18 Jul 2011, 11:59pm
economy peak oil
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  • There are a lot of Bears in the camp these days…

    I’m a macro-bear – I think that there are some pretty serious long-term hazards to economic growth, such as peak oil, environmental degradation and the like.

    I’ve all of a sudden been joined by a whole shedload of Johnny-come-lately bears who are focused on the seriously short-term. Yes, we all know the Greeks are bankrupt and that the European politicians are trying to do a stealth bank-bailout of French and German banks. They’ll lose the fight sometime. The US is devaluing and seem to be in an epic internal fight of their own. The second dip of the double dip recession is hammering at the door.

    It all reminds me of Ben Goldacre’s Twitter comment, on Rebekah Brooks

    must feel amazing to work in an industry where when you f*** up, everyone else loses their job

    only here its that everybody else gets to pay when the financial bank-wizards screwed up. There again, everybody was happy to take the liar loans, and we do so like to see really big numbers in house prices which loose lending is very happy to help with.

    However, when it comes to looking at the stock market, it looks to me that companies are in a lot better shape than your average over-indebted Western consumer, and for that matter their over-indebted governments. At least the yield-paying sorts I am looking at are. Their debt levels seem lower and often profitability seems up (or costs are down).

    I’m not sitting on anything that I’m currently unhappy with owning, as long as they keep on paying dividends. Obviously if this is the second dip on the way to down and out due to all that macro crap falling out of the sky then all bets are off, but I don’t feel that’s the case at the moment. This is the crap falling that was dodged the first time round. It’s still there, it still stinks, and it’s still out to get us, but I don’t feel that it’ll destroy steady companies that are making stuff that people need. As opposed to stuff they want, I’m not about to buy Thomas Cook even at a high yield, because it’ll be a long time before Brits are going on foreign holidays to the extent they were in 2007, particularly when interest rates go up on their over-leveraged homes.

    So I have a list of companies that I’m interested in and would like to buy, and I’m keeping an eye on the price. This will probably be a drawn out slide, so I have to buy these companies is small amounts over several months. For instance, I’d like to buy Tesco, and I’d like to pay less that Mr Buffett did (about 380p in June last year), on the grounds that the yield at 3.6% is below my usual 4% minimum target and heck, I don’t have as much money as Buffett ;)

    I have a price alert on them of 380 and will start to look then. I’ll probably split my purchase in lumps spaced a couple of weeks apart as I can’t call where in the downswing I’ll find myself. I figure that I might as well ride with Buffett’s analysis, the financials are right for me, my shares based HYP is missing this sector and people probably aren’t going to give up eating any day soon.

    I’ve got an eye on some others, I could do with another income IT, at a two digit discount, please. Discounts have narrowed a lot of late, what with everyone wanting income it seems, well, it’s time to shake the tree and see if people start selling again.

    Valuations are improving on quite a few shares at the moment. I’m happy with the gains on my sharesave shares, so I am shorting a quarter of those to lock in the current price until I can get hold of them, as a bear market can hang around for a year or so.

    It’s one of those sad things in life, that it’s easier to live with the stock market when you don’t need the money right now, it makes it easier to watch the gut-wrenching 50% loss in value that happened in the last bear market (2007-Mar 09 for the FTSE AS). This one could be a chance for me to fill in some of the missing slices in my asset allocation pie chart.

    I’ll probably take the last bear market as a guide. Some firms such as Tesco took a reasonable hit to the share price but they’ve kept steady dividend growth through from 2005. Others such as ULVR have had a more ropey dividend performance. So I’ll take some hints from what happened last time, as it’s only a couple of years ago, and favour steady as she goes dividend performance where other parameters are comparable.  Oh and I’ll pass on financials, having eaten a £200 loss on BARC (and having missed most of the recent slide I’m happy to say!). There’s still too many unknown unknowns for me there. I’ll stick with the one financial I do have, RSA.

    So overall, all these bears jostling by my side need to start selling, but I’m not going to be one of them. I am a different sort of bear. I don’t think any of the firms I own shares in now will be destroyed by the forthcoming storm, and more than half steadily increased or maintained their dividends since 2005.

    If they can keep doing that, I can eat a repeat of the 50% variation in share price some of them experienced in the last bear market. Unlike my previous forays where I chased growth, with the share price volatility making me nervous and jumpy, the stability of the income is a much more peaceful ride. As Monevator said

    the companies chosen have steadily increased their dividends over the past five years, but during the same time their share prices have been all over the place.

    All of the firms in my portfolio took a hit in the last recession, and none have reached their pre-recession heights. However, I had the good fortune to start in April 2009. There’s something to this buying when others are selling lark… I haven’t got the diversification right yet, because I targeted the higher yields first. Looks like the opportunity to fix that at a decent yield may be coming my way soon!

    Would you mind saying what the overall percentage return is you are getting with the dividend payments

    @Dreamer Take a look at this post for detail, but in summary: if you divide the divis paid in the last 12 months by the total cash I put into the ISA less the cash held in itthe result is 4%. This underestimates the return amount because I’ve paid in more than half this year’s ISA but have owned the companies bought for < 6months (since April) so I only have half the divis in some cases.

    That post using the complexities of XIRR indicates my return is higher (it allows for the fact the cash hasn’t been working for a whole year).

    In practice I work on a rule of thumb that I need a stake between 20 and 25 times the income I want to realise. So I need 20k to get an annual 1k income, implying a SWR of 5%. Yearly income is much less of a white-knuckle ride than the headline portfolio value, as Monevator said.

    There is no point in realising losses on companies that can continue to pay dividends. If we do have a market crash it will be overdone and a steady regime of buying is the best strategy. I look for net cash, a well covered divi, low PE and small intangible assets.

    I do have some speculative disasters, but most of the paper losses are psychologically written off. The good thing about limited liabilty is that there is only so much you can lose. Meanwhile, my dividend income has risen with more sensible purchases.

    Thanks for the references. ;)

    Tesco is a conundrum. Unless you think consumer spending in the UK is in the mire for years to come, it looks cheap. Yet the market continually pushes the price down.

    In as much as these are about 12 month fears over its UK operations, it’s a buying operation. My concern is there’s something nastier lurking, perhaps in how its fueling its overseas expansion.

    It’s worth looking at how it’s been realizing property value as pre-tax profit, which it then reinvests in expanding its foreign ventures. In China, it’s literally building malls so that it can have somewhere to put a superstore. We’re not in Kansas anymore.

    Or perhaps the market is just worried about Life after Leahy. Sounds simple, but I don’t (quite, consistently!) have a God Complex and I’ll relish in the uncertainty. ;)

    I’m fairly long Tesco, by the way, although largely from lower levels.

    (I mean ‘buying opportunity’ above, of course)

    Hi Ermine thanks very much for your reply.

    [...] are just far too many johnny-come-lately bears in the camp for my liking these days. I don’t know why companies are becoming a lot more [...]

     

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