(B)(N) What’s A Girl To Do?

Figure 1: The RiskWerk Primer on Inflation and Deflation

Drama. We run about 1600 companies in our World Trade portfolio and although we don’t necessarily have an interest (or holding) in all of them all of the time, about 800 of them are running in the (B)-class now and they could all be bought and held depending only on our budget.

But that number is down from 1200 in February and we want to look for the MIAs and what happened to them and get ready for the Second Coming because this has been a rough year for the pension funds and mutual funds which are working the bonds and the market indexes and they’re going to have to find some way to make money to pay their bills and their pensioners because the market hasn’t given them what they wanted – a free lunch.

And we refuse to be whipsawed by the “market of the day” and animations that we don’t share because we’re not playing in the same game as Wall Street – we’re active managers and we know what we want – we want 100% capital safety and a hopeful but not necessarily guaranteed return above the rate inflation.

But they want something else, they want to just make money – a lot of money, fast, our money, very fast – and they routinely put their cart before the horse every day, all day to collect it in their battle of wits to make money from each other in capital gains and losses and not so much from the companies and their earnings and dividends (which aren’t playing in that game either).

And they say that “investing is complex” and “risky” and needs “experts” (like them) but that’s not true either – it’s only “complex” if you don’t know what you want and it’s only “risky” if you’re not an investor – an investor wants 100% capital safety and a hopeful but not necessarily guaranteed return above the rate of inflation – but you’re a gambler and you think and you say that you’re smarter than everybody else (even if it is their money) because you’re an “expert”; alas, please see the examples below.

The Hitchhiker’s Guide to the Money Planet

Don’t worry, son, tomorrow will be a better day.

Only 274 companies in the World (among the big caps in our World Trade portfolio) had solid or enduring price gains of more than 10% this year but more than 1,000 of them had price declines and almost 800 of them by more than 10%.

And it’s in the latter group that we can now find economic depressions of almost any size and whereas Wall Street might be wringing its hands and running for the exits, it’s depressions that make billionaires of mere millionaires with no wit at all.

So, do you want “it” (money) fast or do you want it good?

And the well-worn Wall Street model of risk on/risk off has been and still is to get it fast and then dump the money into government bonds for an income if the rates are good enough. But the rates aren’t good enough now and they might never be again because there’s scant reason for governments to pay excessive rates for the use of their money which we might have for a while in the absence of inflation which is a government business and which worth they control and it doesn’t have a lot to do with the prices of goods and services; please see Figure 1 above for a practical primer on inflation and deflation for investors.

Figure 2: Do you want it fast or do you want it good?

To get it fast, we picked-off a portfolio of 74 of the top performers in the (B)-class this year and ran it back to 2012 to see how it started and (Plan A) returned +70% over three years and an aggregate dividend yield of 5.9% when price-weighted (that is, the same amount of money in each stock); and (Plan B) +110% and a dividend yield of 4.5% when weighted by the market capitalization of each company; and (Plan C) +327% and a dividend yield of 14.1% when we ran it as a (B)-class portfolio pro forma and we’re still holding 61 of the companies at the stop/loss prices and we can’t do any worse than that +327% – oh well – but what next? Please see Figure 2 on the right and Exhibit 1 below for more details (and click on it and again to make it larger as required).

This portfolio is not a good portfolio to buy now (although we don’t know the future) because the expected dividend yield at the current prices is only 0.71% (71 basis points) with a payout rate of 27% of the earnings and the Free Market Yield based on the demonstrated annual volatility of 20% (or half that, 10%, per quarter) is only 0.212% (21.2 basis points) and that’s a deflationary economy in which the price of an income is high, very high, and the usual answer is that the investors will need to eat their capital gains and look elsewhere for an income.

Patient money, however, can expect to do well by buying into depressions instead of bonds and the three depressions in Exhibit 2 below have current dividend yields of 13.8%, 11.9%, and 8.7%, respectively, with an estimated annual volatility of 246%, 138%, and 120%, and with stock prices so low that some companies might be going bankrupt, other companies might be takeover candidates, and still others might do well sooner or later and all that we really need from them (and companies are generally good at this and making money and better than most investors) is that they keep-on paying our dividends regardless of the future yields which, we hope, will decline but not be zero as the stock prices increase and don’t vanish.

That’s not too hard and where’s the expertise? And it’s a sure thing as long as we’re running the portfolio as a (B)-class portfolio and not gambling on the outcome; please see Exhibit 2 below for more details.

Exhibit 1: 10% or More and Still Counting

Figure 1.1: The Hitchhiker’s Guide to the Money Planet

Exhibit 2: The Depressions

Figure 2.1: (B)(N) The Depressions

For more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

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®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ 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*.