Dogs and diversification

When it comes to investing, you’re better off with a pack of dogs, rather than just one pup. And the returns from Dogs of the Dow this year provesit.

The basic premise behind the Dogs of the Dow is fairly elegant. You’re supposed to buy stocks low and sell them high. But many stocks deserve to be low: They’re poorly managed, like Wells Fargo, or they’re in a dying business, like Gannett, or they’re really just walking catastrophes, like Enron.

Whatever the faults of the Dow, the 30 stocks in the Dow Jones industrial average are large-company high-quality stocks spread across a variety of industries. But each year, some of these companies lag the broad index and others lead. It’s just the nature of the market, which loves different industries at different points in the market.

Rosie, the dog of the day

The ones that are unloved — and, hence, dogs — are the ones with the highest dividend yields. Companies normally don’t have high yields because their executives are swell people who want to dole out profits to investors. Most often, it’s because the company’s stock price has been clobbered.

After all, a stock yield is a function of two factors: Its 12-month payout divided by its current price. A stock with a $1 annual dividend and a $50 price has a 2% yield. Drop the price to $40, and the yield pops up to 2.50%. So typically, a Dog of the Dow has a high yield because its stock price has been clobbered.

Last year’s dogs rose by an average 23.6%, vs. 21.83% for the Standard & Poor’s 500, proving that sometimes it does indeed pay to buy low and sell high. (The Dogs of the Dow have had a spotted record the past few years).

This year’s Dogs of the Dow prove a further point: It’s better to invest in 10 stocks than one or two. Here are how 2017’s dogs fared last year:

Investment Ticker Return
Boeing Co BA 94.50%
Caterpillar Inc CAT 74.75%
Chevron Corp CVX 10.59%
Cisco Systems Inc CSCO 31.19%
Coca-Cola Co KO 14.39%
Exxon Mobil Corp XOM -3.75%
International Business Machines Corp IBM -4.03%
Merck & Co Inc MRK -1.46%
Pfizer Inc PFE 15.75%
Verizon Communications Inc VZ 4.07%
Average 23.60%
Median 12.49%

Dividends, gains, reinvested. Source: Morningstar.

As you can tell, without the returns from the big dogs — Boeing, Caterpillar and Chevron — the dogs would be whining instead of barking.

The Dogs of the Dow is an interesting lesson in dividends and value investing — but its biggest lesson is that it’s better to own the entire litter than just one pup.




Securities cops: Be careful with crypto

The North American Securities Administrators Association (NASAA) are on the front lines fighting investment fraud. When they start sounding alarms, it’s usually best to listen. And today they’re sounding the alarm on all things crypto.

NASAA Reminds Investors to Approach Cryptocurrencies, Initial Coin Offerings and Other Cryptocurrency-Related Investment Products with Caution

Borg: “Go beyond the headlines and hype to understand cryptocurrency investment risk.”

WASHINGTON, DC (January 4, 2018) – As cryptocurrencies continue to garner national and international headlines, the North American Securities Administrators Association (NASAA) today reminded Main Street investors to be cautious about investments involving cryptocurrencies.

“Investors should go beyond the headlines and hype to understand the risks associated with investments in cryptocurrencies, as well as cryptocurrency futures contracts and other financial products where these virtual currencies are linked in some way to the underlying investment,” said Joseph P. Borg, NASAA President and Director of the Alabama Securities Commission.

Cryptocurrencies are a medium of exchange that are created and stored electronically in the blockchain, a distributed public database that keeps a permanent record of digital transactions. Current common cryptocurrencies include Bitcoin, Ethereum and Litecoin. Unlike traditional currency, these alternatives have no physical form and typically are not backed by tangible assets. They are not insured or controlled by a central bank or other governmental authority, cannot always be exchanged for other commodities, and are subject to little or no regulation.

A NASAA survey of state and provincial securities regulators shows 94 percent believe there is a “high risk of fraud” involving cryptocurrencies. Regulators also were unanimous in their view that more regulation is needed for cryptocurrency to provide greater investor protection.

“The recent wild price fluctuations and speculation in cryptocurrency-related investments can easily tempt unsuspecting investors to rush into an investment they may not fully understand,” Borg said. “Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility. Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart.”

Last month, NASAA identified Initial Coin Offerings (ICOs) and cryptocurrency-related investment products as emerging investor threats for 2018. Unlike an Initial Public Offering (IPO) when a company sells stocks in order to raise capital, an ICO sells “tokens” in order to fund a project, usually related to the blockchain. The token likely has no value at the time of purchase. Some tokens constitute, or may be exchangeable for a new cryptocurrency to be launched by the project, while others entitle investors to a discount, or early rights to a product or service proposed to be offered by the project.

NASAA has developed a short animated video to help investors understand the risks associated with ICOs and cryptocurrencies. NASAA first alerted investors of the risks associated with cryptocurrencies in 2014.

Common Cryptocurrency Concerns

Some common concerns investors should consider before investing in any offering containing cryptocurrency include:
  • Cryptocurrency is subject to minimal regulatory oversight, susceptible to cybersecurity breaches or hacks, and there may be no recourse should the cryptocurrency disappear.
  • Cryptocurrency accounts are not insured by the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to $250,000.
  • The high volatility of cryptocurrency investments makes them unsuitable for most investors, especially those investing for long-term goals or retirement.
  • Investors in cryptocurrency are highly reliant upon unregulated companies, including some that may lack appropriate internal controls and may be more susceptible to fraud and theft than regulated financial institutions.
  • Investors will have to rely upon the strength of their own computer security systems, as well as security systems provided by third parties, to protect purchased cryptocurrencies from theft.

Common Red Flags of Fraud

NASAA also reminds investors to keep watch for these common red flags of investment fraud:
  • “Guaranteed” high investment returns. There is no such thing as guaranteed investment returns, and there is no guarantee that the cryptocurrency will increase in value. Be wary of anyone who promises a high rate of return with little or no risk.
  • Unsolicited offers. An unsolicited sales pitch may be part of a fraudulent investment scheme. Cryptocurrency investment opportunities are promoted aggressively through social media. Be very wary of an unsolicited communication—meaning you didn’t ask for it and don’t know the sender—about an investment opportunity.
  • Sounds too good to be true. If the project sounds too good to be true, it probably is. Watch out for exaggerated claims about the project’s future success.
  • Pressure to buy immediately. Take time to research an investment opportunity before handing over your money. Watch out for pressure to act fast or “get in on the ground floor” of a new tech trend.
  • Unlicensed sellers. Many fraudulent investment schemes involve unlicensed individuals or unregistered firms. Check license and registration status with your state or provincial securities regulator. Contact information is available here.



Some international funds worth perusing

International markets seem to have awakened after a long, long nap. These funds have excellent returns and positive alpha — which means they have done better than might be expected, given the risk they take.

Bear in mind that you’re taking on stock-market risk as well as currency risk, which is one reason why I don’t generally advocate huge international positions. But if you’re in the market, this is a decent place to shop. And, yes, there’s a paywall here, but it’s for a good cause.

By the sweat of your brow

“By the sweat of your brow
    you will eat your food
until you return to the ground,
    since from it you were taken.”

One of the enduring mysteries of the U.S. tax code is why the system is harder on those who earn their income by the sweat of their brow as opposed to those who get money from their investments.

The tax code’s main purpose, of course, is to fund the activities of the government, and Americans have been having a lively discussion about the proper scope of government activities and how to pay for them for more than 200 years.

Over the years, however, the tax code has been used to encourage certain behaviors and discourage others. In its current incarnation, for example, we give deductions for contributions to some retirement savings accounts, because that’s a good thing. We levy tax penalties on early withdrawals from retirement plans, because that’s often a bad thing.

There are plenty of things to argue about with these types of tax incentives. What is curious, however, is the favorable treatment of investment returns over ordinary income. Currently, for example, employment income is taxed at a maximum 39.6%, while long-term capital gains are taxed at a maximum 20%.

Ostensibly, the lower tax rate for capital gains – the difference between your purchase price and sales price on a winning investment – is to encourage investment. As such, it has some merit: Congress cut the capital gains rate from 28% to 20% in 1982, and the stock market took off. (On the other hand, Congress returned the capital gains rate to 28% in 1987, and the stock market generally rallied until 2000).

Nevertheless, we as a nation tend to encourage hard work and look down on those who work as little as possible. And here we come to a paradox between the admiration for hard work and the tax code. Consider this comparison of two people, each with $300,000 in income, presented by Ben Steverman of Bloomberg.

Our first taxpayer is an emergency room surgeon. The other plays video games all day, thanks to his inheritance.


Now, as with all things taxable, there are some important caveats here. One is that under current law, if the heir’s parents gave him his capital in their will, the estate is liable for taxes under estate tax law. (Heirs don’t pay estate taxes.) That said, it’s unlikely that the parents paid estate tax: It doesn’t kick in until $11.2 million for a couple and $5.6 million for a single individual. About 11,300 estate tax returns were filed for people who died in 2013, of which only 4,700 were taxable, fewer than 1 in 550 of the 2.6 million people who died in that year, according to the Tax Policy Center.

This is largely an investment blog, so it’s useful to point out that lower corporate taxes in the new tax bill means that companies are more likely to increase dividends, buy back stock, or increase merger and acquisitions. All told, it’s hard not for investors to like the bill, because it will help returns from the money you earn while you sleep. But we’re a country that admires hard work. In the end, however, even with a tax break, those who earn their living by the sweat of their brow still wind up paying more.


Quarters, dimes, and bitcoins

Bitcoins have soared to nearly $3,000 apiece at a speed that most certainly is the tragic arc of a bubble. When is the best time to buy a currency? When it’s new or, at the very least, extraordinarily cheap. Here’s a small example.

Back in the Cretaceous period – ok, 1964 – the government announced that dimes and quarters, then 90% silver, would be made of copper coated with nickel, starting in 1965. (Half dollars of 40% silver were minted until 1970.)

Image result for standing liberty quarterWhile the government had changed coin design from time to time, it hadn’t fiddled with the composition of silver coinage before. In 1964, it wasn’t uncommon to find silver standing Liberty quarters in your pocket. They were a beautiful coin designed by sculptor Hermon Atkins MacNeil and were minted from 1916 through 1930. They were replaced by the familiar Washington quarter.

My mother, at the time, saved as many silver quarters and dimes as she could: I still have them. Coin dealers call them “junk silver,” because they are too worn to have any real value as collectibles. Nevertheless, they are 90% silver. How did they fare as an investment?

Not too badly. As of June 10, each silver quarter would be worth $3.11, if you melted it down and sold it for its silver content. That’s a gain of 1,144% over the years, handily beating the 691% cumulative rise in inflation since 1964.

We certainly weren’t in a position to stash gold coins. My mom was a high-school secretary, and my dad was a government worker. Also,  the U.S. didn’t make gold coins, and hadn’t since the Great Depression. And private ownership of gold was illegal until January 1, 1975.

One could argue that we could have done better in the stock market, and that’s true, with one itty-bitty problem: Most stock investments available to the public were pretty awful, laden with outrageous fees and commissions. The Vanguard 500 Stock Index fund was just a twinkle in Jack Bogle’s eye. (As a side note: The fund’s current $3,000 minimum initial investment was the equivalent of $23,577 back in 1964).

One big boost to silver’s price, at least in 1964, was that the government had a significant interest in keeping silver prices low: If silver broke $1.29 an ounce, the Treasury would face a wave of redemptions from silver certificates. At $1.29 an ounce, people could melt their silver coins and sell them at a profit. (As an interesting historical fact, U.S. silver coins had ridges, or reeding, on their edges so you can tell if people have shaved a bit off the side. The tradition continued through the later, less valuable copper-nickel coins.) In any event, the government was the main player in the silver market, and so we acquired our silver at an artificially low price.

While Bitcoin may be in its infancy, it’s by no means cheap, especially since it has no intrinsic value. You can melt your silver and make a nice sculpture, if you’re so inclined, Image result for frankensteinor use it for weird electrical experiments. Even dollars, while primarily an intellectual construct, have the backing of the U.S. government and every other government in the world, at least indirectly.

Back in 2011, you could have bought a bitcoin for $1. After a brief surge to $31, bitcoins fell back to $2. By design, the number of bitcoins is limited, so at least in theory, they will retain some of their value – unless, of course, a new shiny internet object comes about. And at the moment, there are about 100 cryptocurrencies available. I can’t imagine people collecting them. At least with my dimes and nickels, I can think of my mother and smile.