Complete The Art of Investing

I have just proof read Book 0 to Book 6. Most changes are correcting my English. I still have a long way to go thru the 800 pages. If you have the paperback of the book, you may be eligible for a free Kindle version. Try to get Amazon to distribute the updated version free. They did not want to do it before as they thought it would erase the notes. I do not know how many readers use this note feature. At least, tell the user before they update a new version.

Today's financial news

* Now we're used to the terrorist attacks. During 9/11, the market plunged but recovered in a few days. Most of my stops were executed and I had not bought them back in time. A big loss for me. Now, I use mental stops (my term) to avoid these and flash crashes.

* Need to think like a terrorist to prevent such attacks. I wonder Europe still welcome refugees from the Middle East.

* Embargo causes Cuba a lot economically. We cannot use our yardstick to judge other countries.

* This market is very volatile. I bet the charts I'm using have many false signals: Tell you to exit and reenter very shortly. I just have about 50% in cash (fluctuating from 40-60% picking and unloading 'bargains'). Risks: strong USD, potential interest hikes (not possible now), poor global economies, too low oil price (first time I guess)...

* GILD has been roller coaster lately. From the fundamentals, the stock looks great but why it is too valued.

Retail investors

The average retail investor has advantages over the fund managers. However, the average retail investor does worse than the market. They buy high and sell low - a kind of herd mentality.

In quarterly summaries, Fidelity demonstrated this more than one time. It shows that most retail investors moved their investment to money market funds when the market was at temporary bottoms (or close to), and moved them to equities when the market was at temporary peaks (or close to).

It could be a good contradictory indicator if Fidelity or any fund company publishes this money market flow.

Morningstar has similar proof. From 2000 to 2010, equity funds earn an annualized return 1.6% while an average investor captured a .2% return due to moving in and out of the funds at the wrong time.

From my own observation, investors’ sentiment works in the short term, but not in the long term.

It makes ‘Buy and Hold’ look great. The best strategy is ‘Buy at the bottom and sell at the top’. It is easy to preach than practice. Can we overcome the human nature of ‘Fears and Greed’?

The majority of retail investors do worse than the market and so are most fund managers. Logically, a group of investors must beat the market. They are the institution investors besides the fund managers. We try to be as good as this group. It is achievable if you read the chapters on market timing, stock selection and strategies in this book. Most institutional investors do not time the market and we the retail investors have an advantage.

Do not act on the financial news. A lot of time, they’re contradictive, sometimes manipulative and always too late to be useful. Reading WSJ or Baron’s is more useful.

Cramer will tell you how the market is manipulated.

https://www.youtube.com/watch?v=GOS8QgAQO-k

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For more of my reasoning, check out the book described next. It has 800 pages (6*9) for $9.99. It could be the best $10 you ever spend.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.

I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.

Comment on today's financial news

* When you're in Rome, act like a Roman. Do not use our standard esp. in N. Korea. They try to bargain for money. Why students went to N.Korea in the first place?

* CMG gave out poison free and a life insurance too. They should FIX the problem. Most likely it is from the food suppliers. Organic has its problems we have to understand such as butter (vs margarine), eggs...

* China will make better strides than the US with less regulations (killing several from billions is no big deal and no lawyers will ask you for a king's ransom) in advancement for the goods of the billions. Stem cell is one and now driver-less car.

* Ackman aged 10 years in one night. There are many legends including Buffett doing badly in 2015. Depend on yourself in investing. Past winners are PAST winners.* Amazon's Cloud has many customers already. Has Google missed the opportunity?

Politics again

"Kasich has just said that in his first 100 days he would offer full amnesty to all illegals and that he believes it would pass Congress."

My reply:

It will turn most of them into new welfare recipients and will leave many jobs no one wants unfilled. After a year or so, we will have more deficits and we will have one political party.

Very short-sighted.

On Trump and his protestors

In a civilized world, you agree by raising your hand quietly, not with yelling and furious fists.

Are dividend stocks better?

There are continuous debates for and against dividend stocks and dividend growth stocks. I hope this article would settle the debates. If you’re making money with any strategy recently, stick with it. From this test, I conclude that dividend stocks and dividend growth stocks are worse than non-dividend stocks. Read it with an open mind. I accept confirmations and challenges but not “You’re wrong without explanation”.

Do not be biased and data fit to back up your conclusion. Ensure the test can be reproduced with identical results, so there is no cherry picking and no bias. Ensure the number of stocks and the number of tests are large enough so the results are statistically acceptable.

Here is my test procedure. It would be a sample test procedure for other strategies.

A test consists of selecting a number of stocks according to a specific criterion such as the 30 stocks giving top dividends. The performance of the test is defined as the average return of the specific number of stocks (30 in my test) after a period of time (a year in my test).

·         I have four tests for each period of a year: Dividend Stocks, Dividend Growth Stocks, Non-Dividend Stocks and All Stocks. Select the top 30 stocks for each test.  

·         There are 10 tests and the results are averaged. The first test starts in the beginning of a year and end at the end of the year.

·         The last ten years resembles the current market better than older dates. Hence, I start the test on 1-1-2005 and end on 1-1-2015.

·         The start date is Jan. 2 as Jan. 1 is a holiday. In some tests, it is Jan. 3 or Jan. 4 due to weekends. It is the same for end dates. The results are annualized (= Return * 365 /No. of days tested).

·         The data base is S&P 500. Typically they are the stocks of largest companies. It is the All Stocks.

·         Using educated estimates, I add 2% dividend yield to the performance of the S&P500 index, 5% to dividend stocks and 4% to dividend growth stocks. Testing other strategies, dividends may not be as important as these tests.

    Alternatively, I could use ^SP500TR from Yahoo!Finance. I calculated and tested estimates. It would be very time consuming and impossible not using estimates as the dividend yield changes every trade session.

·         Dividend growth stocks have the top dividend yields and dividend growth rate equal to or greater than 10%.

·         Non-dividend stocks are stocks without dividends. Just select 30 of them randomly to be consistent.

·         You can find performance reports on dividend ETFs or funds specialized in dividend stocks, dividend growth stocks or a combination. Compare the results with SPY. Use them to confirm or challenge my test results.

My test has a new set of 30 stocks every year, so an exceedingly good or bad year only affects one test, not all ten tests with the exception of some stocks moving up or down for many years.

I call it window of testing as opposed to what most funds advertise by setting $10,000 or so and let it rises and falls for a long period (say 10 years).

·         Be careful on tests using small stocks that tend to bankrupt more often. The chance of survivor bias would give them better results than the actual results.

Result

The above tests can be reproduced from a historical database if it handles survivor bias the same as mine. It is no cherry picking and I have no bias towards any of the test strategies. The result is for educational purpose only. I am not responsible for any error.

	Avg. One-Year Return	Beat All by
Dividend	10%	-1%
Dividend Growth	9%	-12%
No Dividend	16%	62%
All stocks	10%	N/A

·         From the above table, both dividend stocks and dividend growth stocks do not beat All stocks in this database.

·         Non-dividend stocks beat All stocks in this database by a sizable margin. They represent the companies plowing back their profits to development/research and/or buyback instead of giving dividends. I was surprised by the huge return.

·         You should change your tests according to what you normally do to reflect new trading. For example, you should select 3 stocks only instead of 30 and/or delete foreign countries. However, it would be cherry picking.

·         If your dividend strategy has better return than SPY, do not change your strategy. My tests here are simple without many other filters. Most likely you can improve your returns with better ROE, low Price /Cash Flow, low Debt/Equity…

·         An article (3/1/16) from MarketWatch indicated a different finding than mine; I checked out that DVY (a dividend ETF) did not perform that well. 

Improve the test if more time is available

·         Use 12 months instead of one month for each test. Hence you should have 120 tests less 11 tests due to not enough data for the last year (as of 2/15/2016).

·         Take out the top performer and the bottom performer in the 30 selected stocks.

·         More weight on the last five years than the previous five years. Alternatively, I have one test for each year in the first five years and two tests for each year in the last five years.

Survivor bias

My historical database does not handle the delisted stocks. When I see there are less than 500 stocks in the database for S&P 500, I know they just deleted the stocks taken out from S&P 500 that year. However, later on it includes new stocks added to the S&P 500 index. The adverse impact of bankrupt stocks is far higher than the acquired / merged stocks. For example, the return of the test not including Lehman Brothers makes it look far better. All the tests here look better than they actually are.

The bias can be reduced or even eliminated by:

·         Larger companies as in this test.

·     I use “All” stocks, which consists of the S&P 500 stocks without those that have been delisted.

·      The dividend stocks should have less survivor bias than non-dividend stocks. I did not compensate this in my test results.

·         Actually resolve the bias by including the delisted stocks if your database does not handle it.

From the following table, the impact of 21% (0% means no bias) difference (both including the estimated dividends) is not small. However, all the three strategies have the same impact so it should not be a show stopper.

	Avg. Ann. Return	Difference From All
S&P 500	8%	-21%
All	10%

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For more of my reasoning, check out the book described next. It has 800 pages (6*9) for $9.99. It could be the best $10 you ever spend.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.


I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.