In this article, I detail my activities in the stock market over the past three months. I explain why I bought and sold common stocks and how my stock portfolio performed in comparison to the performance of the S&P 500 index.
I bought the common stock of five companies:
· 200 shares of CBL & Associates at $5 and 1,000 shares of ARC Document Solution at $2. I thought both companies were trading at current low earnings multiples and that capital markets would eventually return to value both companies at a higher, more reasonable earnings multiple in the future;
· 300 shares of Frontier Communications at $8. I thought the goodwill impairment expense, which resulted in a precipitous decline in the stock price, did not reflect the economic reality. You can read what I wrote about Frontier Communication’s accounting shenanigans by clicking here;
· 100 shares of Seritage Growth at $35. I detailed the rationale explanation in How to Understand the Economics of a Business; the irrational explanation was that Warren Buffett had invested in the company;
· 100 shares of GE at $15. I had bought the position simply to force me to follow the future operations of the company - think of it like paying for dinner on the first date, when you know that you want to discover more about the person but not sure what just yet.
I sold the common stock of three companies:
· 500 shares of Famous Dave at $7 compared to my cost basis of $3.5 per share. I sold the position because I earned a hefty, annual return. And because I didn't think I could earn a higher annual return it in the future. Sadly, I will have to pay short term capital gains, which are twice as expensive as long term capital gains. Mike Piper, an accountant, explains the concept simply and clearly;
· 2,000 shares of bon ton stores at 7 cents compared to my cost basis of $1.50. I sold the position to offset the tax payable on Famous Dave. In February 9 of this year, I wrote openly about the mistake I made and you can read about it by clicking here; and
· 100 shares of Regal Entertainment Group at $23. Cineworld bought my shares when it announced its acquisition of Regal. While I was frustrated that I would pay short term capital gains again, I was pleased with the overall result: I had paid only $15 a share in August 2017.
Nine different companies paid me a total of $207 in dividends. And the only interesting thing to note is how uninteresting dividend payments are. First, not only did the nine companies (except for the REITs) pay income tax on these distributions, but yours truly now has to pay taxes again, and in the same tax bracket as ordinary income. Second, I have no idea where to allocate this cash. I would have much preferred the companies retain their earnings and invested at their management’s discretion.
For the time-pressed reader, the bottom line is that the value of my portfolio of stocks increased by 67 basis points, while the value of the S&P 500 declined by 3.2%. And, in theory, if the quarterly performance continues for the rest of the year, then my performance for the year will be 3%, while the S&P 500 will decline 12%.
An unheroic record.
I will remind new readers that to track the portfolio of the S&P 500 index, I bought one share of VOO, an exchange traded fund by Vanguard that tracks the performance of the index. I paid $246 for the ETF in the last week of 2017 and as of last March it was worth $237. And I received $1.07 in dividends .
I calculated the return on my stock portfolio as follows: my cost basis was $27,157 on the last day of 2017. I added $5 thousand in cash (my goal is to allocate $5,000 each quarter in 2018. More explanation can be found in Why I am Doing This). So, if you add the two, the cost basis is $32, 157. As of the last day of March, the value of my stock portfolio was $31,730, and I had $644 in cash. The value of my portfolio was $32,374.
This was the first time that I took the time to write about my past actions in the stock market. I found the process insightful. First, I was able to see that passive investing, my purchase of VOO, led to a reasonable result. While I spent (or invested, depending on how you view it) over 120 hours reading annual reports and analyzing financial statements over the past three months, by investing in VOO, my time would have been free for other things. I could have used the 120 hours to play the piano.
Finally, the careful reader will note that I placed only 9 trades over the past three months (I know of stock traders that execute more orders by the time they finish their first cup of coffee). And if there is one thing I hope you will take away from this article, it is that just because in the long term we are all dead, does not mean that in the short term we should trade feverishly.