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How To Destroy Your Net Net Stock Portfolio

Are you tired of building wealth? Would you rather watch your money burn? One of Canada’s leading newspapers came out in 2013 with a list of net net stocks that it expected would produce amazing returns. Author Robert Tattersall, co-founder of the Saxon family of mutual funds, looked back in time and put together a basket of net nets trading on the Canadian markets at the start of 2012. His strategy was simple: a basket of Canadian net nets, 21 to be exact, trading at no more than a 20% premium to NCAV, with no additional filtering. Over 2012 the stocks would have performed very well, recording an 18% gain versus the TSX’s 4% return. That result is on par with the returns of net net stocks generally. Over 2013, however, returns began to sour. Rather than the market crushing performance of the previous year, Tattersall’s basket of net nets actually underperformed the market, returning just 2% compared to the market’s 7.2% return. What Went Wrong? Part of the problem was the holding period. Net nets show their best yearly performance as a group over a 1 year holding period but then perform worse the longer you hold onto the stocks. Over a two year period, a net net stock’s CAGR drops in a meaningful way. Over a 3 year holding period, results are even lower. Returns decrease step by step until in year 5 a lot of the advantage of owning a basket of net net stocks is destroyed. If you want to run a net net stock portfolio, annual rebalancing is a must. But holding period length is not the only thing potential net net stock investors should keep in mind, and it wouldn’t have been responsible for the large drop in performance his portfolio saw. There is a fair amount of variance in portfolio returns, after all. But, astute readers will notice two other fatal flaws. It’s no secret that net nets perform spectacularly when you stick to the strategy over a long period of time. Not all net nets perform the same. I crafted my Core7 Scorecard to help identify the net nets that have a better chance of outperforming net nets in general and help avoid firms that will disappoint. While it’s impossible to avoid every firm that will produce a loss or ensure that all the highest returning net nets are in your portfolio, it does a good job of stacking the odds in your favor. One of the key requirements in my scorecard is avoiding Chinese net nets and resource exploration companies. China has become famous in the West for its spectacular growth, but it’s also developed a bit of a reputation for offering up western market listed firms that are nothing more than frauds. These companies over-inflate their Balance Sheet figures, record assets they don’t actually have, and even tally up growth in revenue or earnings that just didn’t happen. Understandably, these companies don’t make for the best net nets. After all, if you’re going to be basing your investment decisions on Balance Sheet figures, it’s usually best to stick to firms you have reasonable grounds to assume are producing accurate financial statements. Resource exploration firms are a whole other can of worms. While they may have more accurate financial statements (i.e. they’re less likely to be outright frauds), these companies have a long history of destroying shareholder wealth. They start with a public offering of stock and then spend the money trying to find resources to harvest. This process can take years, if they find anything at all, and the entire time the company keeps draining its bank account. Most companies never actually find a deposit, but do a very good job of eroding shareholder value. 9 Net Nets for 2014? Maybe? These facts aren’t exactly a secret on the Street, so it’s interesting that David Sandel of Simcoe Partners would choose to include Chinese reverse merger and resource exploration firms in his followup portfolio for 2014. Just like Tattersall’s 2012/2013 portfolio, Sandel picked a basket of net nets that he suggested investors purchase for 2014: Automodular Corp. ( OTCPK:AMZKF ) -10.16% Monument Mining Ltd. (MMTF) -41.17% Energold Drilling Corp. ( OTCPK:EGDFF ) -50% Indigo Books & Music Inc. ( OTC:IDGBF ) +46.25% Greenstar Agricultural Corp. (GRCGF) -51.17% Goodfellow Inc. ( OTC:GFELF ) +5.73% Mirasol Resources Ltd. ( OTCPK:MRZLF ) +20.44% ACE Aviation Holdings Inc. ( OTC:ACAVF ) 0% Coopers Park Corp. ( OTC:CJPKF ) +43.93% All 9 net nets were still listed on Google Finance 12 months. If equally weighted, the portfolio would have produced a loss of -4.02%. A quick look at the firms is instructive. Of the firms selected, 3 were resource exploration firms (Monument, Energold, Mirasol) and one was actually a Chinese firm (Greenstar). The return to this group of 4 stocks was an average loss of -24.38%. If investors had skipped over the resource exploration and Chinese firms, they would have enjoyed a much more rewarding +17.15% return versus the TSX’s +6.23% gain. Not exactly statistically significant, but illustrative. Wise Stock Selection for the Best Returns At this point, astute readers will point out that these exploration firms were purchased right before a big drop in commodity prices generally. That’s a fair point, and one more reason to avoid resource firms altogether unless purchased in the depths of a serious bear market. While retail and industrial firms can turn themselves around with effort, planning, and decent judgement, the fate of resource firms are more or less wedded to commodity prices. Net nets don’t work out every year, and not every company will see positive returns. Seeing losses from time to time comes with the territory when buying net nets. Still, despite the occasional loss, net nets produce better returns over the long run than any other value strategy. Returns are consistently above a 25% CAGR in academic studies and my own portfolio has done very well. You shouldn’t just buy any net net, however. Some net nets have a much greater chance of suffering large losses; while other net nets have characteristics associated with outsized returns. Most of my net nets are debt free, have been growing NCAV, are increasing earnings, were bought with a PE below 10x (less than half the market PE!) and at an average discount to NCAV of 55%. If you want to make the most of your net net stock investing, you really have to group the best possible stocks into your portfolio. Why would you do anything else? Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

5 No-Load Vanguard Mutual Funds To Buy In February

The continuous slump in oil prices and weak Chinese economic data has resulted in a bloodbath in the U.S. stock market so far this year. The Dow and the S&P 500 suffered their biggest monthly losses in January since Aug 2015. Both the indexes had also snapped multi-year winning streaks to end in the red last year. In the face of this downtrend, a long-term view will help investors to stay calm. Also, one should look for investments that are less expensive. In this regard, Vanguard mutual funds could be a good choice due to their low expense ratios. The cost can be further reduced if one selects Vanguard funds that have no-load. Why Vanguard Funds? Vanguard funds witnessed a large inflow last year. This indicates that investors had flocked to passively managed funds, being dissatisfied with the widespread failure of actively managed funds. Investors poured in $236 billion of money in the Vanguard Group in 2015, the largest in the industry, according to Morningstar Inc. In fact, Vanguard witnessed total net inflows of about $1 trillion in the last five years, which is almost double the entire sum attracted by the hedge fund industry during the same period. Currently, it is one of the world’s largest investment management companies. It has crossed the milestone of $3 trillion in assets under management. The secret of Vanguard’s success last year lay in its very low expense ratios. The low cost to operate a mutual fund helped Vanguard to navigate the volatile broader markets, which were beleaguered with global growth worries and a rout in oil prices. Now, in 2016, these very same factors are continuing to haunt the stock market. The major U.S. indexes are already in correction mode. Hence, in order to navigate the choppy waters, Vanguard funds are the best choice. Vanguard’s Expense Ratio Declines In January, Vanguard reported expense ratio reductions for 35 individual mutual fund shares. This also includes 12 Vanguard target-date funds. Separately, the Vanguard Target Retirement 2035 Fund trimmed its expense ratio by 3 basis points. This U.S. mutual fund provider picked up the trend from last year. In 2015, Vanguard announced expense ratio reductions for 102 individual mutual fund shares. Vanguard has a history of lower expenses. In 1975, Vanguard managed $1.8 billion assets with an average expense ratio of 0.89%, while it currently manages about $3.2 trillion of assets and charges an average expense ratio of around 0.18%. If considered on an asset-weighted basis, the average expense ratio is even lower at 0.14%. Vanguard CEO Bill McNabb had said that “We strongly believe in setting our investors up for success, and one of the best ways to do that is to keep the cost of investing low, enabling them to keep more of what they earn.” Additionally, Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ said that “due to strong inflows in Vanguard mutual funds, they are able to bring expense ratios down for many mutual funds on a regular basis.” The Advantage of No-Load Funds Investing in no-load mutual funds reduces investors’ expenditure. Numerable research showed that no-load funds fared better than load funds on many occasions. Last year, out of the 15,129 no-load funds, the top 100 funds showed an average yearly return of 16.74%, beating the top 100 load funds’ average return of 11.05%. The average return of these top 100 no-load funds also came in ahead of the top performing mutual fund categories in 2015 such as Japan stock, healthcare and foreign small/mid growth to name a few. 5 No-Load Vanguard Mutual Funds to Consider As the stock market is subject to a persistently downward trend, mostly due to a continuous drop in oil prices and the crisis in China, it will be prudent to invest in no-load Vanguard Mutual Funds. In addition to the advantages discussed above, Vanguard mutual funds don’t charge front-end and back-end loads. A front-end load is charged while purchasing the shares. This type of fees can be as high as 8.5%. This might curtail a $50,000 investment to $45,750. On the other hand, a back-end load is charged when shares are sold. This type of fees can be as high as 5% to 7%. Meanwhile, Vanguard mutual funds charge expense ratios that are on an average 82% less than the industry average. Let us now take a hypothetical low-cost scenario. We assume that the value of a portfolio is $100,000 and it is expected to grow at an average of 6% yearly. Now, if we consider an expense ratio in a low-cost environment to be 0.25%, while the higher-cost scenario has an expense ratio of 0.9%, then in almost 30 years, the low-cost investor will emerge as a winner by gaining about $100,000 more than the high-cost investor. Additionally, such funds when combined with a Zacks Mutual Fund Rank #1 (Strong Buy) are expected to boost your returns. The following funds also have impressive 3-year and 5-year annualized returns and the minimum initial investment is within $5000. Vanguard Strategic Equity Fund Investor (MUTF: VSEQX ) seeks maximum long-term capital growth by investing in stocks of small and midsize companies. VSEQX’s 3-year and 5-year annualized returns are 10.8% and 11.1%, respectively. VSEQX carries a Zacks Mutual Fund Rank #1 and has neither a front load nor a deferred load. The annual expense ratio of 0.21% is lower than the category average of 1.15%. Vanguard New Jersey Long-Term Tax-Exempt Fund Investor (MUTF: VNJTX ) seeks a high level of income exempt from both federal and New Jersey personal income taxes. VNJTX invests in high-quality municipal bonds issued by New Jersey State. VNJTX’s 3-year and 5-year annualized returns are 3.5% and 5.8%, respectively. VNJTX carries a Zacks Mutual Fund Rank #1 and has neither a front load nor a deferred load. The annual expense ratio of 0.20% is lower than the category average of 0.91%. Vanguard Ohio Long-Term Tax-Exempt Fund Inv (MUTF: VOHIX ) seeks a high level of income exempt from both federal and Ohio personal income taxes. VOHIX invests in high-quality Ohio municipal securities. VOHIX’s 3-year and 5-year annualized returns are 4.2% and 6.4%, respectively. VOHIX carries a Zacks Mutual Fund Rank #1 and has neither a front load nor a deferred load. The annual expense ratio of 0.16% is lower than the category average of 0.97%. Vanguard Value Index Fund Investor (MUTF: VIVAX ) seeks long-term growth of capital and income from dividends. VIVAX holds all the stocks in the Standard and Poor’s Value Index and attempts to match the performance of the index. VIVAX’s 3-year and 5-year annualized returns are 9.6% and 9.4%, respectively. VIVAX carries a Zacks Mutual Fund Rank #1 and has neither a front load nor a deferred load. Annual expense ratio of 0.23% is lower than the category average of 1.11%. Vanguard Balanced Index Fund Investor (MUTF: VBINX ) seeks income and long-term growth of capital and income. VBINX’s assets are divided between indexed portfolios of stocks and bonds, with 60% of its assets in stocks and 40% in fixed-income securities. VBINX’s 3-year and 5-year annualized returns are 6.8% and 7.4%, respectively. VBINX carries a Zacks Mutual Fund Rank #1 and has neither a front load nor a deferred load. The annual expense ratio of 0.23% is lower than the category average of 0.89%. Original Post

5 Top-Ranked Diversified Bond Mutual Funds To Add To Your Portfolio

Fixed-income securities are the preferred choice of investors who are ready to forgo capital growth for regular income flows. The expense involved in creating such a portfolio of bonds from different categories may be quite considerable. This is why most investors select mutual funds since they are a convenient and affordable method of investing in bonds. Also, diversified bond funds further reduce the risk involved by holding securities from different sectors. A downturn in any one sector therefore only has a partial effect on the fund’s fortunes. Below, we share with you 5 best-ranked diversified bond mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and we expect the funds to outperform their peers in the future. PIMCO Fixed Income SHares: Series C (MUTF: FXICX ) seeks to maximize total return with preservation of capital. FXICX invests the majority of its assets in fixed-income securities including corporate debt obligations, inflation-indexed securities of corporate bodies and structured notes. FXICX allocates its assets throughout the globe. The PIMCO Fixed Income SHares C fund has a three-year annualized return of 1.6%. Curtis Mewbourne is the fund manager of FXICX since 2009. PIMCO Income Fund A (MUTF: PONAX ) invests a minimum of 65% of its assets in fixed income securities from a wide range of sectors. These securities may include options, futures contracts and swap agreements. PONAX may invest not more than half of its assets in securities that are rated below investment grade. The PIMCO Income A fund has a three-year annualized return of 3.9%. PONAX has an expense ratio of 0.85% compared to a category average of 1.02%. Toreador Core Fund Adv (MUTF: TORLX ) seeks long-term capital growth. TORLX invests mostly in domestic and foreign large-cap companies. The market capitalizations of these companies are identical to those listed in the S&P 500 Index or the Russell 1000 Index. The Toreador Core Retail fund has a three-year annualized return of 8%. As of October 2015, TORLX held 97 issues, with 5.14% of its total assets invested in Micron Technology Inc. (NASDAQ: MU ). Columbia Strategic Income Fund A (MUTF: COSIX ) invests in U.S. government bonds, investment grade corporate bonds, mortgage backed securities, inflation-protected securities, convertible securities as well as high yield instruments. COSIX seeks total return that includes current income and capital appreciation. The Columbia Strategic Income A fund has a three-year annualized return of 0.7%. Colin Lundgren is the lead manager and has managed COSIX since 2010. John Hancock Income Fund A (MUTF: JHFIX ) seeks a high level of current income. JHFIX mostly invests in three types of securities. These include corporate debt securities from both developed and emerging markets, U.S. government securities and domestic high yield bonds. JHFIX may invest a maximum 10% of its assets in foreign stocks. The JHancock Income A fund has a three-year annualized return of 1.7%. JHFIX has an expense ratio of 0.81% compared to a category average of 1.02%. Original Post