(Source: imgflip)
In 24 years that I've been investing, I've tried every get rich quick strategy.
- momentum trading (started in the tech bubble)
- day trading (during the tech bubble recession)
- currency trading (naturally uses very high leverage of 10 to 100X)
- commodities futures (also uses leverage)
- speculative options (up to 1000X leverage depending on the contract)
Did I ever make any money? You bet. I once made $170K in a single day on speculative Apple options ahead of earnings. I then lost it all (well, $132K) the very next day when Apple missed expectations for the first time in 7 years.
It's not what you make in the short-term that counts, it's what you keep.
After making...and losing several small fortunes, I've learned the wisdom in Kevin O'Leary's words "if you want to get rich, stop buying crap."
The Investing Strategy 24 Years In The Making
I can summarize my investing strategy in three simple principles.
These are the same goals that the greatest investors in history pursued, including Buffett, Munger, Miller, Swenson, Greenblatt, Lynch, Dodd, Graham, Marks, and Templeton.
It's also the approach used by
- legendary asset managers such as Brookfield and Oaktree Capital
- all the VCs on Shark Tank/Dragon's Den (across over 40 countries)
I apply what I call a decision matrix to all potential investments.
This is a new tool that's coming to Dividend Kings (along with an intro article explaining how to calculate each goal with the included spreadsheet) on Friday.
Probability-Weighted Return is zero or negative Probability-Weighted Return is 0.1 to 0.5X S&P PWR Probability-Weighted Return is 0.6 to 1.9X S&P PWR Probability-Weighted Return is 2.0 to 2.9X S&P PWR Probability-Weighted Return is 3+X S&P PWR
Points Meaning Preservation Of Capital Return Of Capital Return On Capital 1 Poor Bankruptcy risk 52+% (C-rated company equivalent) Zero dividend capital return over five years 2 Below-Average Bankruptcy risk 13% to 52% (BB-rated company equivalent) 0.1 to 0.5X S&P dividend capital return over 5-years 3 Average Bankruptcy Risk 7.5% to 10% (BBB- or BBB rated company equivalent) 0.6 to 1.9X S&P dividend capital return over 5-years 4 Above-Average Bankruptcy Risk 5% (BBB+ rated company equivalent) 2.0 to 2.9X S&P dividend capital return over 5-years 5 Excellent Bankruptcy Risk 2.5% or less (A-rated company equivalent) 3+X S&P dividend capital return over 5-years
Here is an example of how the decision matrix works in practice, comparing any potential investment to the S&P 500, most people's default alternative.
EPD Decision Matrix
Relative Investment Score
Goal EPD Why Score (Out of 5) Preservation Of Capital Above-Average 5% long-term bankruptcy risk (BBB+credit rating) 4 Return Of Capital Excellent 43% of capital returned over the next 5 year via dividends vs 11% S&P 500 5 Return On Capital Excellent 9% PWR vs 1% S&P 500 5 93/100 Letter Grade A S&P 73/100 = C
(Source: Dividend Kings Tools) PWR = mid-range probability-weighted expected return
Using this new tool, which is the result of more than six years of research as an analyst, I'm able to buy one blue-chip quality good deal or better, each day.
I simply buy the Phoenix daily deal, announced three times each day on the DK chat board.
Margin Of Safety Requirement To Be A Potentially Ultra-Value Buy
Quality Score Meaning Margin Of Safety Requirement To Be A Potentially Good Buy Margin Of Safety Requirement To Be A Potentially Strong Buy Margin Of Safety Requirement To Be A Potentially Very Strong Buy 3 Very High Bankruptcy Risk NA (avoid) NA (avoid) NA (avoid) NA (avoid) 4 Very Poor NA (avoid) NA (avoid) NA (avoid) NA (avoid) 5 Poor NA (avoid) NA (avoid) NA (avoid) NA (avoid) 6 Below-Average (speculative) 35% 45% 55% 65% 7 Average 25% to 30% 35% to 40% 45% to 50% 55% to 60% 8 Above-Average 20% to 25% 30% to 35% 40% to 45% 50% to 55% 9 Blue-Chip 15% to 20% 25% to 30% 35% to 40% 45% to 50% 10 SWAN (a higher caliber of Blue-Chip) 10% to 15% 20% to 25% 30% to 35% 40% to 45% 11 Super SWAN (as close to perfect companies as exist) 5% to 10% 15% to 20% 25% to 30% 35% to 40%
These real money buys are what I call my Phoenix portfolio bucket, which mirrors the DK Phoenix portfolio's daily buys.
(Source: Sharesight) AOK = iShares Core Conservative Allocation ETF (70/30 portfolio)
DK Phoenix began 100% in bonds/cash and has been dollar-cost averaging each day, based on the Phoenix portfolio daily buy.
I'm putting my hard-earned savings to work in the exact same companies that many of our members are, into companies that are likely to, like the proverbial Phoenix, rise from the ashes of this recession and soar to new heights.
No company makes the Phoenix watchlist, which is the exclusive list from which all DK portfolios are buying, without 4+safety, or 9+/11 quality.
Approximate Dividend Cut Risk This Recession
Safety Score Out of 5 Approximate Dividend Cut Risk (Average Recession) 1 (unsafe) over 4% over 24% 2 (below average) over 2% over 12% 3 (average) 2% 8% to 12% 4 (above-average) 1% 4% to 6% 5 (very safe) 0.5% 2% to 3%
(Sources: Moon Capital Management, NBER, Multipl.com, blue-chip economist consensus)
DK Phoenix is now buying $250 per day worth of good deal or better blue-chips, SWANs, and Super SWANs, and I'm buying $500 each day.
That's to match our buying with our monthly savings rates. Our respective cash/bond allocations (20% for Phoenix 25% for me) remain fixed, at least in absolute terms.
In other words, when the next market downturn strikes, whenever that is, for whatever reason, and however long it lasts, we have a large amount of dry powder to ramp up daily blue-chip buying.
In the meantime, we keep deploying our capital in high-probability/low-risk ways, with an eye not on the next year but on the next 5+ years.
The specific goals of the Phoenix portfolio, include
- 2.5% to 3.5% yield (3.0% currently)
- 8% to 12% CAGR long-term dividend growth (11.2% CAGR Morningstar forecast)
- reasonable valuation (2% undervalued currently according to Morningstar's fair value estimates)
- Superior long-term returns to our benchmark (NYSEARCA:AOK)
So here are the 15 companies I've bought for my personal Phoenix portfolio bucket over the past few weeks.
My Last 16 Phoenix Portfolio Buys
- 5/21: 4 shares of Ameriprise Financial (AMP) @ $131.47
- 5/22: 9 shares of Bristol-Myers (BMY) @ $60.92
- 5/22: 1 share of Amazon (AMZN) @ $2,456.50
- 5/26: 3 shares of Alibaba (BABA) @ $206.08
- 5/27: 2 shares of Broadcom (AVGO) @ $284.93
- 5/28: 16 shares of Enbridge (ENB) @ $32.31
- 5/29: 4 shares of Universal Display (OLED): @ $147.26
- 6/1: 11 shares of Toronto-Dominion Bank (TD): @ $43.23
- 6/2: 4 shares of Snap-On (SNA) @ $131.35
- 6/3: 7 shares of Royal Bank of Canada (RY) @ $70.66
- 6/4: 4 shares of Universal Display @ $147.26
- 6/5: 4 shares of Ameriprise Financial @ $163.85
- 6/5: 21 shares of Apogee Enterprise (APOG) @ $26.21
- 6/8: 21 shares of MDU Resources (MDU) @ $24.33
- 6/9: 12 shares of Altria (MO) @ $42.41
- 6/10: 1 share of Amazon @ $2,661.59
Some of these companies I bought just ahead of them going from good buys to reasonable buys.
I moved up some of their buy schedules by a week or two in order to be able to buy them at a good deal, striking while the opportunity for buying a "wonderful company at a fair price" was still available.
(Source: imgflip)
That includes the two AMP, OLED, and AMZN buys, as well as an accelerated buy on RY.
Why did I buy these companies specifically? It would take all day to explain individually, so let's consider all of them as a group.
(Source: DK Valuation Tool) green = potentially good buy, blue = potentially reasonable buy
Fundamental Stats On These 13 Phoenix Stocks I Bought 16 Times
- Average quality score: 9.5/11 Blue-chip quality vs. 9.6 average dividend aristocrat
- Average dividend safety score: 4.7/5 very safe vs. 4.6 average dividend aristocrat (about 5% dividend cut risk in this recession)
- Average payout ratio: 45% vs. 66% industry safety guideline
- Average debt/capital: 40% vs. 45% industry safety guideline vs 37% S&P 500
- Average yield: 3.6% vs. 1.8% S&P 500 and 2.1% aristocrats
- Average discount to fair value: 21% vs. 56% overvalued S&P 500
- Average dividend growth streak: 20.0 years vs. 25+ aristocrats, 20+ Graham Standard of Excellence
- Average 5-year dividend growth rate: 14.3% CAGR vs. 8.3% CAGR average aristocrat
- Average long-term analyst growth consensus: 15.7% CAGR vs. 7.1% CAGR average aristocrat, 5% to 7% CAGR S&P 500 historical norm (thriving companies)
- Average forward P/E: 19.1 vs. 25.5 S&P 500
- Average earnings yield: 5.2% vs. 3.9%% S&P 500
- Average PEG ratio: 1.26 vs. 1.59 historical vs. 3.0 S&P 500
- Average return on capital: 165% (83% Industry Percentile, Extremely High Quality/Wide Moat according to Joel Greenblatt)
- Average 13-year median ROC: 139% (improving moat/quality)
- Average 5-year ROC trend: +8% CAGR (improving moat/quality)
- Average S&P credit rating: A- vs. A- average aristocrat (2.5% 30-year bankruptcy risk)
- Average annual volatility: 30.7% vs. 22.5% average aristocrat (and 26% average Master List stock)
- Average market cap: $599 billion (mega-cap)
- Average 5-year total return potential: 3.6% yield + 15.7% CAGR long-term growth + 4.9% CAGR valuation boost = 24.2% CAGR (18% to 31% CAGR with 25% to 30% margin of error)
- Probability weighted expected average 5-year total return: 10% to 25% CAGR vs. 1% to 4% S&P 500
- Mid-Range Probability-Weighted Expected 5-Year Total Return: 18% CAGR vs 1% S&P 500
So now let's apply the new decision matrix on these 13 companies, at today's prices, remembering that I bought most of these at lower prices and thus even better deals.
Decision Matrix On All 13 Of These Companies
Goal Recent Buys Why Score (Out of 5) Preservation Of Capital Excellent 2.5% long-term bankruptcy risk (A-credit rating) 5 Return Of Capital Above-Average 28% of capital returned over the next 5 year via dividends vs 11% S&P 500 4 Return On Capital Excellent 18% PWR vs 1% S&P 500 5 Relative Investment Score 93/100 Letter Grade A S&P 73/100 = C
(Source: Dividend Kings Decision Matrix Tool)
My goal is sound and prudent long-term investments, even during the most overvalued market in 19 years.
No matter how big market bubbles get, blue-chips will always be reasonably or attractively priced.
My daily Phoenix buys are me not just mirroring my fellow Dividend Kings' founder Chuck Carnevale's favorite mantra "it's a market of stocks, not a stock market", but living this time tested fact.
My Real Money Phoenix Portfolio Bucket (Everything I've Bought Since April 4th)
(Source: Morningstar) 25% bond/cash allocation not shown
Not all of these companies are still good buys because some of these companies have rocketed higher along with the broader market.
(Source: Morningstar) 25% bond/cash allocation not shown
So let me provide the color-coded valuation list, the same feature we provide all our members via our Research Terminal and valuation tool.
DS Phoenix Bucket Sorted By Most To Least Undervalued
(Source: DK Valuation Tool) green = potentially good buy, blue = potentially reasonable buy
Fundamental Stats On My Phoenix Portfolio Bucket
- Average quality score: 9.9/11 Blue-chip quality vs. 9.6 average dividend aristocrat
- Average dividend safety score: 4.6/5 very safe vs. 4.6 average dividend aristocrat (about 5% dividend cut risk in this recession)
- Average payout ratio: 53% vs. 62% industry safety guideline
- Average debt/capital: 38% vs. 45% industry safety guideline vs 37% S&P 500
- Average yield: 3.3% vs. 1.8% S&P 500 and 2.1% aristocrats
- Average discount to fair value: 8% vs. 56% overvalued S&P 500
- Average dividend growth streak: 21.0 years vs. 25+ aristocrats, 20+ Graham Standard of Excellence
- Average 5-year dividend growth rate: 10.9% CAGR vs. 8.3% CAGR average aristocrat
- Average long-term analyst growth consensus: 11.2% CAGR vs. 7.1% CAGR average aristocrat, 5% to 7% CAGR S&P 500 historical norm (thriving companies)
- Average forward P/E: 19.7 vs. 25.5 S&P 500
- Average earnings yield: 5.1% vs. 3.9%% S&P 500
- Average PEG ratio: 2.20 vs. 2.39 historical vs. 3.0 S&P 500
- Average return on capital: 110% (86% Industry Percentile, Extremely High Quality/Wide Moat according to Joel Greenblatt)
- Average 13-year median ROC: 104% (improving moat/quality)
- Average 5-year ROC trend: +4% CAGR (improving moat/quality)
- Average S&P credit rating: A- vs. A- average aristocrat (2.5% 30-year bankruptcy risk)
- Average annual volatility: 25.7% vs. 22.5% average aristocrat (and 26% average Master List stock)
- Average market cap: $293 billion (mega-cap)
- Average 5-year total return potential: 3.3% yield + 11.2% CAGR long-term growth +1.7 % CAGR valuation boost = 16.2% CAGR (12% to 21% CAGR with 25% to 30% margin of error)
- Probability weighted expected average 5-year total return: 7% to 17% CAGR vs. 1% to 4% S&P 500
- Mid-Range Probability-Weighted Expected 5-Year Total Return: 12% CAGR vs 1% S&P 500
How reasonable would it be to buy all of these companies, equally weighted, right now, at a modest overall discount to fair value?
Decision Matrix On My Phoenix Portfolio Bucket
Goal DS Phoenix Portfolio Why Score (Out of 5) Preservation Of Capital Excellent 2.5% long-term bankruptcy risk (A-credit rating) 5 Return Of Capital Above-Average 22% of capital returned over the next 5 year via dividends vs 11% S&P 500 4 Return On Capital Excellent 12% PWR vs 1% S&P 500 5 Relative Investment Score 93/100 Letter Grade A S&P 73/100 = C
(Source: Dividend Kings Decision Matrix Tool)
It would still be a very reasonable and prudent decision, though I never recommend knowingly overpaying for companies, regardless of quality.
All companies come with fundamental risks, and all companies have volatility risk, regardless of quality or valuation.
But valuation risk aggregates volatility risk as well as reduces probability-weighted expected returns.
Bottom Line: Even In The Most Overvalued Market In 19 Years I Continue To Buy Quality Blue-Chips At Good Valuations...Every...Single...Day
(Source: imgflip)
No one can know the future, nor can they time the market with precision.
All we can do is strive to make, what Charlie Munger calls "consistently not stupid" decisions with our savings.
Is the stock market overvalued? Almost certainly.
Are the risks to the economy gone? Absolutely not.
(Source: New York Fed, Dallas Fed, Harvard)
The Weekly Economic Index tracks 10 daily/weekly economic reports in order to estimate, in as close to real-time as possible (updated Tues and Thurs), how fast the economy is growing.
On an annualized basis (how GDP is always reported) we
- bottomed at -48% in April
- improved to -39.5% last Thursday
- are now at -44%
Through June 9th, we just saw the strongest 54-day rally (+45%) since 1933. That's fitting since stocks are partying like it's literally the economy of 1999, while the actual economic facts, as best as we know them, are closer to 1933's.
(Source: Ploutos)
But guess what? I'm not trying to be a market timer, speculating about the market's irrational gyrations.
I'm a disciplined long-term investor, focused on
- buying wonderful companies
- with strong cashflow generating assets
- & very strong balance sheets
- & very safe dividends
- run by competent and trustworthy management
- that have very little risk of a permanent loss of capital
- & strong growth potential
- at reasonable to attractive prices
- to own for the next 5+ years
If the market keeps blowing its bubble? Then I benefit from a portfolio that's 75% stocks/25% cash & bonds.
If the market falls, as it eventually must, then I have 25% in cash & bonds waiting to deploy on a reasonable and prudent schedule, opportunistically profiting from even better deals.
(Source: AZ Quotes)
Speculators and traders pray for luck. Disciplined long-term investors, with diversified and prudently-risk-managed portfolios, make their own.
This is why I'll keep providing Dividend Kings members with our daily Phoenix buys while eating my own cooking.
That way, no matter what the broader market/economy is doing, each day brings us one step closer to achieving our long-term financial goals.
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