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dydo

Trading Strategy

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I am starting this thread for members to share their actions on the market outside of single trade. I see a lot of good info coming from members which are commenting on a larger scale than solar. I also see that solar universe is becoming land-locked with its internal issues. While I fully understand opportunities in contrarian approach, frequently market does not offer awards for being right, and in particular in solar it hard to be awarded if you get ahead of conditions, see them delivered only to observe no reaction or even negative reaction.

Understanding limitations, this thread also combines beyond solar views. Finally, I am not sure where to package my thoughts on some plans I have for investing in dividend walks. For one, it takes a lot of time and effort to find things. It makes only sense to share this with those who support the cost of the side. I encourage everyone to share your views, in this scope.

Thank you

 

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Let me start,

I am looking for the opportunity to jump from stock to stock and collect dividends in the quicker timeline than the average four times a year. There is a lot of concerns about this, as frequently stocks go down after the payment. Of course, it is also not easy to find the variable in payment timelines. Also, I am looking for a particular quality. For example in REIT setting, BV is essential in establishing value. In the definition of assets, I ask what type of mortgages, agency or not debts the company is involved in, to reduce risk of interest rate swings and defaults. Profitability is also an aspect of critical importance. If I get caught in a jump from play to play, I do not have to die slowly every day holding to something of inferior quality. 

This file contains some of the companies I have selected for consideration. Currently, I own ARI at 16.65 average as you can see  I am, $0.20 down on the $0.46 payment payable on April 15 to SOR March 31. My next objective is to jump to PMT. The company has not released its dividend date. I suspected this to happen next week. I suspect to see around $0.47 per share payable with up to 14% yield at today's prices.

For example, CAFD being higher priced pays 50% less per share.

Among that list, there is, at least, one more potential to create three dividend payments within  45 days. That alone gives an opportunity for 12 dividend payments instead of 4. Further block buying instead of buying at the same time the whole amount can result in different equity loss/gains creating a better return.

REIT-diversified companies are just one group of interest, but they have attractive yields. They also have a real equity potential, as they are being sold, in some cases worse than solar.

 

Dividend payers.xlsx

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1 hour ago, odyd said:

I am starting this thread for members to share their actions on the market outside of single trade. I see a lot of good info coming from members which are commenting on a larger scale than solar. I also see that solar universe is becoming land-locked with its internal issues. While I fully understand opportunities in contrarian approach, frequently market does not offer awards for being right, and in particular in solar it hard to be awarded if you get ahead of conditions, see them delivered only to observe no reaction or even negative reaction.

Understanding limitations, this thread also combines beyond solar views. Finally, I am not sure where to package my thoughts on some plans I have for investing in dividend walks. For one, it takes a lot of time and effort to find things. It makes only sense to share this with those who support the cost of the side. I encourage everyone to share your views, in this scope.

Thank you

Great idea to have a strategy thread. The past year I changed my investment/trading approach to a much more strategic one, which in short, as its primary function, sets tight range limits on the allowed exposure against different asset classes. I describe it and continuously track its development in my profile under the "About Me" tab to see how it performs against the TAN solar ETF and the S&P 500 index. For now I'll just copy that page here in the next post as a starting point for the description of my strategy.

At the end of each quarter I will post an updated chart in my profile of the daily portfolio, TAN and S&P 500 development since the implementation completion and inception of this new strategy on January 1 this year. The initial chart will be posted April 1.

It's too early to draw any conclusion if the strategy is beating the S&P 500 index or the TAN solar ETF in terms of risk adjusted return performance, but it can still be fun to follow. Usually these type of strategies have a hard time beating a stock index in bull periods, while in a full cycle that includes a set back on stock markets the diversified asset allocation strategy should outperform on risk adjusted return.

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My portfolio is focused on uncorrelated asset allocation with risk parity target and use of high leverage with the objective to maximize expected return at reasonable risk.

Annual returns

return.PNG

Portfolio / TAN / S&P 500 old performance stats, 2015-12-31

  • Inception 2009-01-01
  • Return since inception 131.58% / -56.52% / 126.23%
  • Max drawdown -97.85% / -87.94% / -27.62%
  • CAGR 12.75% / -11.22% / 12.37%
  • Risk-Return-Ratio 0.13 / n/a / 0.45
  • IRR 14.56%

Portfolio (stocks, funds) / TAN / S&P 500 new performance stats, 2016-03-25

  • Inception 2016-01-01
  • Return since inception -5.39% (-2.96%, -2.51%) / -27.09% / -0.39%
  • Max drawdown -10.94% (-6.56%, -8.12%) / -33.86% / -10.51%
  • Volatility 22.20% (11.32%, 17.23%) / 43.18% / 18.57%

Asset allocation

  • Cash 6.25%
  • Individual Stocks 7.50%
  • Stock Funds 10.00%
  • Hedge Funds 76.25%

Currency exposure

  • Local -27%
  • USD 126%
  • CAD 1%

Performance comments

Since more capital was invested in the old portfolio during its higher return periods the IRR has been better than the CAGR.

The old portfolio volatility has been extreme. The -97.85% drawdown during 2.5 years (from late 2010 to early 2013) means that the total return was 10667% during the 4.5 years outside that period to reach a total 131.58% over 7 years. The CAGR was thus -78.47% during the 2.5 years drawdown period and 182.86% during the other 4.5 years. Extreme indeed.

During the same 7 years period the solar ETF TAN, which is the closest portfolio benchmark since my portfolio has been US listed solar stocks focused, returned -56.52% and the S&P 500 returned 126.23%.

Allocation and currency comments

At this point in time I'm satisfied with the capital return achieved during the past 7 years and I am now reducing my risk significantly in a new portfolio with the described asset allocation strategy. The goal is to more than double the average annual return of the portfolio to 30% while reducing its max drawdown risk more than a factor 3 to 30%. Thus improving the Risk-Return-Ratio more than a factor 7 to around 1.0. To track these new targets the portfolio performance stats are reset 2016-01-01 (old closes and new starts).

Around 75% debt is used to achieve 4x leverage. This means that the exposure of the portfolio capital to cash, individual stocks, stock funds and hedge funds is around 25%, 30%, 40% and 305% respectively. The high leverage is enabled by risk parity in the asset allocation, where the risk of the hedge funds portion, despite its large size, equals the sum of the risk of the rest of the portfolio. Thus the portfolio consists of two uncorrelated parts, each of a risk magnitude corresponding to 70% stocks exposure.

The currency exposure is not an active choice. It directly reflects the currency denomination of the portfolio assets (and debt). The US dollar should however be a solid currency for the rest of this decade so I'm not adding any currency hedging instruments to the portfolio.

Return requirement analysis

With 30% levered return requirement, net after interest and tax expenses, the gross levered return requirement is 37%, since the 4x leverage, after discounting 1% for the cash, is costing around 7% in interest and tax expenses. This means that the gross unlevered return requirement is 9.25%. Since 6.25% is in cash the average gross unlevered return requirement on non-cash assets becomes 9.9%. This is possible to achieve with good asset picking.

Right now the interest rate is very low. As it rises the leverage will become less accretive. When that happens I'll likely need to reduce the leverage in the portfolio. As an example if the interest rate would rise 100 basis points then the average gross unlevered return requirement on the portfolio assets increases from 9.9% to 10.5%. The extremely low interest rate environment right now is thus the main rationale behind the design of the portfolio strategy currently applied.

Stock trading

The stock class of the assets is in turn subject to internal allocation of its allocated capital to its individual assets (stocks). This also applies to the funds based asset classes, but the re-balancing of the stocks follow an aggressive scheme while the funds based classes follow a dollar neutral scheme (dollar allocation of a fund asset does not change with the price of its share). Basically this means that the stock allocations are adjusted by their share price moves, i.e. if the share price goes up its allocation goes down and vice versa. The idea with this aggressive scheme is to effectively reduce cost of shares held. While the stock basket's dollar allocation is kept constant the dollar allocation for the stocks with currently bargain share prices relative to the overall stock basket are over weighted and the high-flyers are under weighted.

To evaluate the scheme I will look at the effect on two stocks that have triggered a lot of re-balancing trades since their first positions were taken, TERP and GLBL. First position is defined as the amount of shares held before the first re-balancing sell trade was triggered. All prices and gains include trading and forex fee costs as well as forex gains/losses in order to reflect net effect of re-balancing trading. For the same reason dividends are net of tax. Numbers are per initial position share. Besides the cost of the initial position shares still held, the cost of all shares currently held are also calculated by adding the effect of net average down/up or net profit/loss taking change in amount of shares held from initial position amount of shares with the assumption that the net change in shares were traded at the current price per share.

Note that the transaction amounts in local currency for initial price paid, dividends earned and trade gains have been converted to USD at the current exchange rate. This means that although these amounts have not changed in local currency the USD converted values fluctuate a little with the exchange rate.

TERP, 2016-03-24

  • Initial price paid: $15.91 (September 28-30, 2015)
  • Dividends earned: $0.84
  • Trade gains: $5.18
  • Net cost of initial position shares still held: $9.89
  • Share count change "gains": $0.00
  • Net cost of all shares currently held: $9.89

GLBL, 2016-03-24

  • Initial price paid: $6.59 (October 5-6, 2015)
  • Dividends earned: $0.43
  • Trade gains: $3.64
  • Net cost of initial position shares still held: $2.51
  • Share count change "gains": -$0.04
  • Net cost of all shares currently held: $2.55

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1 hour ago, odyd said:

Among that list, there is, at least, one more potential to create three dividend payments within  45 days. That alone gives an opportunity for 12 dividend payments instead of 4.

I don't mean to be a wet blanket odyd, but have you observed a historical underpricing of dividends (or lead up to divi) in these stocks?

I guess it seems to me that all this dividend information (barring changes or "news") is well known.  Doesn't the market typically adjust (i.e. price steps down to account for dividend on ex-div date) for these payments?  Good luck and if you've found a free lunch, please enjoy it.

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1 hour ago, odyd said:

There is a lot of concerns about this, as frequently stocks go down after the payment. Of course, it is also not easy to find the variable in payment timelines. Also, I am looking for a particular quality. For example in REIT setting, BV is essential in establishing value. In the definition of assets, I ask what type of mortgages, agency or not debts the company is involved in, to reduce risk of interest rate swings and defaults. Profitability is also an aspect of critical importance.

Thanks for the sheet of dividend payers. I find the quality aspect above of particular interest as my strategy involves hold and trade between dividend payments and thus longer time exposure than the dividend walk. But it will also be interesting to follow "the walk" to see how much can be tapped from inefficient dividend pricing "arbitrage".

 

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4 hours ago, disdaniel said:

I don't mean to be a wet blanket odyd, but have you observed a historical underpricing of dividends (or lead up to divi) in these stocks?

I guess it seems to me that all this dividend information (barring changes or "news") is well known.  Doesn't the market typically adjust (i.e. price steps down to account for dividend on ex-div date) for these payments?  Good luck and if you've found a free lunch, please enjoy it.

That's it, Daniel. Dividend stocks are not what they used to be. They offer a lot of equity fluctuation along the yield dividend variable. You will be able to see how my strategy works. Generally, I find  people stay away from active trading. So I look into active trading things nobody considers trading. I am also looking across industries, to diversify views. There is a lot here which is in my head. Hopefully, I will be able to describe it and be successful at it.

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11 minutes ago, explo said:

Thanks for the sheet of dividend payers. I find the quality aspect above of particular interest as my strategy involves hold and trade between dividend payments and thus longer time exposure than the dividend walk. But it will also be interesting to follow "the walk" to see how much can be tapped from inefficient dividend pricing "arbitrage".

 

I am suprised to see a lot of concerns while most have bought into dividend SUNE complex without a lot of consideration for ex-dividend condition. Just becuase something offers 20% fluctuation instead of 40% fluctuation in equity shift, it does not mean it is not undervalued, hence every time dividend is paid it has to be depleted in value. I expect this to happen, flex the dividend payment, but I am not buying PG here.

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I am also looking at couple of pipeline distribution stocks as part of evaluation,

NuStar Energy L.P.

DCP Midstream Partners LP

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I've calculated the individual return, max drawdown and volatility from the individual stocks asset class and the combined (stock funds and hedge funds together) funds asset classes to see if one of the classes is inferior in its risk adjusted return contribution to the portfolio.

Note that the funds asset classes have 11.5 times higher allocation than the individual stocks, so equal return, max drawdown and volatility performance would mean that the funds contribute 11.5 times more of that to the portfolio than the individual stocks do. If my picks and trading are successful maybe the individual stocks can perform better than the funds.

Note that the individual risk contributions cannot just be summed up or multiplied. The combo is supposed to have better risk properties (from diversification effect) than the sum of parts. For the return the combo equals the parts multiplied.

The strategy description post above has been updated to show these individual contributions.

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The dividend walk will be impacted by an immediate reduction in the share price upon dividend payment (or ex-dividend date). Of course one way to beat it is to buy lower than the price minus the dividend, second to wait long enough to get paid and have equity come back after such payment.  In order to transition to another payment, a couple of things are required: another stock(s) and an actual timeline allowing for a jump and, of course, no loss of equity. I am not going to jump otherwise.

I am not trying to say that the drop will not be there after the payment, but I am hoping that drop will be indifferent as the stock was bought cheaper than the after-the-reduction price. If not, I am hoping it will recover before the jump needs to take. To make a jump one need to have more than one option to do a jump. It would be the best to have variable timelines as well.  The concept is not that hard, but it takes a lot of data mining.  I am sure someone is already doing it.

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Going after AMTG, the object of the takeover by ARI would be a better deal than ARI, at least as it appears today. The stock pays $0.48 per share and just went ex-dividend today, payment being made only by April 29th mind you. It already added half gain versus the dividend. The case of PEGI which also went ex-dividend today, gaining numbers from yesterday's drop, shows that not all ex-dividend dates cause drops in price. Most of the energy stocks had gained today on the ex-dividend date. I am not sure if this is going to be a pattern, but certainly the formula of the drop in value is not obvious.

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It is painful to watch and I am not patient. I sold ARI and bought PMT, small gains, but gains nevertheless. I am staying cash at 60% right now, checking in to solar

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Currently, if all equal I am looking at PMT, CSIQ and NYLD as potential purchases. CSIQ under 19 looks good while I still consider lower prices. I am wondering if Q1 release will be impactive outside what we already know. JKS seem expensive at current pricing.

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On 2016-03-24 at 5:06 PM, explo said:

At the end of each quarter I will post an updated chart in my profile of the daily portfolio, TAN and S&P 500 development since the implementation completion and inception of this new strategy on January 1 this year. The initial chart will be posted April 1.

Attached are the charts (they will also remain on the "About Me" tab in my profile).

Quick comments.

The portfolio outperformed the TAN and S&P 500 for much of the quarter, but the S&P 500 came out significantly on top end of March as the portfolio was hit by simultaneous weakness in its funds, the USD and solar stocks in March.

The S&P 500 ended flat after a weak start. The portfolio ended close to the quarter low. The TAN started the quarter horribly and never recovered.

Looking at the two portfolio components the funds outperformed the stocks for much of the quarter, but dropped off a lot in March, partly due to a large USD exposure, leading to the stocks ending on top.

Looking at the FOREX effect the USD was down 3.6% to my local currency in the quarter. With the portfolio having around 125% exposure to the USD on average in the quarter the USD contributed with a loss of around 4.5% or around 70% of the total portfolio loss of 6.6% in the quarter. I hope this FOREX loss can be reversed and muted or turn into a gain for the rest of the year.

Considering that the stocks portion of the portfolio is solar stocks focused and having more than a third of the stock exposure in the volatile SUNE yieldcos the total portfolio performance being a lot better than the TAN during the quarter is a bit of a testament to purpose fulfillment on the risk management side of the portfolio strategy.

16Q1_return.PNG

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11 hours ago, odyd said:

It is painful to watch and I am not patient. I sold ARI and bought PMT, small gains, but gains nevertheless. I am staying cash at 60% right now, checking in to solar

After a couple of "walks" it would be nice to see some gains metric like percentage of gain to dividend, i.e. 20% if the dividend was $0.50 and "only" a total gain of $0.10 could be pocketed. As long as it is positive it works even if full dividend can't be harvested, but it might need to be put into a risk perspective to be more relevant. A risk measure could be based on how much and how long the position was out of the money even if it at some point time offered a close in the money. I think it is still to early for this analysis, but if you run the strategy for a year it could be interesting to summarize over the year.

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35 minutes ago, explo said:

After a couple of "walks" it would be nice to see some gains metric like percentage of gain to dividend, i.e. 20% if the dividend was $0.50 and "only" a total gain of $0.10 could be pocketed. As long as it is positive it works even if full dividend can't be harvested, but it might need to be put into a risk perspective to be more relevant. A risk measure could be based on how much and how long the position was out of the money even if it at some point time offered a close in the money. I think it is still to early for this analysis, but if you run the strategy for a year it could be interesting to summarize over the year.

The gains seem insignificant versus the amount of money involved and particularly seeing swings in many percentage points trading solar equity. Time investment is also significant plus the work involved. I think I have not enough money to make this work in this fashion.

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5 minutes ago, odyd said:

The gains seem insignificant versus the amount of money involved and particularly seeing swings in many percentage points trading solar equity. Time investment is also significant plus the work involved. I think I have not enough money to make this work in this fashion.

So I guess you've concluded the strategy then as not worth the effort and risk to continue for you at this point (although there are some small gains that can be harvested)?

 

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48 minutes ago, explo said:

So I guess you've concluded the strategy then as not worth the effort and risk to continue for you at this point (although there are some small gains that can be harvested)?

 

Basically,

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