Nick's January Portfolio Update

My holdings increased 5.1% in January, making for a great start to the year.

After a fantastic 2017 that saw major market indexes post gains in excess of 20%, 2018 couldn’t have gotten have gotten off to a better start. The S&P 500 was up 5.58% in January. The Dow Jones Industrial was up 5.41%. The momentum from tax reform that was passed in December carried over and one could even argue that the market is getting exuberant. Obviously investors can’t expect these types of returns to be annualized. I think the sell-off we’re seeing early in February thus far points to the over heated nature of the markets after their recent run up. But this is a re-cap piece so let’s focus on the halcyon days of January rather than focus on the ~10% pullback that the S&P 500 has experienced in more recent days.

I always try to stay even keeled in the market. When I was a freshman in high school I was unexpectedly pulled up onto the varsity team to play quarterback in the Fall. I couldn’t drive then so the head ball coach would pick me up for practices during August before school started. I’ll never forget what he said to me during one of those drives leading up to our first game.

The Friday night lights were quickly becoming a reality. I lived in a small town where there wasn’t much else to do on Friday nights than support the local boys on the gridiron. People don’t often leave towns like that so the players on the field weren’t just playing for themselves and their teammates, but for the community as a whole. This was a lot of pressure for a 14-year-old to handle.

The coach must have sensed it. He looked over at me and said, “Don’t show your fear. All eleven guys in that huddle will be a little scared under the lights. They need a leader. Never too high, never too low. That’s the key.”

Now granted, we didn’t win that many games that season and in hindsight, it’s pretty clear that my coach back in the day was no Nick Saban. However, he made a lasting impression on me as a youngster and whether it’s right or wrong, I’ve lived my life that way: never too high, never too low.

The stoicism that I’ve developed over the years means that I’m not the life of the party. My wife sometimes wishes that I’d get more excited about things. She’s a bit of a social butterfly, you see. But, it does mean that I’m able to stay calm and rational in the markets, allowing me to avoid the buying persistent fear and/or greed that inspire others to make mistakes.

There’s the old saying, “a portfolio is like a bar of soap, the more you touch it, the smaller it gets.” I don’t buy into this idea completely. I think rational investors can use fundamental analysis to make informed decisions in the market. However, I do think that inaction is better than rash reaction and oftentimes in the market, doing nothing is the very best thing than an investor can do.

So, no, I didn’t get carried away with bullish enthusiasm and make a bunch of trades in the month of January. For the most part, I sat on my hands and watched as the value on my portfolio took significant leaps and bounds. And you know what? That’s what getting rich slowly is all about.

The only trade that I made during January was the sale of my Kimberly-Clark (KMB) position. On January 3rd, I sold KMB for $116.83, locking in a small 2% gain plus dividends received. Thus far, it seems like this trade was a fine idea. KMB is currently trading for ~114/share, meaning that it has underperformed the broader market since my sale early in the year.

Kimberly-Clark is a wonderful company without a doubt. This consumer products company sells things like diapers, toilet paper, and tissues that humans will purchase in any market conditions. KMB has a 46-year dividend increase streak going and a 3.4% yield. KMB has a 57.6% forward payout ratio, which is higher than I’d like to see but still doesn’t appear to represent any danger for the dividend. All in all, this is a very reliable equity for income oriented investors; however, I’ve been concerned with the company’s lack of growth and its valuation for awhile now and with rates on the rise, I’m continuing my gradual exit from the consumer staples space.

KMB posted top line growth of -6.8%, -5.7%, and -2.1% in 2014, 2015, and 2016, respectively. Sales are essentially flat during the trailing twelve months. Sure, KMB’s EPS has risen nicely over the past couple of years and the weakness in the dollar should be a boon to this company as it tries to make inroads in foreign growth markets, but as great as the ~3.4% dividend is, in a rising rate environment I don’t feel comfortable relying on the yield without top-line growth to push the stock forward.

I didn’t put the cash that I raised with the KMB purchase to work in January. I also only put a small percentage of my dividend income to work via selective re-investment (I did use dividends to continued to build my Activision-Blizzard stake in one of the retirement accounts). I hate not fully allocating my dividends towards organic portfolio growth; however, the biggest financial move that I made in January was withdrawing a significant amount of my cash position to pay for another semester of my wife’s graduate program.

This move brought my cash exposure down from 10.1% to 7.8%. It’s never fun seeing cash disappear from your account balance like that; however, the degree that Rachel is pursuing is in a high demand healthcare space and I’m certain that her education expenses will result in a high ROI.

I will likely continue to pool cash with dividends. I need to replenish my cash position and now that we’ve transitioned from a two income household to a one income household while she’s a full-time student, it’s difficult to make ends meet from time to time and I may use cash/dividend income to help pay off the mortgage if my income falls short of monthly targets.

The absolute best thing about January’s big rally is the fact that after I factored out the tuition cash from my portfolio balance, we still ended up with more money at the end of the month than we did at the beginning. These gains were on paper and thus far in February a lot of them have been erased, but I tell you what: it felt great knowing that our money in the market was working for us, enabling our wealth to increase even in the face of major expenses like college tuition.

My portfolio returned 5.1% in January (ex-cash that was removed for the tuition). This represents a slight underperformance relative to the major market indexes, though you’ll never hear me complain about a month whose returns exceed 5%. I obviously don’t want to see this underperformance trend continue moving forward and I will continue to monitor my holdings appropriately. I will say that my beta is low and I haven’t built this portfolio to maximize performance in a strong bear market. Many of the moves that I’ve made in recent years are more defensive minded. If February continues to bring more pain than gains, I’ll be interested to see if this more conservative strategy will pay off.

Maybe I’ll be singing a different tune at the end of this month, but I don’t think the current sell-off is the start of something major. To me, it seems like a healthy dip within a market that had become complacent. If this volatility continues I suspect that my February update will include more market moves than January’s does. Time will tell. But in the meantime, I wish you good fortune and best wishes. See you next month!

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