Hello faithful readers. We made a few adjustments to the model today (added back in the foreign stocks and added 1.0% to the expected return to stocks in capital appreciation.
What we expected to happen: The change in expected returns takes the return to risk to 4% from 3%, and maybe this would take our optimized long portfolio from 34 stocks to 24. This should not have been a big deal. The addition back of foreign stocks should have been material, but mostly on the 'not attractive' stocks as these would likely be higher risk. We did not consider that many foreign companies listed on US stock exchanges have closing prices that are 'painted' and controlled to make them look good. We saw this in the past with AeroCentury (ACY) and expect this still continues. What happened: The best portfolio has only two stocks. One is an ETF that is a 3x long / bull fund. That is expected as this particular fund is loved for its adjusted risk returns. The other stock is one that paid an enormous dividend due to COVID supply chain shocks. That makes the stock very attractive, but only if the dividend continues. What comes next: We cannot invest in an index and a stock that we know was picked because of last year's dividend in an industry that has seen 50% to 80% loss in pricing power, US congressional action to reduce their prices, and a weakening economy. We believe this is an issue with how dividends are treated in our model. They are given 100% credit for BETA impacts. Dividend paying stocks are promoted by our math, and the higher the dividend, the higher the promotion, on a linear basis. So, it is with a heavy heart that we need to finish our analysis, then run the whole thing again after dialing back the dividend support parameter. Better this than recommending a stock based on faulty logic. Disaster averted. Cya on Monday. Jeffrey Cohen President, US Advanced Computing Infrastructure, Inc. +1.312.515.7333
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November 2024
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