Dear members:
We hope you are enjoying this holiday season!
At Valuentum, we use a systematic methodology called the Valuentum Buying Index, abbreviated as VBI, that we calculate across our coverage universe. This VBI rating is one part of the research we use, but it is not a catch-all for every circumstance. We also use a proprietary dividend-cut indicator called the Dividend Cushion ratio, which leverages our cash-based valuation system--and perform lots of other qualitative and quantitative data-driven research.
We serve all types of different investors, from dividend growth to aggressive growth to income to high yield to short investors to ESG (Environmental, Social, Governance) focused investors to options traders and beyond. Each member will have his or her own (often very different) goals and risk tolerances, so the best ideas for you comes down to which ideas may be best for your own personal financial situation. That's obviously something only you and your personal financial advisor would know about.
For example, there may be highly rated stocks on the VBI -- the system that combines the discounted cash flow model with relative valuation and a technical assessment -- that don't pay a dividend, so these stocks obviously won't make the cut for the Dividend Growth Newsletter portfolio or the High Yield Dividend Growth Newsletter portfolio. Alphabet (GOOG) would be a good example in this case. Alphabet is a slam dunk to include in the Best Ideas Newsletter portfolio, but it may not fit well in other newsletter portfolios.
There are countless examples like this. There could also be stocks that have mediocre VBI ratings but have tremendously strong dividend growth prospects that are backed by competitively advantaged business models and excellent free cash flow coverage of the payout. One example might be Lockheed Martin (LMT), that has a very strong dividend yield of ~3.25% and a great Dividend Cushion ratio, but its technicals leave it with a middle-of-the-road VBI rating (we're watching LMT's free cash flow closely, too).
There could also be stocks with high VBI ratings or strong income and dividend growth prospects that just don't fit the bill for the ESG investor either. One example in this area is Philip Morris (PM). The company has a lofty dividend yield of ~5.5% and excellent income prospects, but as a cigarette maker, it would never find its way into the ESG Newsletter portfolio, despite being in the High Yield Dividend Newsletter portfolio.
Valuentum is committed to idea generation for a variety of preferences. The Best Ideas Newsletter portfolio includes ideas to consider for long-term capital appreciation. The Dividend Growth Newsletter portfolio represents ideas for long-term dividend growth potential. The High Yield Dividend Newsletter portfolio offers ideas for high income potential, while the ESG Newsletter portfolio contains a collection of great ideas for consideration that are also doing a social good. Each of these portfolios has different goals, and as a result, they come with a different make-up of opportunities and risks.
In addition to these four newsletters and four simulated newsletter portfolios, our team highlights four new options ideas for consideration each month in our additional options commentary product as well as three monthly ideas in the Valuentum Exclusive publication, one for income potential, one for capital appreciation potential, and one short-idea consideration. Options trading is very risky, and investors can lose their entire premium--so this area is definitely not for the beginner. Same goes for the Exclusive. Short investing can theoretically lead to infinite losses.
Choosing benchmarks for these simulated newsletter portfolios and products is a very difficult proposition, and one that we've deemphasized in recent years. We moved to weighting ranges in the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio at the end of 2017. Here's why: The Best Ideas Newsletter portfolio has been a slam dunk since inception, by almost every measure, despite, on average, a ~25% cash "weighting" for much of its history (2011 through 2017). This leaves us with a peculiar situation, as in reality, it doesn't have a good benchmark,
Some may believe that the correct benchmark for the simulated Best Ideas Newsletter portfolio is a 75% stock/25% cash portfolio. This is how most portfolios are judged, on a holdings-based consideration. Others may believe that the correct benchmark for the Best Ideas Newsletter portfolio is a 60%/40% stock/bond portfolio reduced by 1% each year. After all, this is the opportunity cost of the DIY investor hiring an external AUM fee-based service. We tend to view the opportunity cost as the best way to think about investing. Had you not been doing something, what would you be doing, and is that something worse.
For every investor, there is going to be a portfolio that they prefer and a benchmark that they prefer to match up against. It's just the way it is, but the industry plays far too many games with benchmarking, and we don't want to play the benchmarking game. For example, you may have heard that most large cap growth fund managers haven't beaten their benchmarks, and that this may be a reason to index. You may have heard, as well, that most fund managers don't have any skill, also to push you into indexing, or to become a passive investor.
But look at the tragedy this sales pitch would have done.
Had you just picked some of the largest U.S. stocks with strong net cash positions and solid free cash flow -- very well-known stocks -- during the past 10 years, you might have come out with a return of ~515% (see below), give or take, during the past 10 years (the return of the SCHG), while had you rebalanced the 60%/40% indexed stock/bond portfolio, you would have only gained ~180% (see below), give or take. These are just hypotheticals, of course, but they help illustrate the value of DIY prudent and diversified stock selection versus indexed asset allocation strategies.
[Note that the 60%/40% indexed stock/bond hypothetical percentage gain in this comparison is not reduced by the asset management fee that might have been attached to it.]
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Image: A simple large cap growth stock index, as a proxy for diversified active stock selection, vastly outperformed the 60%/40% stock/bond portfolio the past 10 years. Image Source: Morningstar.
Hindsight is 20/20, of course, and past results are no indication of future performance, but we're not talking about cryptocurrency or high-beta, ultra-risky, Hail Mary ARK Innovation ETF (ARKK) stocks to achieve this vast disparity. This comparison shows what a DIY stock investor that focused on some of the largest and strongest U.S. companies the past 10 years might have achieved, give or take. The divide is as large as the Grand Canyon! I think you're being too hard on yourself if you think you're not doing well with diversified stock selection. Just think -- Instead, you could have been languishing paying 1% a year in consulting fees just to rebalance a simple 60%/40% stock/bond portfolio!
With all the simulated newsletter portfolios, all the subjectivity involved in measuring their benchmarks, and the industry perpetuating the great farce of holdings-based benchmarking to sell more index funds, we want investors to think more reasonably about their goals (and achievements). Imagine the investor that is paying through the nose for someone else to rebalance a 60%/40% indexed stock/bond portfolio. My goodness. You could have been one of the worst stock investors the past 10 years and still had done better. It has become my belief that the financial industry only exists these days to sell you large fees on index funds. Don't let it.
Brokerage commissions on stocks are free!
Below, you'll find Valuentum's best ideas for each respective strategy. Now, of course, not all of these stocks will be right for you, and not all of these stocks should be viewed equally. For example, in the Best Ideas Newsletter portfolio, we like Google and Facebook (FB) much more than we might like the Financial Select Sector SPDR (XLF). You should use the hypothetical "weightings" we assign to the stocks as a way to gauge our conviction on (how much we like) any particular name in the context of each portfolio.
I'm so proud of you. Keep going, keep studying. Stay prudent, stay diversified. Cut through the industry nonsense on indexing. See through the tricks of holdings-based benchmarking that are used to take your eyes off the big picture. Keep doing your homework -- and don't forget: We continue to like stocks for the long haul! It's been a lot of fun cutting through the indexing propaganda all these years. May you all have a blessed holiday season!
A snapshot of the four simulated newsletters follows.
Kind regards,
Brian Nelson, CFA
President, Investment Research
Valuentum Securities, Inc.
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BEST IDEAS NEWSLETTER PORTFOLIO |
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DIVIDEND GROWTH NEWSLETTER PORTFOLIO |
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HIGH YIELD DIVIDEND NEWSLETTER PORTFOLIO |
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Sign up to our new options commentary here.
$1,000/year. 4 ideas per month and more!
Image: Win = The options contract was closed as a win. Closed = the options contract was closed at a loss. Expired = The options contract expired worthless. Pie chart above does not consider ideas still open. Data through October 26, 2021. Results are hypothetical. No trading is taking place. Past performance is not indicative of future performance.
Please note that with options trading, investors can lose their entire premium. Don't ever trade with money that you can't afford to lose. Valuentum is an investment research publisher and accepts no liability for how readers may choose to utilize the content. By continuing with an additional options commentary membership, you accept our Terms and Conditions. If you do not agree with the Terms and Conditions, you must stop using this service and cancel your additional options commentary membership.
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Valuentum's President of Investment Research Brian Michael Nelson, CFA, explains why there are not really value and growth stocks, why most of the research in quantitative finance is spurious and needs to be redefined on a forward-looking basis, and why enterprise valuation (not the efficient markets hypothesis) should be the organizing principle of finance.
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Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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"What if I told you that almost everything you know about finance is wrong? The book Value Trap is the finance and valuation course you didn't get in school," President of Investment Research at Valuentum Brian Nelson says.
"The field needs to be almost entirely redefined in a forward-looking manner. Historical data is useless when it comes to asset pricing. It is future expectations that matter. In the age of Big Data, there may be no better book to guide investors than Value Trap."
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Contact Us
Valuentum Securities, Inc.
www.valuentum.com
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This email, its contents, and the reports or articles (links) or comments referenced or attached in this email are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of the reports, articles, Best Ideas Newsletter, Dividend Growth Newsletter, Valuentum Exclusive publication, or any other communication and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the reports or articles and are subject to change without notice. For more information about Valuentum and the products and services it offers, please contact us at [email protected]. The Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio are not real money portfolios. Any performance, including that in the Valuentum Exclusive publication, is hypothetical and does not represent actual trading. Past simulated performance, back-tested or walk-forward or other, is not a guarantee of future results. Valuentum is not a money manager, is not a registered investment advisor, and does not offer brokerage or investment banking services. Valuentum is an investment research publishing company. No warranty or guarantee may be created or extended by sales or promotional materials, whether by email or in any other format. Further, this e-mail and attachments relating thereto, is intended for the abovementioned recipient. If you have received this e-mail in error, kindly notify the sender and delete it immediately as it contains information relating to the official business of Valuentum Securities Inc, which is confidential, legally privileged and proprietary to Valuentum Securities Inc.
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