(B)(N) The NASDAQ 100 Cashback Plan

Where’s my money?

Drama. Almost all of the corporate and public pension plans are underfunded by even the most conservative measures of the actuaries who expect only a 4% to 6% return on the invested capital over the long term which, for the most part, the investors in these plans aren’t getting.

And although “pensions” and “income security” for all are relatively new ideas crafted in the “designer economies” of the 50’s and the 60’s, “investments” aren’t a new idea and they don’t return 6% per year – they are expected to return 30% per year and the capital is always 100% safe with guarantees and always 100% liquid (at least in credit) and the “investment” market is not in your government bonds which might pay 5% per year funded by the taxpayers, but in the equities market funded by the wealthy which is so rich and overflowing with money that it doesn’t really know what the value of its money is neither now nor at any time in centuries of investing.

For example, investors are not disturbed, on balance, by having to pay $20 for $1 of a company’s earnings as signified by a [P/E]-multiple of 20× which is a 5% market yield but they watch night and day for a slip-up to only 90 cents in the earnings when they expected a dollar or celebrate in the streets if the company brings in $1.10 and they boost the “market value” of said company by five years of such earnings in just a day.

And it’s actually much worse than that (please see below) but it all makes sense if you can get used to paying $20 (more or less) for $1 of the earnings in a company which you’ll never own and which earnings you’ll never get and neither will the shareholder across the aisle from you who is looking for a price break at those prices which you are expected to finance.

As consequence, the market is nothing like the 5-year plans and 10-year plans of any government or economy or the 40-year plans of the pensionnaires – it’s a lottery and in a lottery, you have to play to win and, so, we’ve crafted “The NASDAQ 100 Cashback Plan” to solve our pension problem and win today because there aren’t any winners forty years from now.

The NASDAQ 100 Cashback Plan

Although the world market is much larger than the NASDAQ 100, even in just the US, we’ve selected this market because it has an adequate size ($7 trillion) and a high volatility of about 18% per year which means that we should expect the (B)-Class Portfolio in this market to get an annual return of about 36% per year plus whatever dividends the companies might pay from their aforesaid earnings (the dividend yield is less than 1%), should they have any.

But even that fact doesn’t deter the market because the investors are currently willing to pay [P/E] 31× for the earnings in this market (a 3% market yield) and an aggregate dividend yield of 0.95% (95 basis points) with a payout rate of only 30% of said earnings which the investors rationalize as a “growth market” of mostly well-established multi-billion dollar companies waxing and waning on a dime (as above) in their day-to-day estimation.

We’ve scaled the plan in the (B)-Class Portfolio to $20 billion in 2012 which is less than 1% of the NASDAQ 100 in 2012 and less than 1/3rd of that in the $7 trillion NASDAQ 100 today but the “plan” has kept-up and it is worth $80 billion today, as well as having returned all of our capital without ever having “risked” any of it.

In other words, all of our earnings in capital gains and dividends in the future are free and start with today’s free capital of $80 billion because we’ve paid all of our debts.

In the portfolio which we’ll describe below, there are four Super Companies (Adobe Systems Incorporated, Cintas Corporation, Fiserv Incorporated, and Intuit Incorporated) according to the investors (as above) which have never lost any of our money to the stock market in any twelve-month period no matter when we bought them in the last five years – that is in sixty such “years” because there is no reliable correlation between stock prices from one month to the next – and, so, they’ll probably do it again this year and next and they’re already up 25% this year by market value and 50% in the (B)-Class Portfolio which originally bought them in equal amounts of money rather than weighted by their market value which will show-up in due course among the winners and the losers.

Moreover, the market value of these four companies is $166 billion today and their portfolio returned an average of 29% per year on a buy and hold basis by market value and is up +350% since 2012, but we’re still willing to buy and hold them today even at these “high” prices which were much lower in 2012 and even as recently as January this year and investors do tend to buy stocks as if time were running backwards and tomorrow or next month precedes today; please see Exhibit 1 below for more details on these four companies (and click on it and again to make it larger as required).

Exhibit 1: The NASDAQ 100 Cashback Plan – The Four Superheroes

But those companies are only a slide-show and their market is too small for most pension plans.

The Hurdle Rate (please see below) for the NASDAQ 100 Companies is (-40%) but despite the dismal past performance of some of the companies in that portfolio, there is a sub-portfolio in it with eighty-five companies with a current market value of $6.7 trillion which is up +215% since 2012 for an average annual return of 20% per year and the portfolio, notwithstanding the companies in it, has never returned less than zero in any twelve-month period of the last five years (sixty such “years”) no matter in what month we bought them.

But we can do a lot better than that and we’ve already seen the future in the past because what we do tomorrow depends only on the investors who haven’t changed at all in hundreds of years; please see the illustrations below for more information on the theory and practice of the (B)-Class Portfolio in today’s NASDAQ 100 (and click on them and again to make them larger as required).

Exhibit 2: The Hurdle Rate & Below (-30%) Cashback Plan

Exhibit 3: The NASDAQ 100 Above (-30%) Cashback Plan

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*.