A worry-free wealth growth strategy

I’m taking some days off and vacationing in Panama this week. So just talk about something boring but relaxing. As many of you know, I’m really fanatic about a boring long-term investment strategy with dividend reinvestment and compounding growth, which to me is almost a worry-free type of wealth building magic. I presented a case study by using MSFT as an example to demonstrate how powerful it can be as long as you give it enough time to work its way out. Now I just saw another demonstration made by a very-well respectful value investor, called Keith, in which he used LMT as an example. Below is just what he presented:

Let’s say you invest $10000 for LMT at $211/share with a current dividend yield at 3.1%.  Assuming the dividend increases by 10% annually and the stock remains flat, you’ll have $14,231 in 10 years. That’s a 42.31% return. It’s not glamorous, but keep in mind that you would have earned $946 in dividends by year 10, which works out to an impressive 9.46% yield… just because you kept your money moving consistently and efficiently. In 30 years, you’d be sitting on $218,208 and a 118.2% return. Most impressively, though, you’d be earning an eye-popping $65,666 in dividends just for that year.

Whenever I’m doing a presentation on this topic, it’s usually right about now that the hands start going up… but what about a declining market? Surely a stock that goes down by 5% each year for 30 years is a losing proposition regardless of the dividend, right? Wrong. Believe it or not, when the price declines by 5% each year but the dividend payouts rise, you actually end up with more money than you’d have if the stock hadn’t lost any value (after a 25% capital gains tax) that amounts to a 392% return on your initial $10,000 investment!

In this scenario, a $10,000 initial investment transforms into a $252,600 holding – or a 2,426% gain in year 30, with an annual dividend at $233,112,698.10.  Got the point?

Here is the key point: for the vast majority of people investing in stocks, the No.1  fear for them is to see their stocks going down in price. But if you are investing in a great quality dividend stock that has decades of track record to increase dividends, you really don’t need to be worried about what the stock is doing on a daily basis. As long as the business is sound in generating enough money to pay increasing dividends, you should be happy to see its stock price to go down if you just reinvest its dividends. All of this can be done automatically without any of your ongoing efforts.

I have been investing/trading in stocks for long time but I must say I was not smart enough to truly understand the compounding power of the dividend reinvestment strategy early enough. Nearly 10 years ago, I started to seriously put money into this strategy and have become addicted to it since then. Right now, my annual dividend income is over $20,000 which is growing every year. This does not include any trading income I also gain by doing short-term trading around the dividend stocks. You may ask what's the big deal with just $20,000+ per year that is at the poverty level in the US in terms of income. Well, two reasons. For one, this is just the beginning and it will be increasing exponentially over time as long as I keep it for another 10-20 year. I think this part of my portfolio may bring me over $100K annually without me doing anything additional.  It is all about the compounding effect that is magnified by time. The second part is related to my personality. I'm a firm believer of "Unpreparedness spells failure (人无远虑，必有近忧)" and I want to manage my life in such a way that even if a disaster hits without notice, my family can still survive well. While I’m certainly not so silly to brag here for this amount of dividend income, I do want to share with you my retirement-related plan, which has something to do with Panama (since I’m writing this from Panama!): I want to have a peaceful mind knowing that my basic needs with a good quality of life is sufficiently funded without fear of stock market crash or depression. A well established dividend reinvestment portfolio can really support this peaceful mind! This brings Panama into play. I’m here with my wife not as a general tourist but this is our “home” visit sort of speaking. I will write more about Panama but briefly, Panama is a retirement haven for us (and many retirees from all over the world actually). This is a country that has a wonderful policy/program to attract people to come to retire here. Simply put, as long as you have a reliable retirement income just $1000 per month, you are qualified to come here to enjoy their retirement residence with a lot of benefits attached (e.g. 25% discount virtually for everything). In other words, you can enjoy a decent life there with merely $12000 per year. So my annual dividend income as of now, while being at the poverty level in the US,  is already double this amount. In theory, if suddenly I lost everything now from my trading accounts, my properties and anything else, I can still enjoy a decent life here in Panama if I’d like to just based on the dividend income. Not mention the annual dividend income will be exponentially soaring after 15-20 years as the example above has shown.  This is really the peace of mind I want to have and I do increasingly enjoy it!

Of course, you may say, even for quality dividend stocks, it is not 100% secure as in theory they may also drop to zero. I agree with your theoretical concern and I’m actually enjoying another non-stock based wealth building strategy that virtually incorporates all the good features you want to have for your money including but not limited to guaranteed compounding growth, legal protection, and tax-deferral or even tax-free if set up appropriately. I’m going to talk more about this in the future but if you want to get more information now, feel free to send me a note.

Road map for the remaining 2016

I'm heading to Panama to enjoy some warm weather and therefore won't be able to watch the market as much as I'd like to. I just want to lay out my thoughts on how the market may behavior in the remaining weeks of 2016. I'll be fun to see if this could turn out to be a good road map I design for it.


The market has enjoyed a fantastic Trump rally since Nov 8, from being extremely depressed and oversold to extremely euphoric and overbought. Of course, it can simply continue to go to the moon but more than likely, I think it will need to take a breath at least in the very near term. A mini crash to bring down S&P towards the 2100 level is a real possibility in the next week or so. If that happens, then the market is poised in a position to enjoy the seasonal bullish year end rally. Of course it is yet to see if it has sufficient energy to challenge its all time high and break out by year end but ironically the market seems to be really happy with a Trump presidency now and wants to go up. We will know better when we are close to the year end. This projection is based on a scenario that there is no black swan to surprise but we may very much likely see something significant to come. No, it is not the FED rate hike which is already priced in I think. It is potentially a European bombshell bigger than the BREXIT that no one seems to care about at the moment. It is the coming Italian Referendum on Dec 4.



The Italian Referendum is a constitutional referendum. The Italian voters are to be asked whether they approve of amending the Italian Constitution to reform the appointment and powers of the Parliament of Italy as well as the partition of powers of State, Regions, and administrative entities. Simply put, this is virtually a confidence vote to the current government, challenged by the rising rival party which is becoming increasingly popular.  A defeat in the referendum for Italy means a no confidence of the ruling party that could lead to social turmoil in other countries that are already facing a strong resistance to changes with elections across Europe that will take place next year. If that's the result of the referendum, the opposition party will soon come into power, which may very well let Italy leave the Euro zone. This is at least what they are aggressively promoting. This could potentially be a shock wave triggering another worldwide panic selloff. Of course no one knows for sure what the market will do and react as we have clearly see the market has its own mind and may surprise everyone but at least this is a potential threat to the year end rally. Just keep this in mind. We are likely hearing more talking in the next 2 weeks, which by itself may increase the volatility. Don't be too complacent!     

How a wall along Mexico can make you some money

We are now entering into a Trump era and he has made a lot of promise. While it will be naïve to believe what is said during the election campaign will always be honored, especially those from professional politicians, Trump is a businessman and he is going to use his business sense to guide his administration, which is totally a new phenomenon. So we have to see how much Trump will implement his promises made. One promise he is very vocal about and appears he is very serious about is to build up a wall along the border with Mexico. He even made a trip to meet the Mexican president on this proposal. I think this is not something he just talked about but likely for real. Actually believe or not, Congress has already approved a plan to build up such a wall but Trump’s plan is even more extensive I believe. Part of his plan is to make Mexico to share the cost for the wall. So which companies may benefit from building such a wall? Certainly many but one thing that is a must have for a wall is cement. I bet the demand will be huge if indeed a wall thousand miles long is built up. Let’s assume that Mexico ends up having to pay for the wall (don’t forget, if Trump is serious, he can easily use the economic pressure to force them to compromise), don’t you think they would prefer to use the cement produced by them? I bet so!

 

Based in San Pedro, Mexico, Cemex (CX) is a cement manufacturer that should great benefit from this initiative from both perspective. Don’t forget, Trump’s another slogan is to "Make America Great Again", a lot of which is about largely rebuild or improve the US third world class infrastructure. Again, CX will for sure benefit as well. Keep in mind, CX, while a Mexico company, is a cement producer for global supply. Right now it is in a correction mode and very close to a strong support around $7. I think it will be a great Trump stock to own for the next few years.

Mystery solved?

It is still a mystery at least to me why the market reacted so much positively to the Trump victory. It is very counterintuitive and I bet no one ever expected this reaction prior to the election. So I have been trying to decipher the mindset of the market in the past few days and finally I think I understand why.

As expected, the market initial reaction was a shock and panic when it became increasingly possible that Trump would win the election. A 5% crash of the market futures and a huge run of the gold price overnight was exactly what was supposed to occur for the surprising Trump win. So why this panic did not hold after the market opening? I bet this was most likely related to another very unexpected outcome of this election: Not only Trump had a landslide victory but also he helped the Republican to win both the Senate and the Congress. In other words, no one has ever expected this kind complete winning by the Republican. Regardless who you expected to win, I bet the power distribution for Washington DC was universally expected to be divided, i.e. the presidency vs Senate/House would be shared between the 2 parties. But after the initial shock, the market finally realized that at least in the next 2 years, the Republican will be in full control of the White House and the Capital Hill. This unexpected unilateral power control by the Republican is considered very positive to the market but negative to gold:

• Trump has a very bold business-oriented agenda to completely reform and change the political and economic landscape in the US. The high level changes we can expect to see include drastically reducing corporate and personal taxes, repatriating enormous amount of corporate cash held off-shell by slashing the heavy punitive taxation, repealing the notorious Obamacare and hundreds of his Executive orders that are killing business, downsizing the government and heavy regulations, and large-scale rebuilding the very poor and discarded infrastructure. It would be very difficult to implement any of these if Trump would not have a cooperative Capital Hill but now this concern is virtually removed. As such, we should expect to see a more business friendly environment in the next couple of years, which is definitely welcome by and positive to the market. The bond market seems to very much foresee this as the long-term Treasury interests have skyrocketed high so fast not seen before, meaning an expectation of higher inflation due to a booming economy. If you check the historical market performance during the Republican Trifecta, the evidence is very clear that the market should be doing well in this kind of situation. The Republican has only controlled both the White House and the Capital Hill 2 times before: during 1953-1954 and 2003-2006. So what was the return of the stock market? Huge: 36% and 61% respectively during the 2 periods. Of course there is no guarantee whatsoever that this time we will see the same good market performance but before we see anything suggesting otherwise, we have to give the benefit of doubt to the Trump presidency. I believe the market has finally realized this great potential from the Trump administration and therefore mounted a very surprising and powerful turnaround rally.

Naturally, when the panic was gong, gold got hammered. The projected increasing inflation and strengthening dollar is certainly quite negative to gold in the short term. I have been saying for months that I don’t believe the gold correction is over and may continue for a while to bring gold down possibly to $1200. Even if gold indeed jumped high after the election, it would be short-lived. The pain for gold will likely continue, probably till the Fed rate hike in December. But regardless, I think we are very close to the bottom of this gold correction. Long term, I’m super bullish for gold!

The unthinkable

Well, the election was finally over and Trump did not disappoint his supporters with a landslide victory not only for himself but also helping to secure the majority status for GOP for both houses. I bet this is indeed an unthinkable probably the vast majority, if not all, had not expected. But to me, the even more unthinkable is the market reaction to the Trump’s victory. As you all know, I was expecting a major selloff of the market following his win. The market did sell off hard overnight but then it did something truly unthinkable at least for me. The market certainly has its own mind and will follow its own rhythm regardless what other people think and it is never wrong, sort of speaking.

 

While I was wrong about the hedge I promoted this time, I certainly don’t regret a bit about what I did and will do the same next time when facing a major risky incident. No one can be always right but if one wants to survive the market in the stock market for long, it is critical to always think about the potential risks and what protection that may be used to minimize a potentially devastating outcome. As I said, buying protection is just like buying an insurance that you can lose small to protect something big. I have sufficient long positions to enjoy the market jump but I would like to minimize a big paper loss in a major market meltdown.  I was talking about buying some VXX and for myself short term UVXY call options. While I fully understand that my cost for the calls would be a total loss, I always try to do something to salvage a losing position if possible. So let me share what I did with you in this occasion that may be useful for those who are playing with options.

 

I bought 80 contracts of UVXY Nov 18 $40 calls ($0.26 per unit) in an account with some open long positions as I did expect a major selloff that could trigger a huge run for UVXY. It costed me about $2000 which I knew that I might not see it again but it could make me 5-10 times of my money back if something really big happened. I was wrong as very quickly after opening today, the market started to turn around and my UVXY calls were plunging to less than $0.1. In other words, there is no way that I could expect any meaningful return of this position given the very short timeframe involved. Understanding that the market had discounted the risk associated with Trump’s win and very unlikely VIX would mount a huge run upwards in the short term, I placed a counteractive arm to hedge this position. I sold 10 contracts of UVXY Nov 18 $15 calls (about $2 per unit) that allowed me to collect about $2000 as well if indeed UVXY continued to slide down or just move side-way in the next 10 days or so. Good luck for me as UVXY continued to slide down quickly throughout the day and this short arm already gained 70% for me by the end of the day. In other words, I barely lost much from this losing position and if VIX goes up again, I may increase this short position to get more gains. I may end up with some profits if lucky enough.

The lesson from it: for protection purpose, only buy an amount that you can comfortably lose. If situation is right, one may turn a loss to even or potentially a gain. Of course always understand the potential risk of doing such hedge on hedge and don’t overdo!

When there's trouble in Washington DC, there's trouble on Wall Street

This is an old saying, which can best describe the current situation for the stock market! As I have laid out in the last blog, Trump’s win will likely bring down the market to a large scale. But now I must say, I’m probably too conservative. I think even a HC win will also cause a great deal of volatility and selloff after Nov 8. Why so? Three major factors that make me think so. Regardless which side you are standing on, one thing I think we must agree upon: both candidates are extremely hated by the other half. That really creates a big problem if they are so much hated by half of the population that he/she wants to lead. Trump will be a shock anyway to the market for a lot of uncertainties but HC, used to be viewed as having a lot more certainty, will soon be felt by the Street as also with a lot of uncertainty. Then comes to the second point about the legality of her victory, if she indeed wins. We have seen more and more evidence almost on a daily basis pointing towards the dirty behaviors and conduct of HC’s campaign activities, including her initial treatment to her party competitor, Sanders. I’m sure Trump’s legal team is busy collecting such solid evidence and may likely challenge the legality of HC’s victory. Regardless the final result of this legal battle, it will for sure take a couple of months at minimum. Each passing day of unsettling election will be a great threat to the stock market stability. Talking about the certainty that the Street loves! The third point may be more problematic for HC if she wins. We are seeing the political saga unfolding in an unprecedented fashion at moment and there is increasing evidence to make people wondering whether or not HC and even her family have been involved in illegal or criminal activities.  Now think about the scenario that HC wins but she is soon indicted that will almost for sure lead to impeachment. Will that make the Street happy to drive the stock prices higher? I bet not!  More I think about this, more I cannot justify for a happy ending from this election for the near term!

 

Well, all of these concerns are just my personal concerns and I could be very wrong that HC may end up with a clean land-sliding win and becomes the next US president without any legal challenges. But my money won’t bet on this and I’m aggressively buying VIX these days to be prepared for the unthinkable! VXX is the most direct way to track VIX. In the past few days, VIX jumped 50% higher and my UVXY options doubled already. If a true panic hits, I'm looking for several times gain in the weeks ahead.  Of course, using options or inverse ETFs is another effective way to protect. When you read this, we have just two trading days left before the historical election. If you bet for a skyrocketing market in the months ahead, I can only say Good Luck!

"Industry recession signs"

This was the report title I saw today at CNBC. The latest economic data is about the trucking orders in Oct, which is down 46% year over year. And the reporter was asking whether this was another sign adding to the growing concern of a recession. So why is this important for the economy? Well, you may not ask this question if you understand in the US, 70% of goods are moving around via trucks. When transportation companies' order of trucks plunges in such a scale, there is no other reason but the demand for goods transportation is plunging as well. Will this be a good sign for the economy? This is really a leading indicator that the economy is significantly slowing down and we may very likely on the path to a recession next year.


I think the stock market, famous for predicting future directions, seems to have warned us for months. Since July when the market broke out, which was cheered by most people as a sign for next leg up, the momentum indicator (MACD) is telling a different story. For all the months since then, it is consistently moving down, a negative divergence questioning the strength of the uptrend. Now S&P is sitting on the 200 day moving average, a spot where logically a rebound should be expected. In the normal time, it is quite possible as we are entering a bullish season often with year end rally, but with the very muddy election ongoing, I'm not sure if it can stay above the 200 DMA following the election just 2 trading days left (see more thought tomorrow on this). If it break out to the downside, then 2040/2000 will be its next stop. Eventually I think much more downside is ahead of us moving into next year, especially if a recession is indeed striking.






Folks, we are not at a time that will be responding well to higher interest rates and higher tax with more regulations. All our wealth is definitely at risk. Don't be complacent!!





By the way, I just saw a blog in a very easy-to-understand language talking about the differences between Trump and Clinton and the potential impact on US$, interest rates, and economy as well as the true reason why Wall Street including Buffett is so afraid of Trump's presidency. Highly recommend to take a look.