Sometimes explaining the detailed rationale behind my investing ideas is quite a bit more difficult than many readers would probably imagine... I receive many e-mails asking me to explain why exactly I bought preferred stocks for the MSN portfolio in October, or why did I say that AAPL's iPhone growth story is overblown and thus stock was overvalued at $175 a share in August, or why Russian stocks were still too expensive in July? Most of them wanted to see me quote more numbers, present harder facts and be more specific on my projections...
The answer to this complaint is a complicated one- as anyone who has followed my investing strategy here should have noticed already- my strategy is relatively unique and different from other "experts" out there- I have no "sacred cow" strategies, "true convictions" or "stubborn pride in my investing decisions". I am not afraid to acknowledge that I made a mistake by selling losers quickly, and tend to continuously scout the investing universe for mispricing opportunities across all investment classes when others are fearful and tend to become very skeptical and cynical when others are greedy...
It is true that I can easily explain my spreadsheets and macroeconomic views to anyone in a private or public conversation, but I also don't see the reason to spend too much time doing that... Instead I prefer to simply highlight the facts and events that I find to be of great significance, and instead tend to write my opinions on various stocks in non mechanical X+Y=Z manner...
I will let the record of my opinions and projections to speak for itself - look at the history of my messages- and would rather focus on generating the "next idea" instead of going into too much details by explaining how I came up with a current one...
When it comes to my current "hobby" of financial preferreds- the high level logic is simple:
• Banks approved for the TARP assistance are not going to be allowed to fail- they might have troubles with earnings for the common stock holders, but given the fact that government's investment is in the form of preferred stock as well, and a very cheap one I might add, my chances of not getting a dividend are just as low as that of them not paying the government
• With that in mind- one must simply make a calculation that assumes that all preferred securities within one class of the same bank should trade at a similar yield
• One could, and also should rank these banks in the order of the likelihood of them going out of business however remote it might be, and rate their relative yield in a certain order...
That's pretty much it- everything else is pure calculus and Excel magic...Am I going to be a 100% right- almost certainly not- but so far my preferreds theory has allowed me to stay in the black while every other strategy seems to have stopped working...
I do, in fact, believe that certain common stocks and market as a whole are also quite cheap today- but after a quick double digit rebound, the odds for the markets not moving much in either direction are now relatively high, so I'll wait for some serious catalyst to present itself, and in the mean time allow for prefs and closed-end buy-write ETFs to provide me with some dividend cushion on the downside....
Stay safe out there, skepticalcapitalist@gmail.com
More on buy-write funds here:
but here is a punchline:
"A "Buy-Write" strategy generally is considered to be an investment strategy in which an investor buys a stock or a basket of stocks, and also writes covered call options that correspond to the stock or basket of stocks.
Buy-Write strategies provide option premium income that can help cushion downside moves in an equity portfolio, but Buy-Writes often under perform stocks in rising markets. Thus, some Buy-Write strategies significantly outperformed stocks in 2000 when stock prices fell, but Buy-Writes tended to under perform stocks in the years 1995 - 1998 when the S&P 500 rose by more than 20% per year.
Buy-Write strategies have an added attraction to some investors in that Buy-Writes can help lessen the overall volatility in many portfolio"
Why would many of these funds sell at huge discounts? Answer is simple- fear...
