3/14/2013

Readers Q&A: How My Portfolio Strategy Works

I’ve received recently an e-mail from one of my long-term readers. He mentioned some really valueable questions. Below is his mail:

Dear Tom, I’ve been following your site for a while and have come to relate to the dividend philosophy.

I have some questions however, that I don’t find addressed anywhere in your blog site.
I would appreciate knowing….

1. Do you ever sell off any dividend stocks?

2. If so, what trigger/s do you look for to alert you that it may be time to sell a stock?

3. Do you only concentrate on dividend producing stocks, or do you purchase stocks for trading positions?

4. You speak of currency in Euros and the grammar in your blog texts sounds like you are from somewhere other than the US.   May I ask where you live?

These are very good questions and I like to answer them all as good as I can.

1.     My investment philosophy is long-term orientated. Normally, I invest money into stocks with a good past growth performance. I always look for companies which have doubled sales over the recent 10 years with gaining earnings growth. It’s also good when the company have paid consecutive dividends and raised them over the years. In addition, the company should have made share buy backs in a significant amount. I love it when the number of outstanding shares decreases steadily and boosts the earnings per share growth. I don’t plan to sell these stocks. I like to participate on the long-term growth. This alone could drive my net worth.

It could happen that the past performance does not work for the future. Something is wrong with the management and the business model changes or the environment gets tougher. In this case I do sell stocks and I also close positions completely. As example: I initiated a position in Esprit, a global clothing retailer, but I needed to close the position because my view was completely wrong about the stock. There were some changes in the management structure and the turnaround does not work as I hoped it should. As a result I made a 50% loss.

2.     As mentioned, one trigger is that the company in no more on track or something has changed. Another criterion is that the company’s business environment has developed into a bad direction which makes it hard to grow. I sold stocks from credit rating agencies, motor cycle companies, multi marketing level stocks and finally stock exchanges. Sure they can deliver a good return for the future but I see more opportunities in other sectors with fewer headwinds.

3.     I normally don’t trade stocks. I follow a buy and hold strategy. I like to be an owner of the company. Sure this is very idealistic especially when you buy only stocks with an amount of a few thousand dollars but in my view, it doesn’t matter if you buy 100 stocks or a hundred million. The business of an investor is highly scalable and works full-time with a few hundred thousand dollars. Sure, it mainly depends on your living standard approach.

I am not a swing or day trader. I don’t judge these ways of making money at the market. They all have their eligibility and could work if you have a good talent in your trading niche. For me is this not the right strategy because I don’t know how the market moves over the next days. It’s like gambling if you buy stocks without having an idea of how to get a return. You need a clear strategy. I don’t play with money and I couldn’t lose bigger amounts because I must live from it and every coin I don’t lose is also a penny I don’t need to gain.

4.     You are right. I’m not an U.S. Citizen. I have my net worth accounted in Euro. This is a problematic situation because my main investments are valuated in US Dollar. I lose and gain more money with changes in the currency pair EUR/USD. There are days on which I have a bigger currency effect than equity contributions. I always think that I can make more money with currency changes but as a long-term investor, these effects shouldn’t be important for your asset allocation. As example, Philip Morris makes all of their sales outside the U.S. but in my accounts the position is listed in USD. A weaker US-Dollar should boost PM’s income but decrease my position value; the currency effect will be neutralized in the long-run. I have hedged around 35% of my assets because I sold short the USD currency.

It doesn’t matter where you live when you are an investor and maybe I settle one day to an Asian country because of the higher growth situation and the higher degree of economic health. The US-Dollar is still the dominating reverse currency but should lose strength over the time. The Chinese Renminbi and other emerging market currencies should be stronger as well as the EUR.

Sorry for my bad grammar but I’m not an English native speaker. I do this writing not for money. It’s more fun and a nice tool to stay disciplined.

Nothing is perfect in my blog but I hope you get inspired and my work helps you organize your investment strategy. If I wouldn’t do all this research I would have never reached my current wealth level. Yes, investing is still hard work but it pays off.

I hope these sentences helped you to understand of how I work. If not you can leave a comment on my Facebook-Page. I always try my best to help others.

Tom

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