The Next Big Thing

     Everybody wants to be invested in the next blockbuster stock. Once the future craze is identified, an investor must figure what company(s) will benefit the most from it. Based on what I've been reading in Barrons and other financial publications, I have decided that artificial intelligence (AI) will be huge in the years to come. AI can be used for almost any application where large amounts of data must be analyzed and conclusions reached for efficiencies and problem solving. One easy example laid-out in Barrons uses two similar large retail banks- Bank (X) and Bank (Y).  They both notice that their delinquencies and charge-offs due to bad loans are increasing at an alarming rate. Bank X contracts with an outside firm who uses AI to analyze their data. Bank Y uses "In house analysis" and no AI. The Board of Directors at Bank Y decides to lower the credit limit by 50% for all credit card holders to control the bad debt losses. This also costs them millions in interest payments and lost accounts. However, Bank X has discovered through their analysis that most of the charged-off debts came from customers who had their direct deposits halted within the past 3 months. Yup, the direct deposits were paychecks and those customers had lost their jobs recently and were living on credit that they couldn't pay-off. Therefore, the Board of Directors of Bank X just had to get a list of the accounts with a stop on the direct deposit and act on only them. This is the power of AI. The way I see it , in the future, it's a must have for all successful companies. Not only that, but also consider autonomous cars and the massive amount of data that will use. The Internet of Things (IOT) is another huge developing technology where all new appliances will be wired to the Internet for monitoring and auto diagnosis.
     There are several stocks which are trading near their all-time highs because they enable these new technologies to function. I have owned several of them for a while and was tempted to sell this morning for some quick profits. However, I decided that the potential of these stocks far exceeds their current price, so I still hold them. There is no guarantee that these companies will be the ultimate winners in the technology space because there is always the potential for an upstart to unseat them with a better product. At the current time I just have to go with what I know. My picks include Micron Technology (MU), Xilinx (XLNX), Lam Reasearch (LRCX), and Nvidia (NVDA). As always I like to buy on dips, especially with high valuation stocks like NVDA but when the next correction comes, I'll be looking to add to my AI portfolio.

The Rollover

     At almost 66 years old, I decided to perform a rollover of my 401k retirement savings into an IRA at my discount brokerage account. According to the plan rules set-up by my former employer for the 401k, I would have to do this by age 69 1/2 anyway. My reasons for doing this were many, I didn't like the limited choices offered by the old plan, the customer service was sketchy, the website was clunky, and I wanted to derisk my portfolio by putting a substantial amount into federally insured CD's. I will still hold some stocks, mutual funds and ETF's in my rollover account but having guaranteed income without any loss of principle is attractive to me at my age. When it comes to customer service, my broker, TD Ameritrade, really impresses me. They answer the phone 24/7 and are knowledgeable and helpful. Sometimes in life, things happen during non-business hours that need attention immediately so it's good to know they have my back. Most employers contract-out the administration of their retirement plans to the lowest cost contractor. Your calls for assistance are often directed to third world countries. The people who answer the phone are trained to speak English and read the plan rules from a manual. They often have several companies to service thus several manuals to refer to. This can be confusing to them when trying to read and understand all the complex rules regarding rollovers and nuances of each particular plan. I also have trouble understanding some of these folks because I have poor hearing and they have heavy accents. What I have learned is that they can often give wrong advice which can cause major problems when trying to perform a rollover according to IRS rules. The last thing I need is a very large tax liability because someone in Malaysia or India gave me a bum steer. Over the years, I have challenged their instructions when what they were telling me really just didn't make sense or differed from what I read in the same manual they have. My advice is to question them if something just doesn't seem right. Plan participants of any age can elect to rollover into an IRA. My only warning is to check the rollover account for fees which can eat into your returns.  Anyone who is not happy with their current plan should consider the rollover option. The receiving firm should be able to walk you through the steps to complete the transaction.

Stock Splits, Stock Dividends, and Reverse Splits

     Seasoned investors have noticed something about the stock market that has evolved over the last 20 years or so: stocks just don't seem to split anymore. In the old days, when a stock approached the $100 mark, the board of directors would often approve a stock split to lower the price to a more affordable level. Retail investors like a lower stock price so they can buy a "round lot" which is 100 shares. Anything less than 100 shares was called an "odd lot" and the broker charged more for it in commissions. Nowadays, with all the discount brokerages offering cheap commissions, trading in odd lots is not expensive anymore. One example of a common split would be the 2for1 split. If you held 100 shares before the split, you would own 200 shares after. For every one share you owned, they gave you an additional share, thus 2for1. A look at the stock market page today shows more stocks over $100 than under. Some stocks are even trading over $1000 and have no plans to split. So why don't stocks split anymore? One reason may be that companies don't care if retail investors are buying their shares directly. With the popularity of mutual funds and ETF's, a lower stock price is irrelevant. Companies can still have a widely-owned stock and not incur the cost of sending every holder annual reports. The fact is that an investor makes no money in a split. Even though the number of shares held increases, the price is adjusted down to make the holding in dollars unchanged. Stock dividends are also a rare occurrence these days. It used to be that when a rapidly growing company needed to reward investors, they could issue additional shares instead of cash which was needed to fund their growth. A stock dividend would not result in the repricing of the shares and it usually was expressed as a percentage of shares owned.  A reverse split has the opposite effect as a forward split. It is used as a tool to increase the stock price and reduce the shares outstanding. An example would be if you owned 100 shares of XYZ corp and they declared a 1 for 50 reverse split, you would end up with 2 shares. Of coarse, the stock price would increase by a factor of 50 but your holdings in dollars will not change. Companies use reverse splits to boost their stock price when it gets so low that they are in danger of being removed from the index or exchange where they are trading. Another result of a reverse split is that many investors are forced out because their holdings are reduced to a fraction of a share which is automatically sold. This reduces costs for the obviously troubled company. Bottom line, healthy companies are reluctant to split their stock anymore.  In 2017 the total number of splits numbered in the single digits. So if you are hoping for a split of one or more of your holdings-don't hold your breath.

Risk

    After having served on the Board of Directors for a local credit union for the past few years, I have learned much more about risk and how to manage it. Financial Institutions are in the business of risk, so they must be able to effectively identify and manage many different types of risk. Loaning money to strangers is about the riskiest business I can think of, so lenders must have a whole department devoted to mitigating risk. The recent increase in volatility in the stock market has also increased the risk of holding stocks. This is true even if you hold mutual funds or annuities that have a stock component. Since I am no longer in the accumulation stage of my life, I am more sensitive to the market risk than I used to be when I was working. I can no longer afford to have such a long term perspective as a younger person would. One type of risk that I am currently attending to is concentration risk. Even though I happen to like the prospects of the financial sector, I have come to realize that I am too heavily concentrated in bank stocks and other financial companies. I have taken steps to reduce my exposure to this sector by placing some sell orders (limit) just this morning. Just because this market is in correction mode doesn't mean that there aren't days of strength that I can sell into. In order to be tax efficient, I have also placed some sell orders of some positions that just aren't working out. Remember, any capital gains taken in a given year can be offset with capital losses to minimize your tax burden. Any excess capital loss over $3.000.00 must be carried-over to following tax years, where it can be used to offset gains and income. I try to match any gains with losses to achieve a near zero reportable gain where possible. The proceeds of these sales will be split between safe fixed income investments like CD's and some stocks on my wish list. I still like some technology stocks and also some defense related issues. There are currently some very attractive valuations on leading chip stocks due to the market sell-off. In conclusion, check your portfolio for excess concentration in any sector, diversification is the key for mitigating risk.

RIDIN THE STORM OUT

    Reo Speedwagon recorded this song in 1981 and the tune is still bouncing around in my head. With the volatility that we've seen lately in the stock market, many investors are wondering where they can hide to ride out the coming storms in financial markets. The answer is that it depends on many things like: your age, your risk tolerance, where your money is located ie. IRA, 401K, your tax situation, and so on. If you are 20 years away from retirement and are still building up your retirement account in an IRA or other retirement account, you should do almost nothing. Think of the increased volatility as a chance to buy good stocks a little cheaper. I doubt that the current economic climate will affect your portfolio 20+ years from now. If you're closer to retirement, like 5 years or so, then you should be thinking of derisking your portfolio by adding safe income producing assets like Cd's to the mix. I still don't like bonds because the increasing interest rate environment will create a capital loss if a sale is necessary. Most retirement plans within 401K's have a fixed income option, it doesn't pay much but it does provide safety during market downturns. Given the current level of interest rates paid to investors for fixed income products, dividend-paying stocks with reasonable valuations are still the best choice for most investors. A dividend yield of 4-6% is available on some blue chip companies in the utility sector, communications sector and some mature tech names. For those who are already retired, income often trumps growth as an investment objective. Building a laddered CD portfolio that is FDIC insured can create income and provide peace of mind. As rates increase, maturing CD's are reinvested at higher rates. I have just completed my taxes for 2017 and am reminded what a pain the K1 tax reporting for MLP's can be. Even tax software doesn't handle this task very well. After over 10 years of doing this, I still feel incompetent. That being said, MLP's provide excellent income, sometime tax-free, and are an excellent estate planning tool. I won't go into details here but most brokers can explain how they work. Another option is REITS this stands for RealEstate Investment Trusts. They are stocks that hold realestate assets that produce income. The income is then distributed to investors at a rate established by statute. Exposure to both REITS and MLPs can be achieved through ETF's and mutual funds. Finally, market volatility gives investors a chance to buy some stocks that are currently being taken to the woodshed.and whooped like Facebook is currently. I have recently placed a limit order for FB that is much lower than the current price. I believe that a P/E ratio of 17x is reasonable for the stock after the breach of trust and the mismanagement of the scandal. The limit price is easily calculated by using the methods described in my post from 11/19/2016 "More on the P/E ratio".

Change The World

     In past posts,I have described how investing is highly individualized. Every investor has unique needs that can be met by using a targeted approach with their asset allocation. There is also a way to achieve your investment goals while supporting your environmental, social and governance (ESG) agenda. I personally feel that tobacco is one of the most damaging products openly sold to American citizens. Tobacco related illnesses cost all tax payers millions of dollars each year not to mention the people who die from smoking every year. My solution to the problem of big tobacco companies who knowingly sell death is to avoid buying their stocks. I could have profited handsomely over the past 40 years by holding Phillip Morris but I decided to stick to my convictions by investing elsewhere. I also include producers of alcoholic beverages in my list of sin stocks to avoid. I realize that I look like a hypocrite because I enjoy my cocktails and an occasional cigar as much as anybody but I refuse to profit from the sale of these products. Recently, the worlds largest asset manager, Blockrock, has taken steps to address the problem of gun violence after the slaughter of 17 kids in Parkland Florida. Blackrock holds a significant stake in several major gun makers. With already distressed stock prices, the gun makers cannot afford to ignore such a major stock holder. Other asset managers have also joined the effort to reform the gun industry by threatening to divest their holdings unless action is taken to reduce violence. Unlike my puny effort to reform big tobacco, I'm sure that the large asset managers have the attention of the gun industry. How can the individual small investor aid in the effort to improve society? Pay attention to the holdings in your mutual funds and ETF's. Most financial sites post a list of the top 10 holdings of each fund. If you see any stocks that produce products that you find offensive, then don't buy. It can take a lot of time and trouble to research your retirement accounts and other investments but there is an easier way. Most large asset managers now offer some socially responsible investments (SRI) for clients. The long term performance is pretty good also; the MSCI KLD index for socially responsible investing has returned 10.46% per year vrs 9.93% for the S&P500 index since 1990. Money talks so when large asset managers and pension fund managers hear from participants that they care about (ESG) investing, then we can change the world.

Why Dividends Are Important

     Here we are in the midst of a stock market correction. It's a scary time for working people who are worried about their retirement funds. For nine years we have gotten used to seeing steady gains in the value of our 401k's and IRA's. The next statement from your broker may shock many savers into panic selling or even a more disastrous move into the bond market via bond mutual funds. I believe in a "buy and hold" strategy for stocks for the most part. The stocks I want to hold for the long term are companies that have strong, established businesses that pay an attractive dividend. A dividend of only 2-3% may not seem too impressive now, but in the long run it can be a significant portion of your total return. If you look back at the total return of the Dow Jones' 30 stocks for 100 years, the total  return is 9.4%. Of that, about half is price appreciation and about half is dividend yield. Therefore, without dividends, your return would be about half as much. When a company increases it's dividend on a regular basis, your investment yield increases as you hold the shares. Remember, your investment yield is based on the amount you have invested and not the current price of the shares. Market pundits call a 10% decline in stocks a correction and a 20% drop is a bear market. We are not in a bear market yet. The average bear market lasts about 10 months but several have lasted over 20 months, one in 1973 and another in 1980. It's not likely that during these down markets that you will see any price appreciation of your portfolio but that portion of total return from your dividend is likely to be intact. Many companies are loathe to cut a dividend that has been paid to shareholders for many consecutive years. When I look at the fixed income universe for attractive and safe places to put my money, I don't see anything that compares to dividend-paying stocks with good long-term records of paying dividends.