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Real-Money Stock Picks / iPIG Portfolio
|Subject: iPIG Portfolio FAQ v. 1.0.1||Date: 5/16/2013 11:50 PM|
|Author: TMFBigFrog||Number: 121 of 702|
This is version 1.0.1 of the iPIG portfolio FAQ list, built largely from the input collected in this thread: http://boards.fool.com/request-for-quotqquots-for-faq-306504... . Note that this is a static post describing an evolving portfolio, and things may change in the portfolio or its management without being reflected here.
If you see any outrageous errors or misstatements or would like to see additional key FAQ topics covered, please post a reply or new message.
Q: What is the iPIG portfolio?
The portfolio's full name is the "Inflation-Protected Income Growth" portfolio. It's a real money portfolio that attempts to build an income stream that increases each year at least as much as the rate of inflation. The portfolio's primary method of investing is to buy shares of companies with a history of paying dividends & increasing their dividends and that look capable of continuing to raise their dividends in the future. See the introductory article for more details: http://www.fool.com/investing/dividends-income/2012/12/04/in... .
Q: When / How / Why did it start?
The portfolio officially launched with $30,000 on December 4, 2012. The idea for it came to life in October, at the 2012 Fool writers' conference. The Investment Planning bureau chief offered the opportunity to run a real-money portfolio on the Fool site, and eventual iPIG portfolio manager Chuck Saletta submitted the idea that turned into this portfolio. For the decade+ that Chuck has been investing on his own, he has been most sustainably successful when investing in these types of companies, even when an individual investment doesn't work out as planned. See this article for more details: http://www.fool.com/retirement/general/2012/02/22/the-best-l... .
Q: What are the portfolio's key investment criteria?
The portfolio typically looks to buy companies with a history of paying and raising dividends and the potential to continue that trend. With that in mind, the current key criteria are:
* Dividend levels that have regularly increased recently. This is a powerful signal, especially if a company managed to continue raising its dividend even during the recent financial meltdown.
* Dividends that are well covered. A payout ratio of less than 2/3 of earnings with those earnings well covered by cash flows is ideal, though exceptions can be made if specific circumstances warrant.
* A reasonable debt-to-equity ratio, generally between 0 and 2.0 (though, as above, exceptions can be made if circumstances warrant). A moderate amount of debt in the hands of a well-managed company can be useful, but as the recent financial meltdown so painfully reminded us, too much debt can be fatal, even when in the hands of some of the world's most well-educated financial minds.
* Some reason to believe the dividends can continue to grow. That generally comes from either expected company growth rates or a low payout ratio, but sometimes it can come from other sources like corporate structures that force high payout ratios.
* A reasonable price when compared to an intrinsic value estimate, with that estimate determined by at least one fundamentals-focused investment valuation technique. And yeah -- different techniques can have different answers on the same company.
* An acceptable fit with the rest of the portfolio from a diversification standpoint.
Being that strict on investing criteria does limit the universe of available investments, but it certainly helps the portfolio manager sleep at night, which has to be worth something, right?
Q: What picks are in the portfolio?
There's a Google Docs spreadsheet that currently tracks the iPIG portfolio, available here: https://docs.google.com/spreadsheet/pub?key=0AuOfxx43EEvidHo... . The snapshot page shows the portfolio's recent state, and the transactions page shows every transaction since the portfolio was launched. Note that there may be a significant delay between when a transaction happens and when the tracking spreadsheet is updated, and while the information is believed to be correct, it is not guaranteed.
Q: What guarantees do you have of success?
Zero. Zilch. Zip. Nada. None. Not a single one. Investing involves risk, including the risk of complete loss of invested capital (and then some, if leveraged). That said, not investing involves risk too, including the risk of losing purchasing power over time due to inflation.
In reality, it isn't a question of 'is this risky?' (the answer is "yes!"), but a question of 'which risks are you going to take?' Only you can answer that question for yourself and your family and your finances.
Q: Why sell?
Lots of reasons. Nothing lasts forever, and if a company no longer fits, it no longer fits. Could be valuation. Could be business trouble. Could be overleveraging of the balance sheet. Could be a much more compelling alternative. Could be the dividend no longer looks secure. Could be that the original buy was a mistake. And on and on and on...
As an example, as of this writing, Pitney Bowes recently announced that it slashed its dividend to protect its balance sheet, and its stock dropped more than 15% on the news. Pitney Bowes was never an iPIG selection, in spite of its previous dividend growth history, in part because its dividend looked to be at risk. Not every at risk dividend is as identifiable as Pitney Bowes' was, and not every dividend that looks to be at risk will actually get cut. But many are, and if a company starts showing the signs of a seriously at-risk dividend, why take the extra chance, above and beyond the general risks associated with investing in individual stocks by intentionally owning one that doesn't look capable of continuing to fit with the investment thesis?
Q: Who's running this thing, and why should I trust him/her?
Chuck Saletta (TMFBigFrog) is the iPIG portfolio manager. See his profile here: http://my.fool.com/profile/TMFBigFrog/info.aspx . Chuck has been a Fool since 1998, a contributing writer for the Fool since 2003, and was the founder of the Dividend Growth Investing board on the Fool ( http://boards.fool.com/why-this-board-20634027.aspx ). That said, Chuck isn't asking you to invest your money with him, he isn't suggesting you follow his lead, and he doesn't want you to blindly parrot his investments.
The Fool's discussion board mission statement is "Learning together". ( http://www.fool.com/help/index.htm?display=community06 ). Consider this a "Learning together" exercise, and please feel free to post your thoughts & comments on this board.
Q: What is the goal / end state of the portfolio?
The portfolio aims to build an income stream that grows over time at least as fast as inflation. There is no pre-determined end to this portfolio or goal, but nothing lasts forever, and this feature, like many others, can be cancelled.
Q: Are dividends automatically reinvested or accumulated?
Dividends in the iPIG portfolio accumulate as cash. They may be invested if the overall cash pile is large enough when a compelling opportunity presents itself.
Q: What are the expense goals?
On the buy side, it'd be great to keep the commissions below 1%. On the sell side, it's more a question of what's left after all friction costs and how that compares to a reasonable fair value estimate of the company.
Q: Does the portfolio have a maximum or optimum number of holdings?
Enough to be reasonably diversified, not so many as to be unmanageable. This article has a great primer on the portfolio's diversification practices: http://www.fool.com/investing/general/2012/12/31/the-great-i...
Q: Does the portfolio intentionally hold cash for bargain opportunities?
Valuation plays a key part in the portfolio's investment process, but this is not a discount focused portfolio. As a general rule, if a company fits from a dividend, balance sheet, and diversification perspective, it can be bought for the portfolio as long as it looks fairly valued or below. In any event, it's important to realize that any valuation depends on a projection of the future, and as such, it's all about the assumptions which may well turn out to be wrong.
Q: What valuation method(s) do you use to estimate fair value?
Charlie Munger has said he has never seen Warren Buffett do a discounted cash flow analysis. While Warren is a significantly better investor than Chuck will ever be, Chuck's big takeaway from that Charlie's disclosure is that the assumptions make all the difference in any investment analysis technique, and if the assumptions are wrong, it doesn't matter what the spreadsheet says.
With that in mind, any fundamentally focused valuation technique is fair game. Key ones that have been used in iPIG-related analyses are discounted cash flow analyses, dividend discount analyses, and the "Graham Equation" (named after its creator, Benjamin Graham, the founder of value investing). Chuck would also be willing to consider companies that look cheap based on a price to tangible book value basis or other such measures, but they'd also have to fit the dividend, balance sheet, and diversification criteria as well as the valuation one.
If you have any additional fundamental valuation techniques that you'd like to see considered, please post them on this board. Chuck is very open to suggestions, though he is a huge fan of the KISS approach: "Keep It Simple & streamlined".
Q: What is the 'stock that might get away', and why does it matter?
Kinder Morgan (NYSE: KMI) was a potential selection for the iPIG portfolio whose price rose beyond Chuck's buy below level in the brief trading blockout window between when he wrote about the selection and when he could buy it for the iPIG portfolio within the terms of the Fool's disclosure policy/trading guidelines ( http://www.fool.com/Legal/fool-disclosure-policy.aspx ). Although picked, it hasn't been purchased, and if the stock keeps going up, it may never be bought for this portfolio. At some point, either the buy below price will change based on changes in the business, another investment will look more compelling than waiting around for this one, or the market may offer a sale.
In the mean time, as of the initial publication of this FAQ, in addition to the slot currently reserved for the stock that might get away, there's cash in the portfolio for one additional pick. The market has been rising significantly recently, and it's tough to find a pick that fits all the key investment criteria with prices up so much. They say patience is a virtue. While it's tough to be patient while sitting on cash in a rising market, it's a lot easier to be patient while getting paid by the other picks in the portfolio.
For more on the stock that might get away, see the original selection piece: http://www.fool.com/investing/dividends-income/2012/12/28/wh... and the video article that discussed why it might get away: http://www.fool.com/investing/dividends-income/2013/01/04/wi... .
If you'd like to pitch a stock for the iPIG portfolio, please feel free to use this message board.
Q: What characteristics of a business should it possess so that it offers owners better than average protection against the devastating impacts inflation can have on business?
There are no guarantees, of course. Still, the key investing criteria mentioned above provide a decent foundation, but there are also items that are tougher to quantify that matter, too. For instance, companies with great "moats" that keep competition at bay generally have stronger pricing power than those that don't. While sometimes it's easy to identify a moat -- especially in those companies that have natural monopolies on their lines of business -- other times it's harder to see.
Other things to consider are how necessary a company's products are and how frequent the purchase cycles are for those products. The more necessary a company's product is to its consumers, the better that company can pass on its costs. Additionally, the more frequent a product's purchase cycle is, the less inflation appears as sticker shock. For instance, if inflation runs at 4% a year, the new car you buy 10 years from now may well cost you 48% more than the one you buy today, even before accounting for quality improvements over the next 10 years. But on a monthly purchase for a product whose price rises in the neighborhood of 0.3% a month, the change may not be nearly as noticeable. Likewise, you may be able to put off a monthly purchase for a few days to a week or so to come up with the extra cash, but you can often defer a new car purchase for years if needed...
Q: Are you particularly concerned about high or runaway inflation in the future? Or, are you just attempting to cover all the possibilities by emphasizing inflation protection?
Even at 'moderate' levels, inflation can destroy the purchasing power of your savings over time if you don't plan to cover it. A 40 year retirement is not unheard of these days, and even at 4% per year, inflation can knock out around 80% of your purchasing power over that time frame. If you're not prepared for inflation, you can wind up without purchasing power at a time in your life when you can no longer work to earn a living.
Even without that long term view, the official inflation rate generally understates people's true cost increases over time, especially as they age. This article goes into more detail on two reasons as to why that's the case (Hedonic Adjustments and health care costs): http://www.fool.com/retirement/general/2012/10/17/your-socia... . If your investment plan doesn't keep up with the official inflation rate, it'll likely have an even harder time keeping up with your true cost increases.
Q: What about buybacks?
What about them? Many buybacks wind up as somewhere between neutral and bad for long-term shareholders. The only time a buyback makes strong financial sense for shareholders is if a company's stock is undervalued. Unfortunately, many times that a company's stock is significantly undervalued, it's because there's something visibly wrong with it. In those cases, rather thany buy back cheap shares, many companies will cancel or scale back their buyback programs to conserve cash or reinvest in repairing whatever is wrong.
Q: How are dividends calculated? Is it a percentage of current stock price or par value (if there is a par value)?
Q: What is the difference between preferred dividend stocks and regular dividend stocks?
Q: Are there good tax-free dividend stocks?
Q: I'm close to retirement and want to have a more or less steady income from my portfolio. What are some things I should think about when selecting dividend stocks?
These are great general questions that were very well answered by Fool contributor jackcrow, here: http://boards.fool.com/karen-we-may-be-able-to-take-care-of-...
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Disclosure I currently own shares of Kinder Morgan Management, a related company to Kinder Morgan.
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