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Defensive Investing

By The Contender @The__Contender

Defensive InvestingIn this post I am going to talk about  investment timing decisions in particular:

1. A new financial independence striver
 

2. Someone who has already amassed significant investments
 

3. Changes to the TRiBeS investment approach
 

4. The latest DVGI (Dividend Value Growth Investments) screener results for the UK and US (at the end of the post)
 

  • No one can accurately predict THE.FuTuRe
  • Human beings are emotional and sometimes delusional
  • Timing is important
So what is the link between these statements and financial independence planning? Well over the past five years the stock market has done very well. At the same time THE.PaST tells us it corrects around every 5 - 8 years. Does it continue to rise over the next few years or do we get a correction. There are numerous opinions out there on the web.

Defensive Investing

source: dshort.com

But this time is different right? There is no need to be cautios as the Fed has our backs covered. So go ahead and go all in now.
Hold on a second....If you are starting to invest in the stock market at this juncture is this wise?
If you are fully invested and enjoyed the good run should you be cautious and check out some of your chips?
Or are you confident of further gains and are adding to your positions?
Here is a quote from a seasoned trader Dan Norcini on holding onto a loosing position which I think is pertinent if you flip it on its head and consider it from a winning position as well:
"They may pride themselves and encourage their followers to, "Stay the course". That is great if you are a sailor on the ocean and are being buffeted by some high waves and gusty winds but at some point the winds and the waves will force even the most stalwart of mariners to take a detour out of their way if they wish to avoid getting slammed into the rocks or going down. It is called "prudence".
  

Those who "stay the course" and keep pushing ahead out of sheer stubbornness often pay the price with their lives. Same goes for trading or investing - at some point one has to "take a detour" to skirt the danger so as to arrive safely at the final destination.

  

Spitting into the eye of a hurricane just gets your face wet and does nothing to force the hurricane to change directions. It is going to go wherever the hell it wants to go and it could care less what you want. This is how markets are - they go where they want, when they want. If you are smart, you learn to either go with them or get out of the way"

Trader Dan Norcini

Time to sell growth and cyclical stocks?
Are we now in a position with the markets we we could be lured into the trap outlined by Dan above. Could the market change direction and we hold on for dear life waiting for the tide to change.
I have first hand experience of working on a cyclical business - semi conductors. A new super chip would be designed the factories built then the chip sold for the next few years until the next super chip is designed and the whole cycle starts again. The business knew this happened therefore it set itself up for, and planned ahead, for these cycles. It did this through sub contracting, temporary contracts and stock management.
Coming back to point can we manage our investments in this manner or are we doomed to failure? Are we doomed to re-produce past mistakes such as the Tech Bubble.
Growth stocks have been back in vogue and are trading at very high price to earnings ratios. Well known names such as Facebook, Amazon, Twitter have soared based on future growth and revenue expectations / forecast. Are they really going to deliver unlike the companies in the last Tech bubble? Should we downsize our investments now?
Lets consider some different circumstances:
The New Financial Independence Seeker
If the financial independence seeker started investing in stocks or housing in the maelstrom of the financial meltdown of 2007/8 they may be in a good capital gains position now. In order to realize these gains they must be sold - should they?
Is it better to book some of the gains now ensuring a very early retirement in say 5 years time or take the "risk" to retire a year or so earlire vs loosing a significant amount in a market correction....
Personally I would say thanks I have had a great run - time to book some profits or be more defensive.
What about a new young financial independence seeker entering the market for the first time now. Is this the right time to buy a tracker fund, build a dividend portfolio or buy a house? Or would they be wise to wait for the inevitable market correction?
It really depends on the individual and their risk tollerance. Even in downturns there are winners.
I have read a lot of articles by Alex Green from Investment U and he again clearly states you cannot second guess the market. What we do know that over the long haul (last 100 years) the market has compounded at 7% per year with the inevitable (see the graph of the S&P 500 above!). If you have a long term horizon forget the dips and invest anyway.
This is why buying tracker funds and looking at them in 10 years time will probably leave you happy with their performance.
So this is possibly good advice for the NEW financial independence seeker. Consider a market correction a good thing. Time is on your side so you will be buying over a long period of time. Sometimes the investments will be overvalued and sometimes they will be "on sale".
Finally the Financial Independent or Downshifted person - they have a sizable investment pot should they raise, hold or fold?
Saving vs Saved
If you have significant investments to live off in a tracker fund that follows the market and need to sell 4% per year to live on. What happens if a 50% decline in the tracker fund comes along can you afford to risk this?
In this case you will be selling at an undervalued price providing the bargains to the market. Will your funds last? Here is a video looking at longevity, retirement pots and drawdown rates:
Ideally, in my opinion, it would be better never to sell - just accumulate living off a growing income.
Is it not better to have income from the assets that more than cover your costs so you do not have to sell?
Income generation
Another person I have great respect for is Daniel Ameduri of Future Money Trends. He is an avid proponent of making sure you keep on growing your wealth. In particular accumulation of income generating investments instead of depreciating assets.
Future Money Trends does look for growth stories and does put out some very interesting long term growth stock recommendations.
On a personal note our TRiBe has speculated too much in the past and paid for it in some circumstances. In hindsight we wish we had only allocated a small percentage of our investments to speculation. In addition it would have been only money we would write off completely in a separate account almost not considering it as part of our net worth. In THE.FuTuRe we will invest in more smaller companies but keep to a strict limit of 5% of our portfolio.
No post on investing can be completed without mentioning the great old man Warren Buffet. He has lived in a humble property with an old car all these years. All of the profit he has made has been re-invested to buy more productive assets based on a value investing approach. He dislikes dividends because of the tax implications and prefers share buybacks and paying tax through the preferential capital gains tax instead.
This has produced incredible results through the beauty of compound growth, dedication to value investing and not blowing it all on jets, fast cars and women.
FISH - Sleep Easy Portfolio.....
We have decided to sell some of our more speculative stocks, re-invest some of the proceeded back into defensive, strong balance sheet, dividend paying stocks and keep the rest in cash. Holdng cash is not ideal with the availabe interest rates available. It is useful for speculative buys on a pull back in the market or a particular stock.
Our choices were made using the results of the stock screening tool. It looks for stocks by ranking them on the following criteria:
  1. Quality  - consistent earnings and dividend growth, low debt and a well covered dividend payout
     
  2. Value - the stock PE10 is low and the company has a good return on capital
One example of this is a company called AstraZenica - these were bought for their substantial dividend and cheap valuation. Their price appreciated 33% in turn this reduces the dividend yield so we sold it and moved the procedes into other investments and cash. Just after this Pfizer placed a bid to buy the company and the shares went higher! That is THE.FuTuRe for you - unpredictable!
We have also sold out of several of our tracker funds in our trading accounts and chosen defensive dividend players.
A caveat to this is that our long term pension saving accounts stay in equity funds as we are not going to touch these for at least 20 years.
We have even sold out some of our precious metal investments some have been good and some have been bad to help re-balance our portfolio.
In summary this is where we are at:
1. Financial independence savings are in defensive dividend stocks and cash
2. Long term pensions are in equity investment funds (including a precious metals fund) 100% - very aggressive?
We are also looking at opportunities to "work" to increase our income. Work is a loose term to us now. Hopefully this will be a small number of hours a week in something we enjoy (long may it last!). Any earnings will be dedicated to saving and investing money so we don't have to work too much!
Finally below are the latest screener results for the UK all share index (Yahoo! ^FTAS).  
Please note the results are for entertainment purposes only. I am not a financial planner, have no qualifications and I am self taught. I am a wannabe Warren Buffet... but who wouldn't be in the investment world? Please refer to the disclaimer that comes with the site and always do your own investment research.
The excel Value Screener can be found here (it does not include the 10 year quality screening)
Peace, prosperity and happiness and good luck to go with wise investment choices ;)
CoNTeNDeR
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