Lately I have made a number of adjustments to my portfolio. I am not usually a very active investor, however I must admit that some of my stocks that I have had for 7 years have appreciated very strongly. More generally, we can even say that the market is currently very high, with a PE ratio of 25 on the S&P 500 (30 for the Schiller PE ratio) and a market/GNP ratio of 135%. The only thing currently supporting stocks is the very low rate served on bondsWithout this we would have already had a crash.
It's not that I've changed my strategy, but I haven't liked the market conditions for many months. The price-to-earnings ratios of many of my payers growing dividends were close to 30, while current yields were in free fall. Even if the yield on purchase cost was still very good (around 4% on average), and it continued to rise, I no longer felt comfortable with such valuation levels. We are no longer in an investment here, but in pure speculation.
Since I don't like playing with fire, but on the other hand there are no alternatives with bonds, I decided to arbitrate within stocks. I got rid of stocks in sectors that are sensitive to market fluctuations, as well as stocks that had significantly increased in value and are closely followed by the mass of investors and speculators. There are some gems in the lot, but they had really become too expensive. I still feel a little sad because I am losing several "aristocrats", including pillars like MCD, KO, ADP or even WMT. I say goodbye to them, but not farewell, because I will not fail to return there at the next opportunity.
I'm not trying to time the market, and I think these stocks are likely to go up for quite some time. But I'd rather focus on less fashionable and less exposed stocks right now. They'll benefit just as much from the bull market, but they'll be less trashed when the market turns around.
So here I am now adorned with stocks shunned by the market, spread across several heterogeneous countries, sometimes still a few large capitalizations, but increasingly small companies. Geographically, the weight is clearly shifting from the West (USA) to the East (Europe and Japan). In the land of the rising sun, we also find a fairly phenomenal quantity of nice companies that have not emerged from yesterday and that have been completely sold off since the long phase of deflation and bear market that followed the 90s.
From a sector perspective, I remain well positioned in perishable consumer goods, particularly food, and I am now also dipping my toes into the financial sector, one of the major absentees from my portfolio until now. The reason is simple: the fundamentals have improved significantly since the debt and subprime crisis and some stocks are still neglected by the market.
That's quite a few movements, but it's relative to the length of time the shares have been held. For the moment I've made more sales than purchases, so I have plenty of cash left to continue to draw on the bargains.
I will present the new portfolio soon, when all the adjustments are completed. In the future I will also detail more precisely the purchases/sales of each position. Also to be published is a long series of articles on how to diversify your portfolio to protect yourself from market risks.
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I find this article to be of really excellent quality and I particularly admire your transparency.
Even more than the low bond rates, I would say that it is above all the ultra-accommodating monetary policy of the central banks which is supporting the stock market (even if of course the two are closely linked).
For my part, I must admit that in recent weeks I have also reduced some fairly speculative and low dividend positions. On the other hand, in order to better navigate in the event of a stock market storm, I have bought some more stable stocks with juicier dividends (but not or only slightly increasing), e.g. Investis, Intershop, Mobilezone and APG. I still have others in my sights, e.g. CFT, Goldbach or Helvetia whose valuations are starting to make my mouth water…
THANKS:)
Yes, indeed the two are linked. It is the intervention of the central banks that caused this situation.
Hello Jerome,
In the context of a future crash or something else, what would be the financial consequences if you had kept your portfolio with dividend aristocrats such as MCD, KO, ADP? Thanks for the answer
Hello Jean,
It is quite clear that growing dividends, even if they are currently expensive, are still a much better approach than having ordinary stocks that do not pay dividends, or pay irregular dividends. Dividends have a strong protective effect during bear markets, and this is even more obvious if they continue to be increased while everyone is panicking. Dividend payers fall less than others and above all they rise much more quickly, thanks to income hunters. That being said, if we can find other dividend payers that are growing, for less money (from a fundamentals point of view), then we can do even better. Why have companies with PEs of 30 in my portfolio, even if they are defensive aristocratic blue chips, when I can buy small companies that pay growing dividends at less than 10x earnings…?
Additional information: https://www.dividendes.ch/2012/08/les-atouts-des-payeurs-de-dividendes/
And here come the two crazies Trump and Kim Jong to put their two cents in... it's already bright red on the Nikkei this morning...
Hello again Jerome,
Thanks for your answer. If the PE is currently 30, but you bought your shares several years ago (at a lower PE), how does that impact you?
For two reasons.
The first is that the more expensive the stock, the harder the fall when the market turns. Even if we agree, it will always be less worse than with a stock that does not pay increasing dividends. I can generally accommodate myself very well in a buy&hold position of a quality company that I bought at a PE between 10 and 15 and whose price has appreciated significantly because a) profits have increased and b) the market values the stock more (increase in the PE). We win on three counts: the dividend increases, the price increases thanks to profits, but also because the PE increases. This does not pose a problem for me, as long as it remains within the realm of reason... From a PE of 20 I start to ask myself questions, 25 the growth of the company must be very sustained and above all it must continue to be strongly sustained (which is rare over long periods). And at 30… how to say… We can clearly see that it is no longer really reasonable. I remind you that the average historical PER is around 15!
The second reason is that if we can find a company 2 or 3 times cheaper with equally good or even better fundamentals, then there is no reason to deprive ourselves of it... We arbitrate between our own securities and the rest of the market: can we find better outside?
– if not, then so much the better, we are fair: we keep what we have, or even strengthen a little the positions in which we have the most confidence, as long as they are still at a fair price.
– if yes, then our portfolio is no longer quite adequate: we reduce the stocks that have reached speculative spheres, we keep the good students and we buy the stocks shunned by the market
Thank you, I understand your reasoning now, we must try to keep a certain balance with each of the securities purchased. Another thing, which companies are you referring to, which would be cheaper currently and which would respect the fundamentals?
I will soon be posting my new final portfolio. I still have a few purchases and sales to make.
It seems to me that you are from Quebec. For example, I find that some banks in your country are cheap and have very good fundamentals. I am thinking of TD, for example.
In the old stocks that I owned there are Swiss stocks like Bell for example. There are even some stocks that I kept, despite a fairly high PER, but which are saved by other criteria (sales, book value, cash, etc.), I am thinking for example of VFC (US aristocrat) or Emmi (in Switzerland).
Otherwise, as I already mentioned, there are a huge amount of beautiful titles in Japan, not expensive at all. Well, you'll tell me, we just shouldn't let the other nutcase decide to press the button, since they're not very far away... But in that case, it's not just Japan that risks suffering.
Not from Quebec but I lived there for a while 😉 Ok I hope to read you soon, I can't wait to get started with dividends.
Interesting discussion on this eternal question of knowing when the valuation is still reasonable and from when we are in the famous phase of "irrational exuberance".
As Jerome said, I also find the market currently too expensive in general, but I still manage to find a few stocks that are not grossly overvalued.
And the small “political” correction of the last few days is already creating some opportunities.