Starting off on a high. Dividend growth stocks from "Dividend Growth Whisperer" trounce the market in Q4, 2018.

In my new book, Dividend Growth Whisperer, published October 2018, I list 17 dividend growth stocks. While 3 months is a silly period to consider the performance of an (investment) portfolio, just to amuse myself today, I looked at how the portfolio performed during the fourth quarter of 2018.

The portfolio in the book outperformed.

While the market lost 13.55 percent during the fourth quarter -- as measured by Vanguard's S&P 500 mutual fund, VFINX -- the portfolio in my new book lost - "only" - 8.48 percent, a performance 507 basis points ahead of the market. While this degree of loss is a Pyrrhic victory, it is a decent start, considering the blind panic that infected the market at times during the fourth quarter of 2018 -- when far too many people seemed to run out of their Oreo's.

Quite interestingly, and encouragingly, 14 of the 17 stocks profiled in my new book beat the market over this period, a testament to the high quality of the stocks and the portfolio in general.

And while beating the market is not that big a deal for stodgy stocks (many utilities, for instance), these stocks are not stodgy stocks. They share characteristics that should allow them to perform better than the market over the long term -- at least, that's the theory, and that's why I picked them!

If they do what the stocks in my first book, Investing in Dividend Growth Stocks, have done they should outperform the market in bad times (falling less) and good times (rising more) -- a favorable market trait of extreme rarity. Net, over a long period, 5 to 10 years, they should handily outperform the market. At least, that's the theory....

(Even if all this does not come to pass, I believe they should do quite all right. I believe that my dividend growth stocks -- the portfolios in both books -- should beat 90 percent of all funds over a long period, except in very rare instances: rabid markets or long-term performance off a starting atrocious bear period. The portfolio in Investing in Dividend Growth Stocks has done very well, for instance. Quoting from the Amazon page:

"In 2017, the average stock in the book's portfolio returned 23.2 percent, yet again outperforming the market, which returned 21.7 percent, making it ten years out of the last eleven that the portfolio has beaten the market. [It beat the market again in 2018, so that's eleven of the last twelve years that the portfolio has beaten the market.] The portfolio very likely remains the best general purpose diversified portfolio in the market, besting the vast majority of diversified mutual funds, with the best, or among the best, 10-year records to 2017. Over the last eleven years, $1.0 million invested in the portfolio, dividends reinvested, has vaulted to $4.4 million at the end of 2017, ahead of the market by a not too insignificant $2 million -- and with much less risk, meaning as well, for instance, that you are much more likely to hold onto these stocks and actually realize these returns. Such is the benefit to long-term investors of picking these wonderful companies correctly, that is, intelligently.")

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Many investors fail to appreciate the damage severely bad returns do to a portfolio. For instance, while the book portfolio did beat the market by 507 basis points, it actually is 641 basis points ahead of the market in terms of the returns needed to get back to par -- the book portfolio needs a return of 9.26 percent to get back to par while the market needs a return of 15.67 percent to do the same. That's a considerable victory for the good guys.

Another way to look at all this is to consider the amount of time needed to get these returns. At a market average of 9.5 percent a year, the book portfolio needs a little less than a year. The market however would need 1.60 years. So, in a sense, we are 7+ months ahead of the market -- and really considerably more, perhaps 9+ months to a year, since typically dividend growth portfolios outperform the market. Not a bad start.

You only have a finite time horizon in which to invest so time is indeed money.

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Game on.

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Notes:

Dividend Growth Whisperer, on Amazon, https://www.amazon.com/Dividend-Growth-Whisperer-Understanding-Investment-ebook/dp/B07JMMTM4R/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=1547491648&sr=8-1

VFINX, https://investor.vanguard.com/mutual-funds/profile/performance/vfinx

How have the biggest losing stocks of 2013 fared so far

The punch line: The accepted wisdom, really theory, is that big losers of one year become big winners the next year. Buy the losers in December. This theory is invalid -- or at least should be modified as far as it pertains to all stocks. The theory may have validity for the huge companies of the Dow, where companies do tend to come back and companies rarely fail. With most other stocks, however, total failure is a genuine possibility. Big losers of one year can become even bigger losers the next year because they have systemic troubles. In general, stay away from companies with systemic troubles. They can dissolve into nothingness. If a preliminary pass to avoid such stocks is made, returns improve.

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Method: I took a random list of big stocks that were losers in 2013, "Fortune 500: Worst-performing stocks of 2013," http://money.cnn.com/gallery/investing/2013/12/19/fortune-500-worst-stocks/, and calculated how they have performed YTD in 2014. I just read off the returns from Yahoo! Finance. Thus things like bad data, dividends (potentially), and reorganizations are not considered.

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Results: A portfolio of the fifteen worst stocks of 2013 has returned -10% so far this year, underperforming the +10% return of the index. However, it gets more interesting when the group is broken down into two constituents: (a) companies with long-term troubles; and (b) the rest. The stocks in group (a), indicated by a comment in the last column below, have returned -37%. When you have that many coal stocks and one bankruptcy (or close to it, NIHD lost 97% and now trades on the pink sheets as NIHDQ -- I've used -100% in the table) that is bound to happen. The gold miner may not be in long-term trouble but gold has done poorly over the long term. The stocks in group (b) have returned a more respectable +13%, ahead of the market by 3 percentage points. Here is the breakdown:

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Conclusion: You have to be careful buying losers, as far as it pertains to most stocks. The best bet is to avoid those with systemic troubles. You need to do a preliminary pass and weed out such stocks. If this is done, buying the remaining losers (as a group) can work though you have to be careful and pretty patient.

Portfolio returns versus risk, a spreadsheet model to calculate portfolio beta

The punch line: Weigh your portfolio's performance, that is your returns, against the risk that you are taking.

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Beta is not an ideal measure of risk but when looking at how your portfolio fluctuates from day to day it isn't bad. It certainly measures how much your stock moves relative to the market -- and you can use this fact to gauge what the market thinks of your stock.

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This is especially important if you have an aggressive portfolio and the market is weak. You don't want to panic and sell foolishly. For example, suppose your aggressive portfolio's beta is 1.5. Suppose the market falls seven percent. (It can be a daily fall or a multi-period fall.) Then your portfolio should be expected to fall 1.5 * 7 or 10.5 percent. Now, if during a market fall, your portfolio falls "only" (say) 5 percent, that's not bad. You are outperforming the market relative to the risk that you are taking. If, on the other hand, your portfolio falls (say) 15 percent, that's bad. You are underperforming the market relative to the risk that you are taking.

You might think that a fall of 5 percent is bad. You lost money. And in that sense it is. But you cannot be expected to never lose money and always earn money! What you are hoping for instead is that you are more than compensated for the risk that you are taking. What you are hoping for is that the smaller fall in your portfolio value relative to the market during downturns implies that you've got good individual stories. Holders in your stocks believe in these stories and are not willing to sell during market downturns. Over the longer term, these better-than-expected stories should lead to better-than-average returns.

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Here's a spreadsheet that shows how to calculate your portfolio's beta using Excel:

The spreadsheet is straightforward. It uses the result from here, http://www.neocadence.com/2013/06/calculating-beta-of-portfolio.html, that is, the beta of a portfolio is the sum of its weighted betas.

Column C lists your positions.
Column D lists how much you have in dollars in each position.
Cell D24 is the total value of your portfolio, the sum of the individual values.
Column E are the percentages, or weights, equal to the values in Column D divided by D24.
Column G lists the betas. You can get these from a site such as Yahoo! Finance.
Column H are the weighted betas, equal to Column E times Column G.
Cell H24 is your portfolio's beta, the sum of the weighted betas.

(The beta for cash is zero. You can include mutual funds and ETFs here as well.)

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If your portfolio falls less than what is expected, you've got individual stories that are trumping the market's weakness. That's good -- you've got so-called positive alpha. If your portfolio falls more than what is expected, you've got individual stories that are playing out worse than the market's weakness. That's bad -- you've got so-called negative alpha.

Credit Suisse's Top Picks in Software for 2013

Picks from the guys at Credit Suisse:

"Oracle is our top pick in large-cap stocks for 2013, followed by VMware, Salesforce.com, and Sap, while our favorite midcap-software stocks include Cornerstone, Proofpoint, NetSuite, Splunk, Jive Software, and Ultimate Software."

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For now, the market is rewarding revenue growth from the smaller software players in cloud computing -- it is allowing them to get away with investing in their businesses. This has meant that valuations are high -- extreme really -- based on traditional metrics, such as those based on earnings.

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Source: Barron's

If the above link gives you limited access, google "A Top Pick in Software for 2013" and click on the Barron's link. If you haven't reached the Barron's article limit for the month (?), you should be able to read the article in its entirety.