|
Small Portfolio
|
XLF & IAU
|
16.66%
|
|
|
Sector
|
XLF
|
22.19%
|
|
|
Secular
|
IAU
|
11.13%
|
|
|
Large Portfolio
|
Date
|
Return
|
Days
|
|
RIMM
|
7/16/2012
|
60.00%
|
138
|
|
SEAC
|
9/25/2012
|
13.22%
|
67
|
|
CAJ
|
9/25/2012
|
2.27%
|
67
|
|
DDAIF
|
9/25/2012
|
-4.36%
|
67
|
|
CFI
|
10/31/2012
|
15.96%
|
31
|
|
CGX
|
11/5/2012
|
17.10%
|
26
|
|
MO
|
11/8/2012
|
7.68%
|
23
|
|
EL
|
11/12/2012
|
1.32%
|
19
|
|
BOKF
|
11/19/2012
|
-0.38%
|
12
|
|
RE
|
11/26/2012
|
3.67%
|
5
|
|
S&P
|
Annualized
|
3.51%
|
|
|
Small Portfolio
|
Annualized
|
11.06%
|
|
|
Sector Model
|
Annualized
|
14.74%
|
|
|
Large Portfolio
|
Annualized
|
22.44%
|
Rotation: selling CGX, buying GLW.
Couple of changes on the reporting – some of which are
transitional.
You’ll note that the first line still shows the “Small
Portfolio” with the combined returns for the sector model (XLF) and the secular
selection (IAU). For the past year and a
half this has basically been a benchmark that I’ve used to compare with the
Mousetrap. As long as the Mousetrap was
beating the sector model, I was happy. I
didn’t really care how well the sector model performed because I was trying to beat it.
But some folks have shown an interest in the small portfolio
and wanted to know if they should use it.
Yes, and no.
Yes, the sector model beats the market.
No, gold isn’t all it’s cracked up to be. It WILL outperform bonds over the next
decade, but if you want to do better, the sector selection by itself would be
just fine.
The XL- series of ETFs are highly liquid, easily tradable,
non-leveraged funds that contain a large basket of stocks specific to a
sector. While my “Mousetrap” is
diversified by holding just ten stocks, each XL- series ETF holds even MORE
stocks than I would care to hold individually.
So, if you had a small portfolio you’d do well to hold gold
and financials (IAU and XLF), but you’d likely do better just ignoring gold and
trying to rotate sectors as we grind through each business cycle. I have gold up there now for comparison, and
might leave it for a while, but I plan to eventually stop following it
altogether. To be honest, I made this
decision about six months ago, but was waiting for gold to have a little spike
so it would be in the same ball park with the sector selections for a graceful
exit. Gold isn’t a BAD hold. In fact, it will do quite well between now
and 2020, and you wouldn’t have to experience any trading costs or taxes on it
until you cashed out at the end of this secular bear. With the re-election of Obama, gold should do
even better still.
But, strictly speaking, gold isn’t a part of my model. It doesn’t have any businesses in it and
there’s no way for me to analyze it.
Worse, while it is an inflation hedge, you STILL get taxed on that
inflated money in the end.
And speaking of taxes…
There’s been a lot of talk this week about Warren
Buffet. He’s that billionaire Obama
keeps talking about. He made himself
(in)famous by saying we should tax the rich more… while he’s busy avoiding
taxes as much as possible.
Is he nuts? Is he a
hypocrite?
Neither.
Buffet believes in taxing realized capital gains. But most of his wealth is in unrealized
capital gains. If you own stock you don’t
get taxed on the growth until you cash out.
If you just buy and hold, you won’t pay taxes for a long time, and if you’ve
chosen a good company you’ll do even better by compounding your returns.
I pulled out my copy of his collected essays today and read
in detail what he had to say about taxes.
Here’s the book:
He has a few false analogies and tends to wander a bit (don’t
we all), but if you can manage to read his essays all the way through you can
figure out what the heck he’s trying to say.
On page 160 he talks about the evil of excessive trading and
uses Isaac Newton as an example. Newton
is a bad analogy because he didn’t invest in anything worth trading OR
holding. He got caught up in the South
Sea Bubble and lost a lot of money.
Buffet uses this as an opportunity to offer a FOURTH “law of motion”:
Buffet: “the Fourth Law of Motion: For investors as a whole,
returns decrease as motion increases.”
In other words, the more you trade, the less you have.
This is a key maxim of Buffet. He points out later in his essays that he
doesn’t even buy stock any more (or not much).
His main method is to buy entire companies so he won’t get taxed on
dividends OR the sale of stock – because he never intends to sell it.
Buffet isn’t a saint, and he’s not a lunatic. He just doesn’t believe in short term
trading, and I remember reading once that he had said he’d rather short term
capital gains were taxed at 100% to make people stop trading short term and
start investing long term.
On page 267 he begins a section on Taxation and Investment
Philosophy in which he goes through a few numbers. If you were to double 1 dollar 20 times you’d
have a million dollars.
But if you taxed it each time you’d only have 22,000
dollars.
So, instead of TRADING twenty times, one should buy and hold
for TWENTY TIMES LONGER.
Great idea, except it doesn’t work for most folk. Most people cannot pick a company that will
be good for twenty years. Buffet
can. My late grandfather could.
I can’t. Can you?
No.
So who will the so-called Buffet rule impact? The rich?
No.
It affects you and me.
The good news is that I’ve made tax rates and trading costs
a measured aspect of my Mousetrap. It is
currently STILL in a 67 day average holding period, even with the new Obama
tax. But it’s EXTREMELY close to tipping
into a 366 day holding period.
If that happens, I’ll stop paying 35% in (Bush rate) short
term capital gains and start paying 20% in (Obama rate) LONG TERM capital
gains.
Obama’s vaunted tax hike will become the Clontz tax cut.
You’re welcome.
Tim
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