a pleasant 19th century life, but I want zero chance of turning it into a 14th century life. After the above steps, I have far less ability to hurt myself and those I most love. I have protected my downside and can go to work on my upside. Navigating The Site Profile Page Now that you are ready to start, where do you begin? On day one, I started by setting up my profile . Once you do, too, then you become a part of the Seeking Alpha community. If you are new to investing, you can begin the process of identifying what kind of investor you are. Like-minded investors can follow what you write and you can follow them in turn. Home Page The home page offers a lot of information; sometimes it can almost be too much. Except for top articles , articles are mostly organized chronologically, so they come and go quickly. Early on, I would simply read articles based on titles that interested me. Later, I was able to make judgments about who I considered some of the best writers , who I then followed and read their subsequent articles. Instablog Instablogs are less formal, sometimes fun sites that individuals set up to discuss their ideas. I use them for ideas that are not perfect fits for articles, but are still interesting to me and might be interesting to others. Since articles are organized around specific companies, Instablogs can be useful for more generalized content and content outside of the public equity markets. Premium Authors A recent addition to the site in the last few months has been its premium author program. That is where you can subscribe to what Seeking Alpha describes as: Value-added investment services from top SA contributors It is not necessary and it is not for everyone. However, you may choose to check it out. If it is not a good fit, you can subsequently cancel it and get a refund on the balance of your subscription. Incorporating Seeking Alpha Into Your Investing Strategy I am probably as enthusiastic about Seeking Alpha as anyone, but even for me, it is only a small part of my investing strategy. Even Seeking Alpha’s founder blogs on a separate site . How does it fit into other online resources and an overall financial plan? Vetting authors – how do Seeking Alpha stock picks measure up? Who can you rely on? This is a question that I have often asked myself . I have five criteria, including: money – someone who has made some, flexibility – writers without a narrow mandate, introspection – ignorance is fine if it is not covered up, proximity – a writer close to his subject in the real world, and performance – this is the big one. In terms of number 5., where do you find performance data? While it is only a crude instrument, I have found TipRanks to be a useful supplement to Seeking Alpha. Past performance is the best predictor of success. – James Simons Executing Ideas Once you find an idea that you like, you will need a way to put it to work. So, in addition to Seeking Alpha, you will need a broker that you like and trust. My primary criterion is price with a secondary consideration for the strength of its online trading platform. It is a fairly commoditized business. Different investors have different preferences. Something to consider: if you have a significant retirement account at Vanguard, it comes with a large number of free trades. With a $1 million balance, you get 25 free trades. With a $10 million balance, you get 500 free trades. I also like Charles Schwab (NYSE: SCHW ), in part because it is able to take delivery of paper certificates, which I often use. Goldman Sachs (NYSE: GS ) has the best service, in my experience, but it is looking for clients that generate a substantial amount of annual trading commissions. Leucadia’s (NYSE: LUK ) brokerage, Jefferies is a fine compromise for smaller accounts than are of interest to GS. Interactive Brokers (NASDAQ: IBKR ) is great on price, great on its trading platform, and almost comically inept at customer service. Picture trading with a brokerage that learned efficiency and charm from the DMV. Goal A common goal is to beat the S&P 500 (NYSEARCA: SPY ) over a three- to five-year time horizon. SPY serves as a convenient standard – if you are not going to be able to beat it or do not want to try, you can always buy it instead. What is SPY and how hard has it been to beat it? Here are SPY’s major pluses, minuses, and attributes that an active investor needs to beat. “+” 1.) Performance In terms of performance, the SPDR S&P 500 Trust ETF has returned over 600% since inception. In terms of dividend growth investing, SPY has had a growing dividend over that period. In percentage terms, the SPY yield is currently under 2%. Over the long term, SPY has beat most asset classes and trounced the average investor returns. “+” 2.) Cost The net expense ratio for SPY is an extremely low 0.0945%. The extremely high liquidity in SPY shares means that you pay a tiny bid/ask spread when buying and selling. “+” 3.) Diversification SPY is diversified across hundreds of shares, so permanent impairment of capital is unlikely over the very long term. It is certain that at least one SPY component company will go bankrupt. It is unlikely that all five hundred will. In that unlikely event, you will probably have greater concerns than the return on your investment portfolio. “-” 1.) Hyperactivity How is it possible that SPY could have a multiple of the average investor returns, as shown in the above chart? Almost any passive exposure outperforms the average investor. Part of the answer is hyperactivity. SPY trades over 16 million shares per day. Which side of these trades has edgy information about the market’s direction? Most frequently, neither side does. But average investors attempting market timing frequently buy and sell at the worst possible times. Market timing efforts typically buy when markets appear certain and sell when markets appear to be uncertain. In doing so, they tend to pay a high price for the comfort of greater certainty. “-” 2.) Reconstitution There is a pronounced S&P 500 inclusion effect. Average SPY constituents cost about 9% more than non-constituents. This impact might be durable and could impact you both when you buy and sell SPY. But the SPY value including dividends is reduced proportionately. “-” 3.) Forced Selling SPY, by definition, owns equities in the S&P 500. So, when a SPY constituent member is involved in a corporate transaction that creates a security that does not qualify, then SPY’s managers have to sell it. The trading of components in and out of the S&P 500 is often constrained and sloppy. It is not the S&P 500 managers’ jobs to trade such securities with any price sensitivity. Such trading often follows the narrow, specific mandates of SPY at the expense of getting the best prices. Once you contemplate the salient pluses and minuses of SPY, you can then ponder whether or not this is something worth trying to improve upon. Even the great investor Warren Buffett favors a passive investment very similar to SPY for most of his wife’s trust. He did not select Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ) as the investment vehicle. Instead, he said: My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers. You may want to do the same with some or all of your money. Only once you have determined if you want to select securities do you need to bother with sites such as Seeking Alpha. As for me, I do some of each – some passive and some active management of my assets. Conclusion If this is your first day on the site, I hope that some of what I have learned and passed on will be of benefit to you. It took me almost one thousand days to learn. It is what I wish I knew on day one. Seeking Alpha can be a fun, useful, and lucrative part of your financial life. If you think for yourself and find ideas worth putting to work, you can both learn and profit. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

Trend Following Doesn’t Work For Stocks

Summary Applying classic trend following models to stocks is very dangerous. If however you are willing to adapt and move to momentum strategies, your chances will greatly improve. Classic trend following will fail on stocks. Stocks have many unique properties that must be taken into account. Momentum strategies provide a solution and a much higher success probability than trend following. There’s a good reason why most professionals who apply models similar to trend following to stocks call them momentum models. It’s not just a clever rebranding, it’s really a very different game. To blindly cling to trend following as a religion, disregarding any real world evidence and attacking anyone presenting ideas that differ to the trend following mantra is not only unprofessional, it’s outright dangerous. I bet you’re wondering about the title of this article. After all, I do employ quantitative models based on trend following logic on single stocks in quite large scale myself in my business. Some models that I’ve been using for many years produce very attractive returns on single stocks. So why am I writing such a provocative title? It’s not only to get you to click on it (though that worked, didn’t it?). It seems as some people stop reading after such a headline, and simply go on an all out counter attack, without bothering to read or understand the rest. Well, I’m guessing they’re no longer reading, so let’s get down to the real deal. If you apply a standard trend following model on stocks, you will lose. The operative word here being ‘standard’. Trend following on futures is quite easy in comparison. It’s much more complex to model strategies on equities. Most people simply ignore the difficult parts and hope for the best. That’s not an advisable course of action. Doing really proper strategy modeling on stocks may be outside of the budgets and technical capability of most retail traders. Even if you get your models right, you can’t treat stocks like futures. There are a few key differences, that require you to adjust your expectations and approach. Stocks are cash instruments and need to be funded. You have a clear limit to how much exposure you can take on. You do not have a pool of cash anymore to be placed in govvies. You cannot have your client fund his managed account at 20%, putting up 200,000 for a million notional. Stocks are a very homogeneous group. The internal correlation is massive. They will all go up and down at the same time with some small variation. In a bull market, they all go up. In a bear market they all go down. Diversification becomes much less important. You end up mainly trading beta anyhow. That can be ok, but if you’re under the delusion that you’re a great stock picker for buying high beta stocks in a bull market, you’re in for a nasty surprise when the bull leaves the field. Stocks are prone to rapid vola expansion in bear markets. Your neatly calculated risk measurements goes right out the window real quick. Suddenly all those stocks that were doing so nicely all fall down hard at the same time. As you start entering shorts on new lows, the stocks tend to make huge, albeit temporary, jumps up. As you’re forced to shut down positions not to blow your portfolio up, they fall back down. The short side of the single equity game is a veritable nightmare for standard trend following models. Modelling strategies on equities properly require total return series and dividends details. You need to analyze the total return series, trade the price series and have logic in place for how to handle the dividends when they come in. The potential for survivorship bias in single stock strategies is massive. If you run a strategy on the S&P 500 stocks for ten years back, base on the current S&P500 constituents, you’ll get an extremely distorted picture. Many of those stocks are in the index because they had a massive price increase. They were not in before. They wouldn’t have been on your radar when they had those returns. Check your data. Applying standard trend following models on single stocks is dumb. It doesn’t matter whether you use breakout channels, moving averages or other indicators. Toggling parameters up and down won’t help. People who say that you should apply standard trend models on stocks also tend to be the people who lacks experience with professional trading or quant modeling but don’t let that stop them from selling defunct trading system to unsuspecting retail traders at a few thousand bucks a pop. The most common arguments for applying standard trend following models on stocks is based on anecdotal evidence and classic fallacies. The first kind would be to point out that some hedge fund seems to be doing it with good results, without of course knowing anything about how they have adapted models for stocks, or to point out that someone’s cousin got rich doing it. Hedge funds certainly don’t run standard trend models on single stocks, though the often simplify the marketing pitch by calling it trend or momentum strategies. I can assure you that real hedge funds are a little more sophisticated and are fully aware of the special situation in stocks. As for the cousin, well, going on anecdotal evidence anything is possible. Apparently there are people who made gazillions trading on financial astrology too. The fallacies are usually about mentioning stocks that went up a few thousand percent, and how trend following models totally would have captured this. Disregarding of course the probabilities of having covered that stock when it was a small cap, the many times you would have been shaken out along the way, the allocation to this stock compared to the many that did less well etc. A massive simplification of the real world. This argument concentrates on the position level, and on the pro side we’re just concerned with portfolio level results. Does trend following really not work on stocks? If you’re willing to adapt your models and do something closer to momentum trading, you’ll do just fine. But the return expectations cannot be the same as for futures. Not that it’s necessarily lower, that’s not the point. But you’ll be much more dependent on the overall state of the equity markets. You can’t expect to make a killing in 2008 because you were supposedly short all the stocks. Would be nice if the real world worked like that though. How do I know that standard trend following does not work on stocks? Besides the common sense arguments of having lost the advantages of diversification and leverage, there’s quite a bit of actual, empiric evidence. I do this for a living. I have no reason to say that something works or does not work, unless that’s based on experience and research. I’ve modelled thousands of iterations of trend following models on every major index in the world. I’ve arrived at models that work and models that don’t. Standard trend models don’t. So what can be done to make trend following work on stocks? 1. Don’t go short. Kill the short leg of your strategy. Replace it with a short index overlay if you have to. 2. Take the state of the overall markets into account. You can’t keep going long in a bear market and expect to gain. 3. Build a ranking methodology to pick the best stocks. Don’t trade the stocks you read about in the news or heard about from your friends. Automatically analyze a large number of stocks and have the best ones selected. 4. Single stock vola can change dramatically over time. Rebalance your position sizes. 5. Trade fewer stocks with larger positions. Yes, that’s right. Counter intuitive isn’t it? Don’t be fooled into thinking that you’ve got more diversification with 50 stocks than with 20. They’re all beta bets and you just need to get the individual event risk down to reasonable levels. Beyond that, further diversification will worsen your results. Don’t believe me? Run a few hundred iterations of your model and tell me what you find. 6. Expect to have great returns in bull markets and aim to make your strategy lose as little as possible in bear markets. Religious dogma about a trading methodology is not helping anyone but system salesmen. It’s dangerous to view yourself as a trend follower. A much more pragmatic way would be to look at yourself as a systematic trader. Investigate what works and how it works. Trend following is a great concept but be very aware of its limitations. Adapt your rules to reality and overlay satellite strategies where needed. Hard work, quantitative modelling, research and pragmatism will get you to your goal. My new book details how to go about constructing a robust equity momentum strategy and offers a complete methololgy for implementing it. Released in June 2015, Stocks on the Move is now available in paperback and Kindle. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

SCANA Corporation: A Value Play On The Utility Sector Pullback

Summary The Utilities Select SPDR Fund has seen a double digit pullback from 52-week highs. SCANA Corp. has seen even greater losses, with a share price now down over 20% from January highs. This hefty pullback has brought SCANA back into fair value, and provides a nice entry point for long term investors. Background On January 21st, I wrote an article discussing the high valuations being seen among the utilities: ” Have We Reach The Point Of Irrational Exuberance In The Utility Sector? ” It turns out this article was published just one week before the 52-week high was made in the Utilities Select SPDR ETF (NYSEARCA: XLU ). Since then the sector has been in sell-off mode, as interest rates have started to rise and continued fears of a Federal Reserve rate hike looms. One of the utilities hit the hardest during the pullback has been SCANA Corporation (NYSE: SCG ), whose shares are down over 20% since the article was published. This divergence can be seen quite clearly in the chart below. 10 Year Treasury Rate data by YCharts SCANA has seen a 50% greater correction than the rest of the sector, and as a result is now trading below fair value for the first time since the end of September, 2014. (click to enlarge) For those not familiar with F.A.S.T. Graphs , the chart above shows the share price in relation to the PE trendline over the last five years. With the recent pullback, you can see where the share price has retreated to below the long term blue 14.3 PE trendline, which represents the average PE during the period. This is the first time SCANA has traded at that level since the end of September. Company Operations & Guidance SCANA Corporation is an energy-based holding company that is headquartered in Cayce, South Carolina. SCANA was formed in 1984 and currently serves over half a million electric customers in South Carolina and more than 1.2 million natural gas customers in South Carolina, North Carolina and Georgia. These service territories can be seen below, as depicted on page 9 of the company’s March presentation . (click to enlarge) SCANA has a diversified mix of power generation capabilities with assets in coal, natural gas, nuclear and renewables. Coal currently comprises roughly 50% of the mix, but that will be decreasing in the future as the company is in the process of adding two more units to its V.C. Summer nuclear plant, which will shift nuclear to 56% of dispatch power when they are completed. (click to enlarge) This has resulted in a high amount of CAPEX due to construction costs of the new nuclear facilities. These expenditures are expected to peak in 2016 and then continue downward until the new units are commissioned in 2019 and 2020. (click to enlarge) These expenditures have continually been adjusted upwards as the project progresses and this may be an item of concern in the future if there are further delays and cost overruns. However, thus far the company has maintained its stable BBB+ credit rating and appears to have these future costs accounted for with debt offerings and expected rate increases to consumers. Company Performance SCANA has been an excellent performer throughout the years, as it is a Dividend Contender from David Fish’s CCC List , and owns a 15 year streak of increasing dividends. During this period, the company has been able to grow earnings and dividends at a steady rate, with a long term EPS growth rate of 3.9% and a dividend growth rate of 4.4%. (click to enlarge) This consistent performance has led to outsized returns when compared to the market. With reinvestment of dividends, SCANA has produced annualized returns of 8.4% over the period, which crushed the S&P mark of 5.3%, and led to twice the total returns over the period. (click to enlarge) Another highlight to note is that investors who bought at the end of 2000 did so with an initial yield of 4.0%; and through the compounding power of reinvestment and dividend increases achieved a yield on cost over 10% after 10 years. Those investors would now be receiving 12.3% of their initial investment in annual dividends. Shares are yielding 4.3% with the recent pullback, and as things currently stand, investors have a good chance of seeing a similar situation play out over the coming decade. The company is currently projected earnings growth of 3-6% over the next few years. Analysts agree, and project the high end of this range was they expect 4-6% growth over the next 5 years. Using the mid-point of guidance, here are the income projections over the next 10 years with the reinvestment of dividends. Going back to F.A.S.T. Graphs and using the handy forecaster tool with a more aggressive estimated earnings growth of 6%, new investors could hope for annualized returns of nearly 12%. (click to enlarge) 12% annualized returns may not sound like much compared with what we’ve seen in recent years in the market, but it’s still well above historical returns, and doesn’t take any outlandish predictions for it to work out. Even dropping the growth rate down to the low end of guidance would lead to annualized returns of nearly 9%, which is a nice risk/reward type of investment. Investment Risks While SCANA is certainly becoming attractive at current prices, the pullback in the sector may not be over. Treasury yields have been on a steady rise since the beginning of the year, and as long as they continue rising there could be continued weakness in the utility sector. Additionally, the company does have some risk of its own with construction costs associated with the expansion of their nuclear power plant. Any further delays would lead to higher costs, and could lead to lower dividend and earnings growth rates than what is currently forecast. Conclusion SCANA Corp. appears to be an attractive income play in the current market environment. The company looks to be financially sound with a BBB+ credit rating and provides an appealing 4.3% yield that is expected to grow at a 3-6% annualized rate going forward. With shares currently below historical valuation levels, total return investors could also be looking at high single digit annualized returns. There could still be some downward pressure on shares if interest rates continue to rise, but the relatively high dividend yield pays you to wait for the rebound. Personally, I am looking to add another utility or two to my portfolio , and am strongly considering SCANA, along with several others on my watch list. I am currently looking for possible sales to free up capital for a purchase, and may be initiating a position within the next week or two. Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SCG over the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I am a Civil Engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.