Don't Dismiss Value Investing

The current issue of Barron's has a cover story entitled "10 Terrific Dividend Stocks". These ten stocks of mega companies have the current dividend yield of 3.6% whereas the S&P 500's is at 2.2%.

Now if we assume that a person buys these ten stocks when the current bull rally expires and the Dow has declined by let's say 30%, then the investor can buy these stocks at an average yield of 5.14%. I am assuming that the current level of Dow is about 30% overvalued. Should it overshoot on the downside to a total decline of 50%, then the yield that can be achieved would be 7.2%. Assuming that at that level of the market decline, some of these companies might lower their dividends and thus we might get let's say an effective 6% dividend yield.

Now, if the investor were to hold these ten stocks for a very long time, after having bought them at some reasonable valuation levels, they would do substantially better than using Dow Theory's buy and sell signals, primarily because they would not lose the opportunity to have their dividends compounded, which happens to be the golden rule even of Richard Russell editor of the Dow Theory Letters.

The added benefit of this kind of buy-and-hold would be the shield against the most likely scenario to unfold in the coming years which is high inflation in the US. These companies have a built-in advantage of being able to stay alive by raising the prices of their products/services. They also have huge moats and they simply cannot be duplicated at almost any cost.

I have used the Barron's ten stocks only because of convenience as I just read the article today and additionally these thoughts were triggered by the most recent blog posting.

One more point: One distinction that is often not made is this: There are at least two distinct classes of investors that we should account for when we discuss any long or short term strategies. One is young investors whose investment horizon is very long and are working; thus should not need the dividend income to live on. The other class consists of the "non-working" investors with opposite characteristics.

The investors in the "working" group would be better off buying quality, well-run, dividend-paying big companies with strong moats and the pricing power -- like the ones Barron's discusses today -- and holding them for a very, very long period. Once they buy their 6 to 10 stocks from a list like Barron's when the market has shed its over-exuberance, they need not be concerned with daily/weekly/monthly gyrations of the market, nor even with the exogenous events. The companies like these recreate/rebuild themselves continually -- are Johnson & Johnson (JNJ) or Proctor & Gamble (PG) for instance the same as they were say 20 years ago? As the consuming population keeps increasing, along with productivity and technology, the growth of these companies should ensure the safety of their dividends in good as well as bad times. Plus they being excellent inflation hedges, the capital preservation goals would also be met in the long term.

My point in all this is that using the Dow Theory for getting in and out of the markets and doing so for a decade or two might not be the right approach for the "working" group. The "non-working" group can profit more by shifting allocations among various asset classes.

Written by V.S.

Profiting from Dow Theory

When a person decides that they want to invest in stocks, most new investors, by default, take the approach of buy-and-hold. Since the release of Graham and Dodd’s book Security Analysis the idea of buy-and-hold seems like the most effective approach to investing. However, what many people forget is that Graham and Dodd’s book was written after the crash of 1929 to 1932 and therefore is built upon many attributes of hindsight. The method of buy-and-hold investing has not been proven through severe market declines like that of 1929 to 1932.

The success of Graham and Dodd’s book Security Analysis has been fostered primarily through the success of Warren Buffett. The immense fortune that Warren Buffett has accumulated through investing only in stocks, has cemented the buy-and-hold mantra as the pre-eminent investing approach. Warren Buffett’s success has come at the price of eliminating the idea that buying and selling stocks on a reasonably short term basis might be a acceptable alternative.

Short-term investing was successful before 1929 by the likes of Joseph Kennedy, Bernard Baruch, Jay Gould, John “Bet a Million” Gates, James Keenan, and Jesse Livermore and was promptly discredited after the collapse of the stock market in 1929. Interestingly, many of these people made money as the market declined using the same short-term approach as when the market was going up.

To demonstrate the benefits that may or may not exist for buying and selling stocks in a reasonably short period of time, I have examined four different methods for measuring the increase of the Dow Industrial index from 1896 until 1998, 1990, and 1999.


The first method is the buying and selling of stocks during all the bull markets from 1896 to 1989. This means that stocks are bought at the exact bottom of a bear market and sold at the exact top of a bull market. The second method is the buying and holding of the Dow Industrial index with dividends reinvested. The third method is the use of Dow Theory. This means buying at bull market indications and selling at bear market indications. The last method is the buy and hold of the Dow Industrial index without dividends.

Using the book Principles of Professional Speculation, I calculated the total return to an investor who bought and sold at a bear market bottoms and bull market tops. If an individual had invested $100 in 1897, and bought at the exact bottom and sold at the exact top of every bull market until 1989, that money would grow to $403,106,218.46. Again, this is calculated by reinvesting all the money that was earned during each bull market selling at the top of each bull market and buying at the exact bottom of each bear market.

The next method that I reviewed was the buy-and-hold of the Dow Industrial index with dividends reinvested. To evaluate the performance of the Dow Industrial Index, I used the article “The DJIA Crossed 652,230,” by R. Clarke and M. Statman, The Journal of Portfolio Management, Winter 2000. According to the abstract of the article, “The DJIA, like most indexes, is a capital index. It excludes dividends. The DJIA was initiated in 1896 and 40.94 and reached 9,181.43 by the end of 1998. The authors show that a wealth DJIA, an index that accounts for reinvestment of dividends, would have reached 652,230.87 by the end of 1998.” This means that for $100 invested in the index it would have grown to $1,593,038 by 1998. Again, this is if an individual were to buy and hold the stocks from the very beginning until the very end reinvesting all dividends that were paid.

The next method is the Dow Theory. Using the book Dow Theory for the 21st Century written by Jack Shannep, we find on page 27 a table of Dow Theory’s 103-year history. From the period of 1897 until September 23, 1999 an investor who bought and sold based on Dow’s theory, would have had $100 grow to $362,212.97. Again, this method of investing is based on the buy and sell signals of Dow Theory.

Finally, we are reviewed the Dow Jones Industrial Average if it was just based on the movement of the price and not the reinvestment of dividends. In this case, $100 would have grown to $25,103.27 from 1896 until 1998. It is interesting to note that at the time that the article was written by Clark and Statman, the Dow Industrial Average was at the same level that the Dow Industrial average closed on November 20, 2009 (10,318).

Out of the four methods, I calculated buying at bear market bottoms and the selling at bull market tops as a benchmark. Ideally, all investors should have the goal of getting as close to the maximum that the market has to offer. Naturally, Warren Buffett has become the benchmark that most people measure their investments by.

The best performing approach is the buy-and-hold with dividends reinvested. This approach increased $100 to $1,593,038. This approach required no special skills and it did not require a special knowledge of how stocks or the stock market work over that specific period. It should be noted that the Dow Industrials are supposed to represent quality companies that, although are not the leading edge technology companies, are among the largest well-run companies in the nation.

The runner-up was the Dow Theory method of investing in stocks. This approach garnered a reasonable return of $100 growing to $362, 212. However, Dow Theory pales in comparison to the buy-and-hold with dividends reinvested. In this respect, Dow Theory does not make much sense. The buy-and-hold method resulted in five times the returns.

Despite the flaws of Dow Theory, the actively managed approach beat the buy and hold approach without dividends reinvested by a considerable margin. This is the equivalent of investing in NASDAQ stocks that do not pay any dividend. Some would argue that NASDAQ stocks offer significant growth opportunities and therefore justify no dividend payment. However, anyone who applies this logic relies on the fact that they must sell in order to see any gain in the stocks purchased.

Profiting From Dow Theory

One of the critical problems with Dow Theory is the fact that the technical buy signal comes far too late in the process of a bull market. This is a problem that I have known about for a very long time. In fact, it is one of the main reasons that I did not choose to study Dow Theory critically until after reading about it for over 10 years. I was always concerned about the "lateness" of the Dow Theory buy and sell signals.

However, I have learned that the Transportation index may be the key to investment success while applying Dow Theory. Although the Dow Jones Industrial Average is more popular, the Transportation index has greater volatility in both bull and bear markets. As an example, since the March low the Transports have racked up 85% while the Industrials have only gained 60%. Additionally, in bull markets since 1932, the Transportation index has exceeded the gains of the Dow Industrials by a wide margin 14 out of 16 times as noted in the book Principles of Professional Speculation (page 107). I have known this to be the case about the Transportation index for a very long time. However, I could not act on that information since I had not been able to demonstrate exactly the best way to benefit from it.

After the bear market of 2007 to 2009, I have been able to determine that the best way to take advantage of bull markets for the Transportation index can easily be done in a fairly methodical fashion.

Again, a main problem of Dow Theory is that you don’t get the bull market indication until well after the fact. A prime example of this took place when the Dow Theory bull market indications came five months after the bottom in the stock market on March 9, 2009. As described before, the outsized change in the movement of the Transportation index compared to the Dow Industrial index means that although you get a late indication of the Dow Theory signal for a bull market, you can still take considerable advantage of the potential upside move.

This is demonstrated when the Transportation index on July 24th, only went up 11% between July 24th and November 20th (Industrials have been up by 13%). However, specific stocks within the Transportation index went up 30% to 80%. This means that if you chose the correct companies based strictly on the Dow Theory buy signal, you would have been able to achieve at least half of the March 9 to November 20 gains of 60% in the Dow Jones Industrial Average.

As I looked through the Transportation index, I sought out the characteristics of the companies that significantly beat the index from July 24th to November 20th. Not surprisingly, the Transportation stocks that increased the most were those that had a low price, were in the passenger airline industry, were held for two months, and had large volume.

There were exceptions to this rule. For example, Ryder Systems had increased up to 40% from the July 24th signal. Additionally, Federal Express (FDX) increased by 30% from the July 24th bull market signal. However, these companies were exceptions to the rule.

In the case of Federal Express (FDX), you would think that the stock of competitor UPS (UPS) would have done the same as FDX. Unfortunately, that was not the case for UPS. Because there was no correlation between the companies that provide the same service I had to disregard the performance of FDX. In the case of UPS, it underperformed the Transportation index by rising only 20%, at the most, from the July 24th to the November 20th.

As for Ryder Systems (R), there were no correlating companies that are part of the Transportation index to confirm the reason why Ryder Systems increased so much. Therefore, I can only guess that this company had specific issues that contributed to the 40% increase in the stock price from the July 24th to the November 20th timeframe.

It is important to remain focused on the components of the Transportation index for the stocks that you would buy or sell. The reason for this is because these companies are intimately tied to the performance of the index. Although there may be better companies that fit the characteristics described above, their price action has little to do with the index and therefore cannot be confirmed through the use of Dow Theory.

I expect that future investment opportunities will be found in Dow Theory sell signals and shorting the Transportation index as well as Dow Theory buy signals and buying stocks in the Transportation index. These indications will likely increase the performance of Dow Theory as compared to the buy-and-hold approach with dividends reinvested and all bull markets since the inception of the Dow Jones Industrial Average. Touc.

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The Choice is Yours

The purpose of this website is to give investors the opportunity to invest in quality companies at the most opportune time. When viewing the companies that I have selected, you will find that on average the companies are at or near a new low. Additionally, the companies are in the realm of dividend achievers, companies that have increased their dividend every year for at least 10 consecutive years in a row.

After studying these companies for well over 10 years, I have determined that, all things being equal, these companies provide the best margin of safety for the uninitiated investor. The companies that I review are not intended to replace your own due diligence. Instead, my goal is to point out to you the companies that might be the best investment opportunities available at a given time.

My hope is that if you are interested in a company that I have suggested you would be able to do your own research at the same time that the prices fall so that when you finally decide you’re interested in buying the company, the prices is even lower than when I made my recommendations.

The choice becomes yours when you decide whether or not you wish to hold the stock short-term or long-term. In the section “About this Site” you will see the outline for my take on the short-term investment approach that you can utilize. However, for the very same companies that I make any reference to that are Dividend Achievers or former Dividend Achievers, you can just as easily apply a buy and hold strategy for investing in these companies.

The choice is yours when it comes to deciding whether to invest in the stocks for the short-term with the potential for no dividend or the long-term with the benefit of compounded dividends over time. In either case you will find that the time that these stocks are recommended may be as close as you can get to either the companies point of undervaluation or the actual low in the company’s share price.

My pledge is to do my best to bring these companies to your attention in a timely manner. Additionally, the companies I highlight are companies that I myself would invest in or probably have invested in. the manner in which I set up my investment philosophy is to have to stop gap measures in case I am wrong. As Warren Buffett says, he seeks a considerable margin of safety when making investment decisions. Because I don’t know as much as Warren Buffett, I seek the lowest amount of risk possible.

My first line of defense in avoiding risk is selecting only those companies that have increased their dividend every year for a minimum 10 years in a row. This is the only way that I can prove that a company is committed not only to growth but also the shareholders.

The next step in reducing my risk is focusing on those companies that are near or at their 52-week low. This does not mean that the companies at or near a 52-week low should be bought. Instead, the 52-week low is the best point to start doing my homework on a company’s financial statement.

while reviewing a company’s financials, my primary goal is to determine if the company can succeed as a going concern into the future. I do not care to highlight the exceptional or deplorable short-term conditions of the company. I only care that the company can continue to operate profitably for at least another 5 to 10 years into the future.

After having decided that I will invest in companies that have proven track records of dividend increases and that the company will survive as a going concern into the future, I then determine how much downside risk I’m willing to accept. As I’ve said many times before, the upside takes care of itself. Therefore, the downside risk is the only critical concern that I have. Once I have the perspective on the downside risk using various approaches I take my time in determining when I wish to buy the company.

Typically there is more than one company that is within the range of consideration. Previously, I had thought that being within 10% of the 52-week low was the best parameter to start investigating companies. However, I now believe that Dividend Achievers within 20% of the 52-week low is a much more reasonable approach.

After having determined the downside risk to a particular company, I then determine how long I’m willing to wait for that investment to pay off. Typically I like a company that has a return of 10% or more in less than one year. If a company returns 10% in a month or two, I’m willing to forgo the remaining 40% or 50% upside that company may have remaining.

Because the dividend achiever list contains over 250 companies, there are many opportunities for me to choose the companies that I wish to invest in. As I have described on my blog many times before, not a month, week, or year goes by without a company falling within the parameters that I have set up for examination. Therefore, I do not have to worry about missing an opportunity or missing the upside gain or upside opportunity that is expected of an investment.

I don’t sit down and regret missing 30% or 40% upside. I am constantly focused on determining which companies are presently undervalued and being ready to rotate out of a minimum 10% gain and into a brand-new investment opportunity that is expected to rise.

Again, the approach on my blog is meant for the short-term investor. However, the same companies that are mentioned as potential investment candidates are also the same companies that can be utilized as long-term holdings. Whatever your risk tolerance may be, I have laid out on this blog the opportunity to be a short-term investor or a long-term investor. The choice is yours. Touc.

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Dow Theory: Transport Triple Top Threat

One of the most challenging chart patterns is now upon the Dow Jones Transportation Index. That chart pattern is the triple top formation. Triple tops can be considered challenging because they imply a three strikes rule of baseball. If the batter swings and misses three times then they're out for that at bat.

The triple top usually indicates that investors have, or are about to give up on the particular stock or index. This could be an instance of the market bulls capitulating to whatever forces are at play. One thing is certain, if the downtrend of the Transports continue on this downward trend then we could expect the index to go to the previous low of 3600, which implies a Dow Industrials of 9700.

The implications of a triple top is troubling primarily because the Transportation Index has spent the better part of the last two months resisting going over the November 4, 2008 peak. The Transports have not been able to confirm the Industrials in this regard which, to this point, is a Dow Theory non-confirmation.

In addition, the volume on the Transport Index has fallen off a cliff in the most recent rise from the November 2nd low. This indicates a lack of interest in market participants. Lack of interest in the rise generally means that the current levels in the Transports will be difficult to sustain. Additionally, the MACD and the RSI have appeared to top out and are headed lower.

The threat of a triple top shall remain in place unless the Tranports can exceed the 4072 level. All of the indications mentioned make me wonder if this means the end of the bull run within the secular bear market. Touc.

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The Language of Wall Street

• An old man's sayings are seldom untrue.
• Get an investment that will let you sleep.
• They who lose to-day may win to-morrow.
• Opportunity is often lost by deliberating.
• Illusions ruin all those whom they blind.
• The maxims of men disclose their hearts.
• The poorer the sheep, the harder it bleats.
• A little loss frightens- a great one tames.
• Where something is found there look again.
• He that will have eggs must have cackling.
• The best is always the cheapest in the end.
• Liberality is not giving largely, but wisely.
• Get information before you invest, not after.
• Thrice happy they who have an occupation.
• Wisdom adorns riches, and shadows poverty.
• No lock will hold against the power of gold.
• Begin to buy when prices are dull and weak.
• Satisfy the rich and they will pay your price.
• His a wise man who wears poverty decently.
• Great minds have a purpose; other have wishes.
• An ounce of luck is worth a pound of wisdom.
• Great undertakings require great preparations.
• Of what use is a 10 per cent. margin in a panic?

Nelson, Samuel A. The ABC of Stock Speculation. S.A. Nelson. 1902.

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CIT's pain is Goldman's gain

In light of the recent apology that was offered up by Lloyd Blankfein, CEO of Goldman Sachs (GS), I came across something that highlights Goldman's role in the world of guerrilla investment banking. I pulled the old Value Line for CIT Group (CIT) dated November 24, 2006. I was trying to determine the pre-banking crisis book value of CIT.

What caught my eye was the brief historical description of CIT which indicated that the company was established in 1908. In 1915 the company moved from St. Louis, MO to New York City. According to Value Line:

"On 11/18/97, J.P. Morgan and Goldman Sachs jointly led CIT's initial public offering of 36,225,000 shares, priced at $27.00 per share on the NYSE. On 6/1/01, CIT was acquired by TCH, a wholly-owned subsidiary of Tyco Intl., Ltd. On 7/8/02, Tyco sold 100% of CIT's outstanding stock in an IPO, led by Goldman Sachs and Lehman Brothers*. Offering was for 200,000,000 shares, priced at $23.00 per share on the NYSE."

In the first public offering done with Goldman Sachs as the joint underwriter, CIT was valued at $978,075,000 or just less than $1 billion dollars. Four years later, Tyco International (TYC) acquired CIT Group in a cash and stock deal worth $9.2 billion. CIT was taken private for a year then relisted as an IPO. Who was there to administer the 2nd IPO but none other than Goldman Sachs, of course.

It is important to note that TYC shares were trading at a (pre-split) price of $57 a share when the acquisition of CIT took place. By the time that the 2nd IPO of CIT took place, TYC was trading at $12 a share (a decline of 80%.) What led to the dramatic decline in Tyco shares? Insiders at TYC were tried and convicted of manipulating the financials and using the company cash as a personal treasure chest. Based on the court proceedings that followed the trial of CEO Dennis Kozlowski and CFO Mark Swartz, it became apparent that the earnings that led to the high share price that allowed TYC to buy CIT Group was based on fraud.

What is most interesting about the second issuance of CIT Group was that somehow in a years time the company lost more than half of its value. The IPO on July 8, 2002 was valued at $4.6 billion, exactly half of the price that the company was initially paid for by TYC. Either TYC paid 100% more than CIT Group was worth or TYC raided the coffers of CIT.

TYC is a shadow of its former self. TYC had to do a reverse split in order to mask the deplorable condition of the company. At an all time high of $250 (pre-split $62.50) in January of 2001, the stock has fallen to the current $37.08 (pre-split $9.27), a decline of 85%.

As for CIT Group, well that company just recently filed for bankruptcy. CIT traded as high as $61 in May of 2007. The last quote of CIT on November 18, 2009 was $0.20 or twenty cents.

Goldman Sachs, doing God's work [the implied message in a recent interview], had no problems brokering fraudulent transactions. Some would say, "How could you accuse Goldman Sachs of knowing that Tyco was cooking the books?" I would suggest that the question should be, how could they not know? This is where knowledge of stock market history is plenty useful. There are too many examples to reference where corporate raiders descended upon hapless companies that didn't have the largess of a high stock price to defend themselves.

It is clear that somebody got hosed in the Tyco/CIT Group deals. One thing is for sure, Goldman Sachs wasn't one of them. Touc.

*Lehman Brothers is gone

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Wal Mart favored by Buffett

Dividend Inc. is at it again. Tooting our own horn, 'cause if we don't then who will?

According to news sources, Warren Buffett increased his holdings of Wal Mart (WMT) by 90% over the summer. This was an increase of 18 million shares above the reported June 30th holdings for Berkshire Hathaway. I would consider this the best buy recommendation Mr. Buffett could give aside from outright buying the company as was done with BNSF.

It should be noted that Dividend Inc. stated the case for Wal Mart in a June 18th article titled, "Values Biding Time." The article aptly started with a quote by S.A. Nelson saying,"Value go on increasing, while the market rests..." The overriding point of the article was that there were very few credible arguments that could be made against a company that had traded in a range for so long; especially a Dividend Achiever of 33 years.

Not to be outdone, in a recent article titled "Dividend Stocks Worth Your Time," Dividend Inc. placed WMT at number 1 out of 10 in a list of companies to consider investing in. Even at the current price, WMT is still reasonably priced. Close attention should be paid to the June 18th article since I dropped an investment grenade in the midst of all that "analysis." A little due diligence would wonderfully augment the investment decision to buy this stock. For all references to WMT on Dividend Inc. click on the following link.

It is my hope that regular readers of this blog have benefited from the insight and the opportunity. This is only one of many investments that Dividend Inc. has been able to jump on before any annoucements from Berkshire headquarters. Are we luck? Probably. Will we fight our luck? Nope. Keep reading and spread the word if you think that Dividend Inc. has proven useful. Touc.

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A Healthy Discussion on Investing

A reader, and personal friend of 15 years, responding to my most recent investment commentary said:

"[After] reading the following email [blog posting] a thought occurred to me as follows;

You won't go wrong in your analysis since you already know a whole lot how to use the Dow Theory (DT), but DT itself might go wrong, taking all the DTists down along with it. There is one particular weak-spot of this theory, I believe. It does not differentiate between the secular bear markets' "internal mechanics" versus that of the secular bull markets.

For instance, you recently blogged:

In category one, I have calculated the 100 year compound annual growth rate for the S & P 500 (this is being generous) at 11.57% (Jan. 1, 1908 to Dec. 31, 2008). To me, any investment return greater than 11.57% in less than a year is consider as a sell candidate.

Now, using CAGR for such an extended period to make any buy/sell criteria is not right in my opinion since bear and bull periods within such 100 year spans behave differently. They have aspects of stress and strain that impact them radically differently. Major departure in CAGR of period like 1966-1982 versus that of 1982-2000 needs to be accounted for and then only some criteria can be developed. Currently we are in a secular bear market which may last even a decade more. What CAGR should we use for this period? I believe a much lower figure than 11.57%. In that case how does your above criteria stand up? You might not be able to use this concept or the system at all.

These are just a few thoughts for you to ponder. Not really related to the DT but just the same.

DT is technical analysis used for stock picking/dumping. In super long, secular bear and bull stretches, asset allocation theories might work better, IMHO."

My response is as follows:

Dow Theory is an especially wonderful tool to deal with cyclical bull and bear markets. In fact, for many years I confused a secular bear market as strictly a bear market (i.e. 1966 to 1982) and nothing else. This would typically mean that I would not want to invest at all in a secular bear market. However, the reality is that Dow Theory responds perfectly to the short term issues that an investor must grapple with in all cyclical bull and bear markets. The ability to determine a secular bear or bull market is dependent on an extended review of history which only points out the obvious. This is where the cliche "hindsight being 20/20" is apropos.

I will reiterate, there is always a cyclical bull or bear market. This contrasts with the fact that sometimes there is a secular bear market and sometimes there is a secular bull market. Dow Theory responds to the need of have a reasonably objective view of the market, along with the multitude of other market and economic gauges and measurements.

On the issue of Dow Theory possibly being wrong, to my thinking, this is implied in the analysis. I expect the theory to be wrong and only succumb to the reality (that it has been right almost 80% of the time; 80/20 rule) after the fact. I do not make my investment choices based on the technical aspect of Dow Theory. The aspect of Dow Theory that I do use for my personal investments is regarding values.

Applying the focus on values (dividends being the primary precept), as laid out by Charles H. Dow, and Geraldine Weiss, makes investing, regardless of other overwhelming attributes, much easier. I do not care so much about an overvalued or undervalued market when deciding to buy or sell a stock.

Evidence of such an approach has been backed up time and time again but can be most accurately be found in Jeremy Siegel's article "The Nifty Fifty Revisited" or Geraldine Weiss' Dividends Don't Lie. However, the evidence doesn't stop there, if we pick any period when the market was at a peak (before a major decline) and look at the list of stocks that were at a new 52-week low at that same time, you will find that the "quality" stocks overperformed the market during the subsequent decline (went down less than the market) and recovered faster than the market or overperformed on the upside (8 times out of ten; 80/20 rule).

I had previously thought that value stocks must be bought only at market bottoms of secular bear markets, at the same time ignoring cyclical elements of individual quality stocks. Put differently, even if you bought undervalued quality stocks at the middle of a major declining trend like the period from 1929 to 1932, you would have broke even on your investment by 1934 at the latest. I love using the 1929 to 1932 period due to the extremity of the market and the lessons it can teach.

The issue of bringing up the "long term" was done only to placate those who continually argue that buy and hold is the way to invest. Because the concept of investing for the long terms is accepted as gospel, I have to respond to those who place so much emphasis on the idea even though the majority of investors have an investment time horizon (in a substantive manner) of only 20 years at the most. With such a short investment time frame, as compared to the "long term" period of 100 years or more, it is ridiculous to bring up the matter of long term investing. Again, not wishing to break with investment orthodoxy, I have made the effort to respond to such an issue despite my understanding to the contrary.

It is likely that I will pay dearly for having such a cavalier attitude in what I have been able to observe and prove. However, the evidence that I have is far from anecdotal. The case I make is even more compelling because I was a vehement market critic or perma-bear for over 15 years. Despite my unwillingness to acknowledge the facts, the market truths kept pounding down every argument that I raised. I have acquiesced on this matter only grudgingly but continue to seeking information that can resolutely refute my claims. Thus far, I have been met with good arguments and interesting facts but nothing to show that using my own money and my current approach to investing will need to change. On this matter I feel confident.

However, please continue to show either weakness or defects in my logic. It will always be openly discussed and shared with the readers of my blog. I will gladly change my view at the drop of a hat when I can apply any new idea or concept better than my current approach when it comes to buying and selling stocks. In the most self deprecating manner, Touc.

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Dividend Stock Review

On October 9, 2009, I created a list of ten Dividend Achievers that I felt were the best investments at the time. After having passed the 1 month period, I feel that it is necessary to review the performance of the stocks that were on that list. As with the original article I will show the performance based on those that were ranked from 1st to 10th (chart).

1. Wal-Mart (WMT) up 6.46%
2. Cardinal Health (CAH) up 14.43%
3. Weyco (WEYS) down 0.8%
4. Bard Inc. (BCR) up 3.62%
5. Northwest Natural Gas (NWN) up 1.01%
6. Piedmont Natural Gas (PNY) down 3.67%
7. Becton Dickinson (BDX) up 5.77%
8. McCormick & Co. (MKC) up 6.71%
9. Abbott Laboratories (ABT) up 5.73%
10. ExxonMobil (XOM) up 4.62%

As an investor, I believe that the performance of these stocks need to be put in perspective. There are three tiers that I like to categorize my investments:

1. As compared to the historical CAGR of the stock market
2. As compared to the gains in a single month
3. As compared to if the money was in government guaranteed alternatives

In category one, I have calculated the 100 year compound annual growth rate for the S & P 500 (this is being generous) at 11.57% (Jan. 1, 1908 to Dec. 31, 2008). To me, any investment return greater than 11.57% in less than a year is consider as a sell candidate.

Category 2 is wholly dependent on category one. If the gain of a stock has exceeded, in one month, more than half what could have been received based on the historical return of the stock market then I need to consider selling the stock.

Category 3 tells me whether or not I'm doing, at least, better than the alternative guaranteed sources. If I can't beat the government protected sources then I need to re-evaluate the investment position. For the stocks that have lost money so far (WEYS and PNY) the dividend payments allow the investor to wait for a reversal of the declining trend. WEYS has a dividend yield of 2.60% while PNY has a dividend yield of 4.70%. Both instances provide the ability to compete against government guaranteed alternatives over the coming eleven months.

Based on the aforementioned thoughts, I would recommend that all of the stocks (except WEYS, NWN, and PNY) be sold at the earliest opportunity. For anyone to claim that a stock, which has gained 3 percent in a month, could continue the same trajectory over the next 11 months is going to be highly disappointed. Below is the hypothetical annual return if the past month were to continue at the same rate until October 9, 2010:

1. WMT up 77.52%
2. CAH up 173.16%
3. BCR up 43.44%
4. NWN up 12.12%
5. BDX up 69.24%
6. MKC up 80.52%
7. ABT up 68.76%
8. XOM up 55.44%

Only one of the above stocks has the ability to fulfill the projections with ease and that is Northwest Natural Gas (NWN). Suffice to say, all NWN needs to do is go up 7.32% and combined with the dividend of 3.8% you have acheived the 12.12% annual return. If we exclude the dividend, then NWN would have to rise 11.11%. In either case, NWN has the highest probability of continuing the current trajectory.

Keep in mind that I tend to invest 100% of my portfolio in 5 companies at the most. Truth be told, I have been invested in 2 or 3 stocks since December 2008. This means 33% to 50% in one stock at a time. Obviously, my approach isn't for everyone however it is worth your time to critically examine the approach that I advocate. Touc.

Please revisit Dividend Inc. for revisions to this post. Email me.

Dow Theory: Q & A

Question:

On Nov. 11, 2009, Richard Russell (Dow Theory Letters) stated the following:

"If the Transports close above 4045.11, I believe I will have seen enough to label both the primary and secondary trend of the market as bullish."

Could this be true under the interpretation of the Dow Theory such as yours?

Answer:

Thanks for the question. Dow, Hamilton, Rhea, Schaefer and even Russell have been clear on this matter. A bull market requires that the previous peak needs to be exceeded by the Transports and Industrials at the same time. For each successful breach of prior peaks by both indexes we get a confirmation of the bullish trend.

As yet, the Transports have not been able to exceed the prior peak of November 4, 2008 at 4072. In fact, markets in general, and the Transports specifically, have not been able to exceed the November 4, 2008 high. Each time the Transports go to the November 4, 2008 peak, markets in general have declined.

Presently, if we are lucky, the Transports are on course to break above the F1 and F2 double top. The F series double top is not above the November 4, 2008 peak. The F series double top is where the 4045.11 comes in. I would not be satisfied with the 4045.11 for a confirmation of a bull market based on the volumes of documented Dow Theory literature on this topic.

To get a confirmation of the bullish trend in the market, the Transports need to go above 4072 and the Industrials need to go above the 10,358. Without the confirmation of both indexes we only have a non-confirmation with a bullish bias until proven otherwise.

All of these concepts on Dow Theory are within the context of a secular bear market unless the Dow Industrials go above 14,279.96 and the Transports go above 5044.24. When these levels are exceeded, we'll be at the beginning of a secular bull market.

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The Language of Wall Street

• Hear-say is half lies.
• Talk little and well.
• Control your temper.
• Enough is great riches.
• No one is always right.
• The first loss is the best.
• All players cannot win.
• Press your luck to the finish.
• There is luck in leisure.
• Cheap advice is plentiful.
• A true word need no oath.
• Done leisurely-done well.
• Negotiate before slaughter.
• When in doubt do nothing.
• After one loss comes many.
• Wall Street easily forgets.
• Great vaunters, little doers.
• Learn to take a loss quickly.
• Information makes a market.
• Nothing risked, nothing won.
• For a lost thing care nothing.
• Losses make us more cautious.
• Little and often fills the purse.
• All is not lost that is in peril.
• When wisdom fails, luck helps.
• Punctual pay gets willing loan.
• Let profits run; limit all losses.
• Some men learn only by failing.
• Losers are always in the wrong.
• Cut a loss and let a profit run.
• A thing well bought is half sold.
• A plunger gets but seldom holds.
• Interrogate before you negotiate.
• Money is most valued when lost.
• Everyone is wise after the event.
• At a great bargain make a pause.
• Don't buy an egg until it is laid.
• Under fair words beware of fraud.
• liberal hands make many friends.
• Novelty always appears handsome.
• Business neglected is business lost.
• After extreme weakness buy stocks.
• More sheep than lambs are sheared.
• Better lose the wool than the sheep.
• It is fortune, not wisdom that rules.
• Fraud is built on misrepresentation.
• Don't put all your eggs in one basket.
• Better lose the saddle than the horse.
• The market will be here to-morrow.
• Small losses often prove great gains.
• Men often seem rich to become rich.
• Inspiration often means perspiration.
• By the husk you may guess at the nut.
• Hear the other side and believe little.
• Beware of one who has nothing to lose.
• Speculation begins when certainty ends.
• The rich buy in a hurry when the buy.
• In a trader's market-buy low- sell high.
• Delay overmuch is oftentimes great risk.

Nelson, Samuel A. The ABC of Stock Speculation. S.A. Nelson. 1902.

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Dow Theory: Event Horizon

There isn't much to say about the market's most recent movements other than the fact that the Transports will decide whether or not we are going to continue this run. It was of little surprise that Warren Buffett happened to buy out the share of Burlington Northern that he didn't already own which catapulted the Transportation Index off of the intermediate low. To those who have been following my Dow Theory commentary, I have been vociferous about the fact that the Transports are commanding the direction of stock market. I have a lot of problems with the methods used by Buffett to acquire BNSF. However, that is beside the point for the Transport Index.

The actions of Mr. Buffett provided the lifeline necessary to complete the reversal of the Transportation index one day earlier than my cycle projections had predicted. All that we need now is the capability to exceed the previous double tops at F1 & F2 as well as the November 4, 2008 high of 4071. The fact that these three points loom large over the Transports means that we're possibly approaching an event horizon for the stock market.

Not being able to breach 4071 and F1 & F2 could mean that the bull run has ended. Breaking through the aforementioned points could be the equivalent of a rabid bull market with no ability to see the cliff ahead. Based on the previous cycle data, we should expect that the Transports will get to the F1 & F2 highs on or near November 18, 2009. What lies beyond that point is unclear at this time.

The coming days will require that we proceed with caution. If you have profitable investment positions then be willing to accept that your gains were exceptional and be ready to unload your stocks to an all too eager public. Let new investment opportunities (Dividend Achievers at or near a new low) come to you. Take your time to investigate the companies that are of interest to you and accept the downside risks. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

Research Recommendation: Aqua America (WTR)

Today's research recommendation is AquaAmerica (WTR). According to Yahoo!Finance's water utilities review, WTR is ranked as the second largest water utility based on market capitalization.

The most important point about this research recommendation is that WTR has fallen to a brand new low during market hours on Friday October 30th. This low may soon match the 2-year low of around $14.50 set in mid-October 2008. This is fascinating because the actual lowest point after the market peak of 2006 at $30 is no longer on our last 52-week radar. However, we will watch to see if the ultimate low of $14.50 is reached.

According to Value Line Investment Survey, WTR normally trades around 1.6 times the per share dividend divided by the "interest rate" (1.6x $0.51/interest rate). Valueline doesn't tell us by which interest rate we should apply to the company, so I have decided to apply the 30, 20, and 10 year U.S. Treasury rate. The following are the mean prices that WTR would trade at for each interest rate:

• 30 year rate- $19.29
• 20 year rate- $19.47
• 10 year rate- $23.93

Based on the 30 year rate, WTR is selling 19.91% below the historical mean value. I chose the $19.29 value since it was the most conservative figure.

However, according to Investment Quality Trends, WTR is considered undervalued when it is selling for $12.27 or less. This indicates that WTR is not currently undervalued but could easily get to the $12.50 range if market conditions continue on the downside. Additionally, WTR has a large debt load and a high dividend payout ratio of 74%. This means that the stock could only "afford" a decline in earnings of 25% before the company has to borrow or issue more shares to service the dividend.

According to Dow Theory, the following are the most important downside targets to watch for:

• $14
• $11.25 (fair value)
  
• $9
• $6.50

These targets are supposed to act as support levels. Support levels are points which the stock falls to but should not go below. If the stock goes below one support level then we should expect the stock to decline to the next target level.

When you look at the 5 year chart of WTR, one support level that is significant is the $15 level. This happens to be the most obvious level that the stock needs to hold above. Falling below $15 could indicate the negative nature of the sentiment for WTR.

Although this is a water utility and water is critical to life, investors need to understand that companies in this industry aren't a "sure thing." The biggest reason for this is that when, and if, water becomes scarce, government regulators will step in to take over (nationalize) what should otherwise be sold at the most profitable price (thereby curbing wasteful consumption.) There is literally an upside cap on profitability to a company like this due to the critical importance of the resource being sold.

Take your time to consider this Dividend Achiever for the good and the bad attributes. Your careful analysis of this company might compel you to purchase the stock. It is my hope that the stock falls further before your next acquisition. Touc.

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Value Metrics Q & A

Q: How do you calculate Dow Fair Value and why is 1.52 fair value?

A: Dow Theory is about long-term values as much as it is about technical analysis. For this reason, I have put in the right hand column some measures that I feel are necessary for gauging where the market is on a long term basis. One measure of long-term value is the Dow Fair Value indication. This measure tells us how close we are to a historical low in the value of the Dow Jones Industrial Average relative to the dividend yield of the same index.

To arrive at the fair value figure for the Industrials, I divide the P/E ratio by the dividend yield of the index. This data can be found in Barron's "Indexes P/Es and Yields" section. In the latest Barron's, the P/E for the Industrials is 16.38 while the dividend yield for the index is 2.80. Based on these two numbers, I arrive at a ratio of 5.85 (16.38/2.8=5.85). If, as I assert, the Dow is at fair value when the Industrials are at a ratio of 1.52, then the current level of the index is 385% above the historical fair value.

Where am I getting my data for this historical "fair value?" I am using the data from the Value Line Dow-Jones Long Term chart. This chart is free and contains the information necessary to calculate the fair value of the Industrials all the way back to 1920. Once you run the numbers you will see that almost anytime the fair value ratio is below 2 you're within reach of good values in the stock market. Whenever the Industrials are near 1.5 then you can buy stocks with little regard for values. Finally, when the Dow Industrials are below 1, you can buy stocks blindly with little regard for quality.

The following are the years when the Dow Industrials were below the ratio of 2 or less:

• 1920 at 1.55
• 1924 at 1.77
• 1941 at 1.69
• 1942 at 1.93
• 1947 at 1.81
• 1948 at 1.22
• 1949 at 1.07
• 1950 at 0.93
• 1951 at 1.54
• 1952 at 1.91
• 1953 at 1.74
• 1974 at 1.54
• 1977 at 1.96
• 1978 at 1.24
• 1979 at 1.13
• 1980 at 1.20
• 1981 at 1.37
• 1984 at 1.92

In every instance, if you had bought "for the long term" you would have never lost money in your investments. Obviously, had you selected the "lowest" ratio years you would have done even better. I'm not the creator of this method for looking at the market. However, I can say that it made enough of an impression for me to believe that it is worth carrying forward for the purpose of perspective on the market.

In my article on August 3, 2009, I addressed the question of whether the market would ever get to historical values again. I see no harm in repeating that, in order to have a perspective on the current market conditions, we must know the past. As time goes on, all the data from the past reverts to a mean. This allows us to make better decisions about the future. I do think that the historical norms will be visited by the indexes in the future, either by a market crash or by a long, drawn out secular bear market.

So far, we seem to be cursed by the Dow at multiples of one hundred. Dow 100 took 18 years to resolve. Dow 1,000 took 16 years to resolve. So far, depending how you look at it, Dow 10,000 has taken 10 years with no resolution yet. The long term still has an effect on our investments and for this reason 1.52 (the middle value; less than 2 and more than 1) seems to be the prevailing figure to watch for unless proven otherwise. Touc.

Dow Theory

It is without a doubt that I am probably running on luck more than anything else. However, the Dow Jones Transportation Index has made a tremendous turnaround today. Just when it appeared that the Transports would decline further, the index made a full recoup of yesterday's losses. All that needs to happen now is that the Transports do not fall below the low of 3629.94.

The fact that the Transports fell within 2% of the prior intermediate trough, set on October 2, 2009, tells us that we might be on our way back to the 4071 level. This implies that the Dow Jones Industrial Average is likely to go back to, and possibly above, the old high. Again, this thesis is contingent on the fact that the upward move in the Transports continues over the next couple of weeks.

The chart below shows how the Transports have completed the G1 and G2 double bottoms. We are now set for the next double top.

It is our luck that if this trend continues, the Transports will exceed the F1 & F2 peak to breach the November 4, 2008 peak. Notice that the RSI or relative strength (red circle) for this index has hit a major low, in fact the lowest so far, and is now in a rising trend. Additionally, The MACD (green circle) is at an all time low for the index. All of these indications point to significant upside from here.

However, the best that I can say at this time is that we are going to test the old high for the index. Failure to accomplish this marginal target will signal, in my opinion, a major decline in the markets. The question now becomes, am I willing to buy into this trend? My answer is no, I will only be considering selling into the strength of the rise and seeking out new investment opportunities as they come along. Seeking out new opportunities means doing the necessary research on companies with no particular desire to buy until the next confirmation of the bullish trend.

It is my hope that I am not incorrectly reading the current movement of this index. Touc.

China Insight Worth Considering

China's rivers of cash flowing wrong way
Sydney Morning Herald
by John Garnaut
October 26, 2009

"On Thursday, the National Bureau of Statistics spokesman Li Xiaochao had been comfortably batting away curly questions from the international media about what lay beneath China's spectacular headline GDP growth of 8.9 per cent through the year.

But one question from Shanghai's Oriental Post tied him hopelessly in knots: 'What is the amount and growth rate of consumption expenditure for government administration, compared with last year?'

The journalist was asking how much of China's spectacular retail sales growth - 17 per cent after adjusting for falls in prices - was simply the bureaucracy taking advantage of the fiscal stimulus to spend more money on itself. The question cut to the core of whether China's rivers of cash have flowed to the people or been invested by an ever-growing state."

continued...

Demand Deposits

It has been a while since I last mentioned the Demand Deposits of Commercial Banks. It is necessary for me to review what I said in my February 11, 2009 posting. At the time, I felt that what I was observing was so important that it deserved the title "Convergence of Extraordinary Forces." In retrospect, that article seemed prescient considering that only one month later the stock market would embark on the most unforgettable rises in history.

Let's review what I said back in February of 2009:

• The parabolic rise of demand deposits was likely to succumb to entropy
• The stock market would respond to the decline in demand deposits by rising violently
• The rise in demand deposits would peak in June of 2009
• At 59% y-o-y change, demand deposits would revert, at least, to the previous peak of 13% y-o-y
  

In the above chart, we can see that the 54% y-o-y change (previously 59% before revisions) was in fact the very top of the parabolic rise in demand deposits. The y-o-y change has now fallen to the level of 22% and is still on track to reach the 13% peak of 2003.

A look back at the data shows that after revisions were made by the Federal Reserve, the index actually peaked in December of 2008. This is a far cry from my June 2009 estimation of when the index would peak. However, the stock market has responded as expected by rising in a violent fashion.

Based on the cycles mentioned in the February 11, 2009 article the current downward trend in demand deposits is expected to end around September 2011. At which point, there would be a rise in demand deposits at commercial banks and a decline in the stock market.

It is hard for me to believe that we have another 2 years of market increases to go. However, when the Coppock Curve is applied to the total amount of demand deposits on a monthly basis we get an ascending trendline (green line) which suggests that June 2010 or April 2011 is the next low for demand deposits. However, achieving the 13% y-o-y level (mentioned above) could mean a reversal of the downward trend in spite of all cycle projections.

It is clear that my interpretations on the change in demand deposits is purely speculative. However, those who read this might be able to refine my thinking on this topic and bring some clarity to my thought processes to the fore. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

The Rise and Fall of Fiat Currencies

As explained in a Saturday morning cartoon from the late 90's that I really enjoyed. Pay no attention to the fact that TJ (main character) puts on the hat of "the working class" as he ascents to the top of the pecking order on the play ground. Try to avoid thinking of the U.S. dollar as one form of currency goes out of favor on the playground. Make no mention of the fact that this appeared on the Disney Channel.

To be honest, I have been looking for this for years. I hope you enjoy this as much as I do. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

Dow Theory

The Dow Jones Transportation Average is really calling the shots in this market. Currently, we've managed to complete the F-series double top as the Transports fell 3.49% today to the 3804.95 level. The chart below shows the third double top on its way to a possible fourth double bottom. The Transports would have to fall to the 3636.28 level or point G2 as the next support level. After achieving the G2 support level the next stop would be E1 at 3544.15. Finally, the next decline would take us to the C2 level of 3048.83. Anything below C2 would require a big picture analysis that goes beyond the month of May.

The cycle sequence for the next Transports signal are the following dates:

• November 3rd-based on the 15 day average
• November 25th-based on the longest sequence
• October 25th-based on the shortest sequence

Again, the Transports faltered as it approached the November 4, 2008 peak of 4071. The blue arrow on the far right-hand corner of the chart indicates the level that needs to be beat by the Transports. The fact that the Transports cannot break through this resistance level, like the Dow Jones Industrial Average has, indicates that we may be looking at the top for this market. For now we can resign ourselves to the probability that the Transports are going to G2 before retesting the old technical level of 4071.

Thus far, Dow Theory has pointed the way without missing a beat. Touc.

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An Important Note About Coppock Curves

It has been proposed by some that the Coppock Curve has given both buy and sell signals for individual stocks and indexes. However, it is my understanding of the Coppock Curve that it is strictly for the purpose of giving buy signals. Sell signals are purely coincidental if they occur at all.

Drawing from Mr. Coppock’s own words in Barron’s October 15, 1962 article, Mr. Coppock states that, "It [Coppock Curve] gives a so-called buy signal."(page 5) Mr. Coppock goes even further to state that, “Because well-timed buying is far more difficult for the nonprofessional investor than timely selling, it is best to think of the curve as a very long-term buying guide. Its formula was devised for that type of use.” (page 5,16)

In James Dines’ 1972 book Technical Analysis (page 377) There is not mention of the Coppock Curve as being able to provide a sell signal or eminent market slumps. Any mention of the Coppock Curve was with the ability of the Curve to “pinpoint the start of new trends and enable investors to select future market leaders.” (page 378)

There seems to be no evidence that would suggest that the Coppock Curve should be used to determine potential declines. Instead, the Curve should only be tested on its ability to accurately call the bottom in a given stock or index.

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