Buy and Hold Portfolios Help Us Learn

We just finished updating our model portfolios so I thought I would share some thoughts on these models.

Long time readers know that we have always constructed portfolios simply as a learning tool—YES I am 65 and after publishing websites on the topic of mostly preferred stocks and baby bonds I am still learning. If you are rather new to investing in these securities I guarantee you will never stop learning.

We currently are running 4 models–2 on this site and 2 on the website. Today I want to review only the 2 on this site–then in a few days I will review the website models. The website is owned by the company that bought my old website – The Yield Hunter – and they pay me to do a little work for them yet.

The Medium Duration Income Portfolio is simply a portfolio of baby bonds and term preferreds which mature within 10 years of inception. The portfolio is not meant to be traded–except where absolutely necessary. No flipping, dividend captures etc occur in this model.

Lesson 1 in this portfolio is don’t buy securities issued by tiny untried companies. This portfolio held the Atlas Financial 6.625% baby bonds which mature in 2022. The company really screwed up big time in reserves for losses (they are a small insurance company) and ended up writing off damned near half the equity. Needless to say I sold for a 55% loss on this position. Lesson 2 is that when it walks like a duck, quacks like a duck–guess what? It is a duck. I watched this baby bond plunge from $25 to $17 on first announcement and said to myself “give it a little time” to bounce after the initial overreaction. Well I should have simply sold it, but instead watched it go ever lower. Lesson 3 is simply that in spite of my good fortune running these models over the years with a relatively concentrated portfolio this is a good example of what happens when you have $100,000 spread across only 10 holdings. This one bonehead purchase took 5-6% of performance off the portfolio so instead of being up 8ish% it is up a very poor 2.86% after 16 months.

The overall message is that these models are too concentrated–you can’t be at 10% allocations and not get hammered at some point in time. We will be working to resolve this in the months ahead. This was the number 1 loss I ever had in a model and honestly just plain stupid.

I should note that I did not own any of this security personally–although we had owned it at some point in time.

The Enhanced High Yield Model Portfolio has performed quite well relative to our modest goals. After 17 months the model is up almost 10%–so it is tracking right on goal–7% annually.

We don’t have any clear cut new lessons to be learned from this portfolio, but we know that it is too concentrated just like the other portfolio–only 11 issues are in the model and it should be double that (or even more). This portfolio holds the hated Spark Energy 8.75% perpetual preferred which traded down to $18 last year, but now has bounced back–we may have dodged a bullet with this kind of junky issue so we need to address that situation.

For us personally we take these lessons quite seriously–sometimes you get a bit cocky, but buying a total loser knocks you down a few rungs. If I can get 6-7% year after year I would be happy—very happy.

55 thoughts on “Buy and Hold Portfolios Help Us Learn”

    1. Yes, Nomad this replacement pipeline has been a sore point and struggle for quite a while and constant roadblock. The current pipeline is very old and ENB has made mention they may have to reduce the flow in it soon for safety purposes. Court battle after court battle. . …It appears both up north and here in states getting permissions to move resources by pipe is harder to get permits for than the extraction process itself. The ironic thing is much then gets transported by rail and truck and that would appear to me to increase hazardous risks. But that is only my low level opinion.

  1. Dave and Mikeo, wanted to add a little more color to NYCB-U, but the comments section is closed under the thread we were working from so I will post it here.
    Dave, your thought on the Tier 1 issue is correct. Due to tax benefit of the trust, NYCB would have to issue a QDI preferred in the 4.75% range to be beneficial to call and reissue. That will not happen. Also to add color to the ratings…Fitch is a bit different. They rate it BBB- (all the subordinated debt which NYCB-U originates from), but punish their preferreds 5 notches due to further subordination and non cumulative. They have the preferred at B+.
    I am no financier, so due to the general leverage banks have to begin with, and my pessimism of subordinate debt, I am under no illusion of any recovery of money in a receivership event.
    I failed to comment but you may have noticed the warrants equaling the price of around $35 to kick in the call warrants, and then later a blurb I pasted out of NYCB of it being around $20. They are different because NYCB had a couple minor stock splits in 2003 and 2004 that caused the readjustment downward to 2.4953 shares at $20.04.

  2. Maybe something useful:
    A recent comment regarding setting up a very functional portfolio that would serve as a very low maintenance Buy&Hold led me to do some more research yesterday and set up a new Watch List dedicated to Term Prefs. I went over the universal lists and only chose issues that 1) still had call coverage, 2) had IG or some other factor that may put into consideration and 3) no regard for length of the term meaning it could be well past MY expiration. I threw out the junk. Alot of clicking, reading and processing. I ended up with just under 50 issues some TRUPs (bond-like). They COULD play a part in portfolio construction with ameliorating some interest rate risk as maturity is approached, but in general terms for a diversified group are to the LONG side. Also, many were WAY overbot, but watchable. I suppose a few select CEFs could be salted in when appealing, but there are other issues there and few term issues.
    Construction of a theoretical portfolio that is quite decent CAN be accomplished with Exch Tr Instruments, with ‘Term Pref’ as a percentage.
    A true BUY and HOLD does not exist. Either you do the tending, a broker does it for a fee (ie: ETFs/Indexes) or TIME changes the complexion of the internals.

  3. Why sell the Atlas bonds? Selling at some sort of stop loss is a stock strategy. This bond is still paying it’s coupon and the company is still actually making a profit. 2020 EPS projected at .65. This bond is likely to pay at maturity.

    1. Possibly Andrew. But management has lied or been ignorant past several years. Look at the massive 4th quarter charges past several years. They dont understand their “book” or liabilities that keep growing from 2015-16 period.
      They even dropped AM best because they didnt want their rating, and it must have been poor because A.M. is a pretty soft rater. Their last opining on them was not good at all.
      The ratings of the American Service Pool reflect its balance sheet strength, which AM Best categorizes as very weak, as well as its marginal operating performance, neutral business profile and marginal enterprise risk management (ERM).
      The ratings downgrades of Global Liberty take into consideration the significant reserve strengthening charge taken in the fourth quarter of 2018, which has resulted in material contraction in surplus and deterioration in risk-adjusted capitalization.
      So the issue could be a good one or bad one. But the investor profile would be more of a distressed high yield buyer instead of a safe income owner. So it depends on ones investing profile.

      1. Gridbird, I agree with you that Atlas is “distressed high yield” now. I wouldn’t encourage “safe income owners” to buy it now. But if someone bought it before the crash, holding onto it now instead of selling at a BIG loss seems to me to be the best course of action. That’s what I am doing.

    2. My expectation would be that Atlas Financial Holdings gets sold before it goes into bankruptcy. Insurance companies rarely fold, and Atlas has hired a financial adviser with a track record of brokering such deals. I took a small position in AFHBL when the asking price went below $10 with the goal of doubling my investment…we’ll see what happens.

      1. Atlas looks a bit scary to me. Seems like their clients are being run out of business left and right by the likes of LYFT and UBER among others. Def a spec play for sure. Would be nice to find a real data point on the # of taxi’s still in use versus the time before LYFT and UBER took over. I rarely see taxi’s anymore in my metro area, yet see plenty of the the ride sharing service cars being called and running the streets.

    3. Thanks for your considerable wisdom in this piece, as well as all you do and teach those of us who follow this site regularly. Like you, 6% would be a great return, but I can’t even answer the question: “What would you invest in if Stalin told you you have to earn at least 5% every year.”

      1. My favorite deep Stalin quote:
        “I believe in one thing only, the power of the human will.”
        Smile, Nomad

    4. I hold the same bond. Still holding. placing 10% of a portfolio in a bond like this is a rookie mistake.

  4. Thanks for the pointing out the lessons learned. We all make mistakes and can learn from each other.

    1. WILL BOWERS—that is the beauty of contributors–I am always kind of shocked on all I learn from others.

  5. Don’t beat yourself up for mistakes. We all make them. They’re part of the human experience. Use them as learning experiences. Even Einstein has an eraser on his pencil.

    1. I agree Jerseyvinny–some errors seem silly–at least with the benefit of 20/20 hindsight.

  6. Tim, I am wondering if you would consider developing a medium duration portfolio of baby bonds and term preferreds that are investment grade, or at least ones you would consider to be investment grade if they were rated.

    1. Hi Alan–not sure there are enough of those issues out there, but certainly will add portfolios in the future.

    2. Medium duration at this time, with what is available, seems to look like about ten to twelve years to get some basic IG and diversity. I have been working on this. Also, QDI or IRA (or mixed and allocated for a withdrawal plan)?
      I have a three tiered basic outline for a portfolio to guide its construction and the average yield looks to be about 6% right now if held to maturity. There is a “grooming” maintenance as opportunity arises that may enhance its performance over time. I think Grid calls it developing ‘your lane’.
      My base point for performance maintenance is simple and never forced rigidity: What if I was skimming 4% a year and turning 2% into offsetting inflation with no use of principal on a diversified, IG portfolio? Right now, I am learning to manage that lane as if I was fully retired. At 61 years old and am turning it ALL back in to compound, but I get the opportunity of time to see how my plan can perform when I hit say 65 years old. ( I don’t think SS will do much more than cover the Medicare co-pay and an occasional colonoscopy, if you get my drift) I know we will have to manage through a downturn or two, turbulence, prob interest rate reversion and stepping in to re-allocate cash within the plan.
      Eventually, we can take slivers of principal since any heirs are on their own!
      Happy Planning! J

  7. Tim, a very good reminder to avoid concentration risk.. That is why most prudent people hold individual positions to 2-5%. The risks one should be mindful of…Duration risk, company risk, sector risk, market risk, call risk, currency risk, and concentration risk…All sorts of pitfalls to be mindful of. That being said I have about 25% of my funds in SP-A. For anyone else I would never advocate that. But I dont live off my income stream and can own what I want as I dont really trust much to begin with. I am fine for now until something better comes along owning that much Laclede Gas that first listed on NYSE in 1880s. If any other utility preferred would provide me a better option, I will ratchet it down.

    1. Grid–I have had various models over the years which were concentrated and never had a big blowup like this one, but yes the lesson is there for me and others to observe.

      Yes if you are not now, and maybe won’t ever, live off your portfolio income stream the motivations are different. The older I get the more conservative I become and even though I am not certain I will ever need the income stream I don’t want to go backwards too much.

      1. Very sound philosophy of course. Of course I am comparing a dirtbag quirky insurance outfit to a regulated utility that has been on the Big Board since 1888 and uninterrupted dividends since WWII ended. Of course that is why the yield is lower. I wont sit this way forever though. An opportunity will break at some point, and funds will eventually be moved.

        1. Hi Girdbird,Thoughts on ALP-Q cumulative preferred around 25.20 Div.qual. 15 % for taxable account would be happy just to earn the 5% Div.
          Thanks B/L

          1. Hi Big Lou, the issue in terms of dividend payment is very safe. Southern cannot get their greasy hands on dividend extractions from its subsidiary Alabama Power to feed the holding company monster, until the preferreds get paid first. Very regulator friendly with all CEO wives from Alabama Power serving as state regulators (hyperbole humor there). In other words they are very pro utility and allow recovery of capital in a timely manner. They maintain their own lines of credit and are not really dependent on holding company (Southern). Many people get confused on this but Alabama Power is a subsidiary preferred while take Spire (SR-A) which is a parent (holding company) issued preferred.
            Duration risk and long end interest rate cycle are your real concerns here. Being one of the lowest yielding perpetual issuances outstanding it would suffer more from higher rates or fear from higher rates. That is your main thought to ponder.

            1. Girdbird, thanks for your insight, just looking for some what safe place to park some cash in a taxable account. Own alot of SR-A my local[ Laclede Gas] would buy more if it would drop some.
              Thanks B/L

              1. Lou, Im sure you know, but jusk making sure you know this issue has seen 22.60 before in case capital preservation is king. I am a bit more ambivalent on some safer issues since I reinvest and contribute. I would actually prefer some of what I own to go down more also to buy more.

                1. Gridbird,I did see that looks like it mostly trades 25.00 to 26.00.any idea`s after they come down?
                  Thanks B/L

                  1. Girdbird,ALP-Q looks like went down with Southern in Oct.and Dec.2018 with out that drop it`s been 25.00 to 26.50.
                    Thanks B/L

                    1. Lou, the Oct drop was a pretense to long end curve moving up. It didnt stick of course. But if it did go to 3% or get credit spread craziness from market upheaval in Dec. occurs it could happen again. Im saying this in a manner that this will happen anytime soon, as one never knows, in fact it may head north again. The dividend is secure. I just get a little nervous when suggests a 5% perpetual as a parking place for cash. That as a general rule is a contradictory strategy from a conservative capital preservation plan.
                      Not criticizing at all, just talking theoretical.

              2. Big Lou,
                If you’re looking to stay in the ute space, check out NI-B or DCUE or CNLPL. Also, a fav or mine is CNP-B. Both Grid and I like PPX.
                CNP-B and DCUE have dipped quite a bit the past few days… PPX dipped also as Grid noted.

                1. Affinity, Picked up some CNP-B today also long a little NI-B will check out the others.
                  Thanks B/L

                2. A4I, does the Mandatory conversion of CNP-B in 2 years’ time concern you at all ? Or are you intending to sell before that date arrives ?

    2. Grid, I could not find SP-A. Did you mean to type SR-A, the Spire preferred?

      Now that Sempra is trading, I’m debating if I should get some. Their California operations give me pause, because of risk of losses and penalties due to the ridiculous laws of CA.

      1. Inspy, lol, I have a mental block on that issue. I believe it should be SP-A, but NYSE doesnt agree and they are the boss. So yes its SR-A. But I dont even think its Spire…A fake name…It will always be Laclede Gas to me. Just like Ameren is really Union Electric and the L.A. Angels are really the California Angels, ha.

        1. OK, so what are your thoughts on the Sempra Preferred? It’s trading for about $25.10 right now. I will not buy at that price, but was thinking of putting in a bid at $25 even.

          1. For what I am holding and staying invested, I would have to sell out to buy. The only real candidate would be the AQNB issue I have. And I dont really see a benefit to switching out of that. So I really didnt give this a thought. Now for me if it had been a true QDI preferred at par 5.75% I would have sold something to initiate a position though.

          2. Curious…I am at a lost which Sempra preferred you’re referring to. I see two convertible issues at $100 par. I don’t see $25 par issue.

          3. Decided to stretch a little, and bought 200 SREA at $25.05.
            Might flip if I see an opportunity.

            I do not consider this a SWAN stock because of fire risk in SoCal, exacerbated by the law that puts liability for wildfire damage on the utilities even if they have followed all necessary safety & maintenance procedures..

            I sold SCE-L a while ago, so this is my only SoCal exposure. Not intending to increase it.

          1. That is irrelevant, Bob… Anyone who seen them in Brooklyn should be dead, in The Home, or have a financial advisor making all investment decisions. 🙂

            1. I did and I am not in any of the locations you mentioned. Stereotyping is a no-no. I also saw Maurice Stokes play in MSG and He was a fantastic ballplayer; he passed away very young and few fans remember him. He was 6’7″ and could play any position on the court, along the lines of Magic Johnson, but of course years earlier. ( I alone make all my investing decisions – unless i ask you for a little guidance, which you are kind enough to offer ). Take care,

              1. Howard, thank you! I wasnt actually trying to stereo type, I was trying to invoke a response in kind like you did…..Bob wouldnt take the bait. They left in ‘57, so someone easily at 5 yrs old could have a memory and they would be around 67 years old. Not typically “The Home” age yet. 🙂

        2. California Angels ! It should have stayed that way ! Long time fan here from 1962 on, I hate they are stuck with that Los Angeles thing again 🙁

  8. Hi Tim. I have a similar small portfolio, but much less concentrated with 23 positions (among them the same Atlas security you sold). When I set it up, I resolved to not trade regardless of blow-ups to determine an actual hold to maturity return on sub-investment grade high yield stuff. It was hard to watch and do nothing with Atlas, but I want to know the rate of failure and recovery after defaults (if any). Good luck.

    1. Qniform, I would be very interested in your lessons learned from your portfolio. I have wondered about the rate of recovery and such after defaults.

      1. Yes, I to have a small Atlas position and am holding to see some sort of outcome, whatever it may be. Not the most expensive lesson the markets have given me, but one that has definitely changed my methodology.

        1. mikeo–that is what I always want to do also–but the older I get the less “experimenting” I want to do.

          1. Remember I come from a daytrading and bitcoin background. I can do some REALLY stupid things in an effort to supposedly make money. :-/

    2. Qniform–sounds like you are doing your own portfolio “experiments”–keep folks updated when it fits the topic at hand.

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