In the post from a couple of weeks ago I mentioned several stocks (that we do not own) that fit the bill. Another one to mention in this context that we also do not own in Chevron (CVX). The company has been around forever although the name has changed a few times over the years and there has been M&A activity along the way.
Since the debut of the Energy Sector SPDR (XLE) in 1998 CVX has lagged XLE noticeably but going year by year there have been many times that CVX has outperformed. CVX has been a decent proxy but not a world beater and the company is nowhere near as complicated as something like a mortgage REIT or insurance company. Going forward it is very likely to continue being a decent proxy (it also has some yield) even if it doesn't beat XLE for the next ten or 15 years.
This compares to a stock with much different attributes that was extremely popular a few years ago but has since fallen on hard times and was taken down pretty aggressively at Seeking Alpha; Nordic American Tanker (NAT). NAT used to pay out a very large dividend (quite often it was actually a return of capital) and the CEO was on stock market television very frequently although I never understood why.
I've written about NAT twice on the blog that I could find. One time I included it on a listy post about combining higher risk and lower risk names to build a sector allocation and I mentioned it again with a much more skeptical tone noting among other things my suspicion about the CEO's performance on stock market television. In that second post I said the space was valid but that the CEO made me uncomfortable relative to ever buying NAT which we never did. Based on how many stocks in the shipping group have been crushed without every coming back maybe the space isn't valid. NAT is down 75% from its 2008 high.
The last time I mentioned shipping stocks a reader pointed out Navios Maritime Partners (NMM) as being an exception. I don't know if it is an exception but it has done better than many other shippers.
It probably would have been easy to have been sucked into this stock a few years or at least infatuated with it because of how often the CEO was given a platform to speak and how articulate he is. As someone not having a forensic accounting degree however it would not have taken long to realize that the company is far more complicated than something like Chevron for several reasons including the many secondary offerings. The very high yield back then would have also been a clue for risk even if not complexity.
This is not a post about being anyone having to be a great stock picker. I would contend that picking a name like Chevron, even if it does fantastically well, is more about picking what you know and what is a little easier to understand and avoiding something like NAT is about avoiding the complex. Investors who keep it simple and have an adequate savings rate are giving themselves a very good shot to have enough money when they need it.
To be clear, CVX is simply an example, we have no plans to buy the name. One other point to make is that I pay attention to all sorts of stocks including complicated names like NAT (even though we never bought), it is one of the things that makes the job so fun.
4 comments:
I think it is important to avoid individual stocks for two reasons:
1) There is the possibility of underperforming the market when it is not necessary. For the average market participant - the investor - the likelihood of underperforming is more than 50%. That's just the brutal honesty of basic math.
2) Who will manage the beast when either the person you hired to manage it no longer does or if you are a DIY investor you can no longer manage it yourself? This is especially important if you have family memebers depending on this portfolio. I have seen plenty of elderly people who get confused just paying monthly utility bills. They simply cannot manage a portfolio of stocks.
There are of course going to be exceptions but do you feel lucky?
Your number two is important but easily mitigated and not a reason to avoid one method of investing.
Good post, I agree. I have most of my portfolio in indexed etf's and mf's, but have always enjoyed picking a handful of individual stocks (aapl and goog have been nice winners, fb - um, never mind). I also sell covered calls on my positions (any thoughts on that random?). I feel comfortable doing this as long as I keep in mind my position sizing vis-a-vis my total portfolio.
Call premiums are so much less than they used to be that IMO it is less compelling. Interest rates are part of most pricing models and with rates at zero the premiums are lower.
I've written about selling calls a couple of times with the context being trying to squeeze out the equivalent of one more dividend during the year.
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