NASDAQ 100 – (B)(N) There And Done That

We’re going to repeat, to some extent, what we have already said in our recent Post, What’s a girl to do? June 2012, but rather than use The Perpetual Bond (B)™ in the Dow Jones Industrial Companies which only contains giants such as Alcoa, American Express, Boeing, and so forth, with a combined market capitalization of about $3.8 trillion, currently, we’re going to show you what The Perpetual Bond (B) is doing in the companies of the NASDAQ 100.

That ought to be a challenge, but it isn’t. Of all the North American markets that we’re currently following, the NASDAQ 100 is far and away the best from the point of view of  “Alpha-smart with 100% Capital Safety and 100% Liquidity”™.

For example, for the three years from early 2009 through 2011,

The Perpetual Bond (B)®
The Dow Jones Industrials – 16% per year (plus dividends)
The S&P TSX Companies – 18% per year (plus dividends)
The S&P 500 Companies – 23% per year (plus dividends)
The NASDAQ 100 Companies – 37% per year (plus dividends)

The Perpetual Bond (B)®
“Alpha-smart with 100% Capital Safety and 100% Liquidity”™
Guaranteed.

Exhibit 1: The Perpetual Bond (B) – NASDAQ 100 – 2009 through 2012

(B)(N) There And Done That (Summary)

Exhibit 2: The Perpetual Bond (B) – Cash Flow – 2009 through 2012

The notation is the same as in the Dow but the amounts are different. There are one hundred and six companies in our NASDAQ 100 database and it cost $2,607,000 to buy (figuratively and for the sake of clarity in this discussion) 1,000 shares of each of them in late December 2008 and early January 2009. Transaction costs are barely material and negotiable with our broker since, after all, a transaction costs no more than $5 on an e-trade with our bank and the dollar amounts don’t matter at this level.

In any case, we didn’t buy them all for The Perpetual Bond (B). To start, we only bought those that were designated as (B) at the end of December 2008 and early 2009 – one hundred and one of the companies, gradually trimmed back (it turns out) in the subsequent quarters (and only the quarters) as indicated in Exhibit 1.  We currently own (June 2012) an interest in sixty companies, up from fifty one at the end of December 2011 but down from sixty seven as recently as March 2012  and the indication is – although we don’t know until more balance sheet data becomes generally available – that we might have to sell some more during the last two quarters of the year (2012Q3 and 2012Q4) because of expected (B)- to (N)-transitions (which are a “state change” and don’t have much to do with the current stock prices nor can they be predicted from the same).

In summary, we bought 1,000 shares each of one hundred and one companies and the cost was $2,658,000 but to keep within our budget of $2,607,000 for this discussion, we bought less than 1,000 shares in some of those companies so that the cash balance is zero rather than negative (although, obviously, we could have borrowed $51,000 to effect the whole transaction – that’s trivial!).

The current portfolio, The Perpetual Bond (B), at the end of June is worth $7,242,000 of which $3,969,000 is in equities and the balance, $3,272,000, is in cash (of which we’ll have more to say below because so much cash is really not sensible to an investor). Nevertheless, the average return is 37% per year, compounded over three years straight, plus earned dividends of $108,000 through the year ending in December 2011.

It is also the case that although the “NASDAQ 100 Index” increased from $2,607 to $5,451 (on the same scale), the portfolio of all the companies (Plan 100 in Exhibit 3 below)  increased from $2,607,000 to $7,184,000 and paid dividends of $182,000 to the end of December 2011. Please see Exhibit 3 below. That amount ($7,184,000) was comparable to The Perpetual Bond (B) but obviously, there was no cash balance and the Plan 100 exhibited “volatility” similar to that of the NASDAQ 100 Index (please see Exhibit 4, far below, for more on this).

Exhibit 3: The Perpetual Bond (B) in the First Half of 2012

As in the case of the Dow, we had $6,759,000 in The Perpetual Bond (B) at the end of 2011 of which $3,699,000 was in equities and $3,061,000 was in cash (Plan A, above) and had we continued that, making only the necessary changes to the portfolio on (N)- to (B)-transitions (we buy) or (B)- to (N)-transitions (we sell), then we’d have a portfolio worth $3,969,000 in equities and $3,272,000 in cash, now, for a return of 7% in the past six months, including new dividends of $14,000. And, of course, Plans B, C or D are always an option, at any time, and simply allocate more of our cash to the equities that we already own.

So, how do we explain this to the legions of portfolio managers who can’t get 12% in a good year, let alone, for three years in a row, and are beggaring their customers with fees and loads?

Or, to the legions of pension fund, endowment fund, and segregated fund managers who are beggaring their sponsors who can’t meet their liabilities?

Or, to the legions of politicians and governments who think that the stock markets are a bellwether of national prosperity or desperation, and the same for all?  What does it matter to them that we’re becoming rich by taxable transfers of wealth from the wealthy to us, the owners of The Perpetual Bond (B)? We know exactly what we did, and can do it again, year after year after year, any time, as long as there is a market for equities, free market or not, anywhere.

No doubt, that is clear enough, but we can obtain some insight into the current practice of “portfolio management by volatility” (please see these Letters, Volatility for the Delta Challenged, June 2012, for example) by examining the performance of The Contra Portfolio (N) in the same market.

Exhibit 4: The Contra Portfolio (N) 2009 through 2012

The Contra Portfolio (N)  has an effectively zero return ($2,607,000 to $2,923,000 over three years) and that performance is both predicted and expected by the theory – the theory of the firm and the “N/B/W”-Financing Model (Goetze 2009). The Contra Portfolio (N) is the exact opposite of The Perpetual Bond (B) – it buys what we’re selling and it sells what we’re buying.

The buyers and sellers are essentially informed by “volatility” and/or the notion that they should “buy low” (in (N)) and “sell high” in (B) – would that they knew what (B) was and that the stock that they’re selling now was in it.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”,  ”price of risk”, “risk price”, and the symbols “(B)” , “(N)” and N*.