Month 102 - A-rated Stocks in Vanguard’s Wellesley Income Fund (VWINX) - December 2019

Situation: For retiree savings accounts, most of the financial advisors that I follow prefer that half be allocated to bonds and the rest to stocks that reliably pay an above-market dividend. There is a convenient, low-cost way to anchor one’s portfolio in that direction, which is to invest in VWINX -- Vanguard’s Wellesley Income Fund. The managers allocate almost 60% to bonds and the rest to stocks that have been selected from the FTSE High Dividend Yield Index. Vanguard markets the U.S. version with the stock ticker of VYM. The ~400 stocks in VYM are selected from the Russell 1000 Index of large-capitalization companies (IWB). 

As a prospective retiree, you’ll want a balanced portfolio--one with approximately a 50:50 balance between stocks and bonds. The transaction costs for buying a corporate bond are high so you’ll want a mutual fund with a mix of government bonds and corporates. For stocks, you have the option of picking your own while keeping transaction costs (expense ratio) at ~2%/yr. But the expense ratio is much lower if you leave stock picking to professional managers (or computers) and opt for a mutual fund or Exchange-Traded Fund (ETF). The easy way to start is with VWINX, which has an expense ratio of 0.23%, and a 10-yr total return of 9.7%/yr. That’s 60% bonds, so supplement it with a stock mutual fund, stock ETF, or stocks of your own choosing. The Fidelity Balanced Fund (FBALX) is also weighted 60:40 in favor of bonds, also has a 10-yr total return of 9.7%/yr, but has a higher expense ratio of 0.53%. VWINX lost 9.8% in 2008 while FBALX lost 31.3%. That difference occurs because stock managers at VWINX are required to confine their selections to the ~400 companies in the FTSE High Dividend Yield Index while managers at FBLAX opted for a wide range of stocks typifying the S&P 500 Index. In other words, VWINX lost much less in the 2008 stock market crash because it held bond-like stocks. For a detailed analysis that compares VWINX to other balanced funds, read this Seeking Alpha article.

Mission: Use our Standard Spreadsheet to analyze companies in VWINX that have: 1) an S&P bond rating of A- or better, 2) a S&P stock rating of B+/M or better, 3) the 16+ year trading record needed for quantitative analysis by the BMW Method, and 4) are found in the current list of companies in the Vanguard High Dividend Yield Index. 

Execution: see the 26 companies in this week’s Table.

Administration: We have emphasized the safety features inherent in confining stock selections to companies in the S&P 100 Index. The managers of VWINX apparently agree, given that 17 of their 26 selections (see Column AK in the Table) are in that index. 

Bottom Line: We offer this view of stocks picked by managers at VWINX because that fund serves as a beacon for retirees. It has had only 5 down years in the past 40, and was down only 9.8% in the Great Recession of 2008. Since inception on 7/1/1970, it has returned 9.7%/yr. 

Risk Rating: 4, where 10-year US Treasury Notes = 1; S&P 500 Index = 5; gold bullion = 10.

Full Disclosure: I dollar-average into PFE, NEE, INTC, PG, JPM, JNJ and CAT, and also own shares of CSCO, DUK, KO, PEP, TRV, MMM, BLK and XOM.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Week 328 - Precision Agriculture

Situation: Production Agriculture has created its own problems. Worldwide supply has exceeded demand for years. In early 2017, the USDA projected that farm income would fall for a 4th straight year. But it hasn’t turned out to be that bad, since crop prices have coalesced near last year’s levels, and sales volumes have risen. Much of the oversupply results from technological improvements in farming, starting with the buildout of center-pivot irrigation in the 70s and 80s. Weather prediction started improving in the 1990s, and the National Oceanic and Atmospheric Administration (NOAA) now has a number of online tools available to farmers at no cost. 

To integrate weather information with soil characteristics on a given farm, we now have professional agronomists who provide specific advice on the use of seeds, fertilizer, water, insecticides, herbicides and fungicides. Agronomists are sometimes employed by equipment or seed vendors, who offer Wi-Fi connections that link information collected on tractors to agronomists. More often, Agronomists are employed on retainer by farmers. Many have university degrees, and others with less training work under supervision for an agronomy service, such as Servi-Tech, Inc. 

The application of Global Positioning Systems to agriculture began with patent approval in 1998. Increasingly, agronomists encourage farmers to adopt GPS-based services addressing their entire set of specific needs, a tactic called “Precision Agriculture.” For example, satellite imagery and soil sampling can be used for variable rate seeding and watering. Results at harvest time are analyzed using Wi-Fi linked to a crop-yield computer program on GPS equipped combines. Trimble, Inc. (TRMB) is a leader in this technology, and new combines are increasingly equipped with Trimble receivers.

Mission: Present a table of publicly-traded companies that provide precision agriculture equipment, and explain in the Administration section the specific offerings of each company in the Table.

Execution: see Table.

Administration: 

SYNGENTA AG
* Provides a variety of digital tools through strategic collaborations with 1) Lindsay Corporation (manufacturer of center-pivot irrigation systems) to match soil and seed characteristics with water needs; 2) Ag Connections to present a complete range of farm management software in a digital platform.  
DEERE
* Recently purchased Blue River Technology, because it makes “tractor-towed robots that can analyze crops and apply fertilizer and pesticides plant-by-plant.”
MONSANTO
* Has started using its experience with thousands of corn seed varieties in various soil conditions in “self-teaching algorithm” to predict how a particular seed variety will perform after a farmer plants it. But the key to Monsanto’s emerging dominance of precision farming is due to a subsidiary: The Climate Corporation. It’s FieldView Platform is mounted on tractors and provides software for integration of various planting and harvesting inputs. 
AGCO
* Has purchased Precision Planting LLC, which had been part of a Monsanto subsidiary--The Climate Corporation, and is licensed to retain connectivity with The Climate Corporation’s FieldView Platform.
VALMONT INDUSTRIES
* Has developed the AgSense software app for optimal GPS-managed control of variable center-pivot irrigation systems.
ARCHER-DANIELS-MIDLAND
* Provides daily information and analytic tools essential for precision agriculture planning, augmented by its recent purchase of the Agrible news service.
IBM
* Precision agriculture is increasingly dependent on GPS systems and images of farmland generated by orbiting satellites. Detailed images of quarter sections of farmland are now available, using satellites designed to transmit different types of information with specific uses in farming. Agriculture research has been a specific mission of NASA since 2015. IBM owns “The Weather Channel” and has worked with NOAA since 1996 to improve weather forecasting at a “hyper-local” level. IBM provides most of the hardware and software that makes this possible, and has started applying this to precision agriculture, specifically in Brazil.
RAVEN INDUSTRIES
* Is a pioneer in field navigation equipment and tractor-mounted computers. Its product line has been successful with farmers and is being upgraded almost annually.

Bottom Line: Precision Agriculture is in its early years, but the consolidation phase is well underway. We’ve presented the leading publicly-traded companies above, along with investor information (see Table). These are powerful tools in the hands of the farmer, and will no doubt improve the efficiency and scope of crop production worldwide.

Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10)

Full Disclosure: I dollar-average into MON and IBM, and also own shares of CAT and RAVN.

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Week 132 - What kind of returns can you expect after taxes and inflation?

Situation: Here you are, constantly worrying about whether you’ll have enough retirement income. Here at ITR, we want to give you as many options to consider as possible, along with pluses and minuses for each. Since true profit is the net of “gains” minus “expenses” it’s very important to consider what various retirement options are costing you, in real time. These costs are something that mutual fund managers and TV "experts" are loath to discuss, to say nothing of those infamous hedge funds. 

In this week’s blog, we want to boil this down to your likely “take home pay” for Plan A vs. Plan B vs. Plan C. We can start right up front by subtracting rates for taxes (25%) and inflation (2.4%) from Total Returns over the past 10 and 17 yr periods. Then we can subtract transaction costs, which better be a lot less than the 2%/yr spent by the average retail investor if you've been following our style of investing.

Plan A is the “plain vanilla” plan consisting of 50% in the lowest-cost S&P 500 Index fund (VFINX) and 50% in the lowest-cost intermediate-term investment-grade bond index fund (VBIIX). Looking at the Table, 17-yr returns for Plan A averaged 7%/yr and 10-yr returns averaged 6.1%/yr. (Note: you would have had to do some rebalancing every few years in order to maintain a 50:50 ratio.) The transaction costs or “expense ratio” for this plan are incorporated in the returns for each of the mutual funds, ~0.25%/yr. Subtracting 25% for taxes and 2.4% for inflation leaves you gaining an average of 2.9%/yr over the past 17 yrs, or 2.1%/yr over the past 10 yrs.

Plan B is the "balanced fund" plan, consisting of 100% in either the Vanguard Balanced Index Fund (VBINX, a computer-run fund kept at 60% stocks and 40% bonds) or the Vanguard Wellesley Income Fund (VWINX, a managed fund kept at ~60% bonds and ~40% stocks). Looking at the Table, 17-yr returns for VBINX averaged 7.4% and 10-yr returns averaged 6.8%. As in Plan A,transaction costs for these Vanguard funds are ~0.25%/yr. For VBINX, subtracting 25% for taxes and 2.4% for inflation leaves you gaining an average of 3.2% after 17 yrs and 2.7%/yr after 10 yrs. For VWINX, returns, net of all 3 costs are 3.7% after 17 yrs and 2.7% after 10 yrs.

Plan C is the do-it-yourself plan consisting 50% of Plan A and 50% of 8 large-capitalization “hedge stocks” (see Week 126). Turning to the Table, we see that those hedge stocks returned an average of 9.9%/yr over the most recent 17 yrs and 10.2%/yr over the most recent 10 yrs. The expense ratio (Column O) for building those DRIPs at computershare is 0.9%/yr. After subtracting 25% for taxes and 2.4% for inflation, average returns come to 5.0%/yr after 17 yrs and 5.3%/yr after 10 yrs; then subtract 0.9%/yr for transaction costs and you’re left with 4.1% and 4.4%. Combining those net returns 50:50 with the net returns from Plan A leaves you gaining 3.5%/yr after 17 yrs and 3.2%/yr after 10 yrs for Plan C.

In terms of reward, Plan C is superior but VWINX is a close second. In terms of risk, the three plans also differ. For example, note the losses sustained during the 18-month Lehman Panic (Column D in the Table): 20.3% for Plan A; 28% (VBINX) and 16% (VWINX) for Plan B; 16.2% for Plan C. Risk is also reflected by the 5-yr Beta values (Column I): 0.5 for Plan A; 0.94 for VBINX and 0.58 for VWINX in Plan B; 0.45 for Plan C. Note: Returns are as of 12/31/2013; red highlights denote metrics that underperform VBINX.

In terms of risk, Plan C is superior but VWINX is a close second. Plan C also fits well with your workplace retirement plan, since almost all such plans offer an investment-grade bond fund and a stock index fund as options from which to choose. Then you can use your IRA for investing in the hedge stocks.

Bottom Line: All 3 of these plans are conservative, in that they’re designed to conserve your resources through any but the worst of financial calamities (nuclear war, global pandemic). For example, all but one of the 8 hedge stocks in Plan C is a “Lifeboat Stock” (see Week 106). Risk has been avoided except in the case of the computer-run balanced fund (VBINX), which is 60% stocks. Over the past 5 yrs of remarkable growth in the stock market, that part of Plan B has outperformed the other options (see Column G). VBINX is our benchmark, referenced in every blog, because it is not subject to human error and is largely hedged anyway, given its 40% bond index component. Daily rebalancing prevents any momentum in either stocks or bonds from skewing the fund in either direction.

The most important message that we’d like to leave with you is that transaction costs need to be accounted for, and avoided where possible. Warren Buffett has made this clear on several occasions. For example, at the 2004 Annual Meeting of Berkshire Hathaway shareholders he said, when asked about the best way to invest for retirement:

 “Among the various propositions offered to you, if you invested in a very low cost index fund -- where you don't put the money in at one time, but average in over 10 years -- you'll do better than 90% of people who start investing at the same time."

Risk Rating: 4

Full Disclosure: I own stock in all 8 of the companies at the top part of the Table.

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Week 128 - Disintermediation Is Our Investment Philosophy

Situation: Every project needs a Central Thought or Point of Main Interest. Forty years of investing have taught me to take personal responsibility for controlling my costs, i.e., inflation, taxes, research, and commissions. At first, those seemed to be largely unavoidable. So, I didn't keep track of them. Finally, I realized I was losing money after subtracting what accountants call CGS (Cost of Goods Sold) from my gains, whether paper or actual. That brought me to DIY (Do It Yourself), using DRIPs for stock investing and treasurydirect for bond investing. I could cut out the middleman. There is a fancy name for doing that: disintermediation. My first small step was to dollar-average Savings Bond purchases through automatic withdrawals from my salary, starting in 1992. Two years later, I set up a DRIP for Exxon Mobil (XOM) and soon moved on DRIPs for McDonald's (MCD) and Procter & Gamble (PG). All 4 of those investments have beat inflation and implied taxes over the past two decades, and all but MCD remain free of transaction costs.

Let's break down the benefits of disintermediation. First, you regulate safety. Second, you decide how much to diversify your holdings. Third, you decide whether to emphasize income or growth. Fourth, you decide when to sell. We have suggestions for how you might manage those control levers:

#1 Safety: Start with 40% of your savings in 10-yr Treasury Notes (or Savings Bonds), 20% in hedge stocks (see Week 117), and 40% in other stocks chosen from our universe of 51 (see Week 122).

#2 Diversification: Bonds are priced around the world on the basis of their risk of default compared to the US 10-yr Treasury Note. That makes T-Notes the most obvious hedge for stocks, given that T-Note prices go up in any recession whereas stock prices fall. With stocks, you need to have a portfolio where all 10 S&P industries are represented. You'll need at least 12 different DRIPs; 4 of those need to represent the 4 defensive S&P industries (healthcare, consumer staples, utilities, and telecommunication services) and 4 need to be hedge stocks (see Week 117). For this week’s Table, we’ve picked the highest ranked stock in terms of long-term Finance Value (Column E in the Table) for each of the 10 S&P industries. That leaves non-defensive industries underrepresented so we’ve added the two highest capitalization stocks that remain: Nike (NKE) and Chevron (CVX).

#3 Income vs. Growth: A growing dividend is money in the bank, but a growing stock price is fungible. So look to own stock in growth companies that pay a growing dividend. Many growth companies, i.e., those in the 6 non-defensive S&P industries (energy, materials, information technology, consumer discretionary, industrials and financials), provide substantial and growing dividends even if their fortunes ebb during recessions.

#4 When to sell: If you're dollar-averaging into a DRIP, never sell as long as the dividend is being increased every year. When you retire, start spending (instead of reinvesting) that dividend.

Results of this plan: If you go to the Table and add two parts 10-yr T-Note returns to 3 parts 10-yr returns for our 12-stock list, then divide by 5, you’ll see that the total return/yr is approximately 35% better than the total return/yr for the S&P 500 Index (VFINX) but the risk measures (columns D and L) indicate greater safety.

Bottom Line: What’s not to like about point-and-click investing? Well, your choices have to be well-researched because selling a DRIP comes with tax headaches. You’ll also need to have nerves of steel in order to maintain fixed regular allocations into each DRIP during a bear market. Even though you’re getting more shares for each dollar allocated, you’ll really wish you weren’t shovelling more money into a falling market. I had to learn that lesson the hard way during the dot.com recession but shovelled on during the Great Recession. 

Risk Rating: 3

Full Disclosure: I make monthly additions to DRIPs in WMT, NKE, ABT, and IBM. I also have stock in MCD, CVX, MON, and OXY.

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Week 3 - Goldilocks Allocations

Goal: To introduce asset allocation choices (the main drivers of investment returns) that minimize the risk of temporary loss while maintaining strong returns over two market cycles.


The internet makes it possible for investors to simply point and click their way to a balanced portfolio and cut out paying the middle man. This is important in the maintenance of a balanced portfolio for several reasons. First, it is less expensive—management fees are eliminated and commissions are reduced to less than a dollar a share. Second, use of an intermediary agent, such as a mutual fund portfolio manager, introduces what are called agency issues. Agents carry additional costs besides fund management fees: your investment can be allocated in ways that subject your funds to excessive risk of loss, and you will know nothing about it until it is too late. You own the cash you entrust to financial intermediaries but they are not required to act in your best interest. For example, the manager of a mutual fund may select risky stocks in an attempt to out-perform the relevant benchmark. This fund could achieve that during an “up market” but would surely underperform during a “down market” because stock market “risk” is what statisticians call “variance”: it cuts both ways. Risk, with respect to stocks, translates into the risk of bankruptcy for that company. For example, a stock that is unable to pay a dividend and is issued by a company that is deeply in debt is risky—its expenses exceed its earnings. The price of that stock will vary depending on whether the economy is strong enough for its products to be sold at a profit. Its price swings will be exaggerated because the chance it will have to declare bankruptcy is about the same as the chance it will earn enough to pay its debts. Another example is that of companies that are publicly owned but mainly operated by employees who are not shareholders (Berkshire Hathaway and Microsoft being notable exceptions). Those employees are being paid to act as the owner’s agents but they will probably act first to secure their own jobs and enhance their own remuneration.


An individual investor can best minimize the conflict between her needs and agency issues by eliminating this middleman, diversifying her holdings, and investing in companies that value shareholders by paying a reasonable dividend (25-50% of earnings) that increases every year. Direct ownership of stocks is done through Dividend Re-Investment Plans (DRIPs). Almost every S&P 500 company has a DRIP; some companies even waive all expenses. Computershare (computershare) services the largest number of DRIPs. The US Treasury issues the largest number of investment-grade bonds (treasurydirect) and also waives all commissions.


Changes in the macro economy (such as recession and inflation) are externalities that we try to anticipate through asset allocation decisions. For example, commodity-related stocks keep step with inflation and consumer-staples stocks retain value during a recession. Our ITR asset allocation plan is designed to weather these storms without sacrificing upside potential.


In future blogs, we will explore the ITR Investment Strategy:

• Use do-it-yourself point-and-click investment in assets that generate dividends or interest (computershare);
• Use a 50:50 balance of stocks and bonds;
• Select stocks that yield as much or more than the S&P 500 Index (SPY);
• Select stock in companies that have increased annual dividends for at least 10 years;
• Avoid derivatives (assets linked to other assets) except for a global allocation stock fund and two bond mutual funds;
• Stock allocations: 50% industrial & commodity-related, 33% defensive (consumer staples and health care related), and 17% in a global allocation mutual fund;
• Bond allocations: 17% in 10-year US Treasury notes (treasurydirect); 33% in an international bond mutual fund, and 50% in a diversified investment-grade bond mutual fund. A future blog will provide detailed information about purchasing no-load bond funds online.

Bottom Line: Conserve assets, minimize expenses, and maintain what you’ve obtained. Forget about the big kill but instead seek a portfolio similar to one which investors call a “Goldilocks Economy”— not too hot and not too cold.


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