About Charles Lewis Sizemore, CFA

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Have a Plan and Stick To It

The difference in life between success and failure, more than anything else, is having a plan and sticking to it.

Whether you’re talking about launching a business, getting through Navy SEAL training, becoming a concert violinist, or even getting a date on Friday night; success comes from seeing a plan through to completion.

This is particularly true when it comes to investing.

Warren Buffett, the legendary Oracle of Omaha and by most accounts the most successful investor in history, is probably a little smarter than you or me. I say “probably” because Mr. Buffett has never published his IQ score, and measurements of intelligence can be subjective.

But, in Buffett’s own words, in order to be a great investor, “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ.”

To put that in perspective, the average IQ falls in a range of about 85 to 115. An IQ over 140 is considered genius level, and theoretical physicists Albert Einstein and Stephen Hawking were believed to have respective IQs of about 160 each.

So, according to Buffett, you need to be a little above average to be a good investor. But you certainly don’t need to be an Einstein or Hawking.

Buffett attributes his own success to “being greedy when others are fearful and being fearful when others are greedy.”

In other words, Buffett is Buffett not because of his intelligence but rather due to his emotional control, which allows him to stick to an investing plan even when most other investors are pulling the ripcord.

Now, I don’t claim to have Warren Buffett’s talents. But some of my greatest investment successes have come from being equally stubborn about seeing a plan through to completion.

I don’t have a large enough nest egg to retire today. But it’s big enough that I don’t really need to keep adding to it with fresh savings. Even with very modest growth assumptions, the savings I’ve accumulated already should be more than sufficient to take care of me and my wife in retirement when that day comes in another 20 years. Savings I continue to add just put the icing on the cake.

It wasn’t fantastic investment returns that got me to this point. It was having a savings plan and having the discipline to see it through to completion. I max out my 401k contribution every year, even when doing so is painful. Even when the market looks scary. Even when I’d prefer to blow the cash on something else or when I have to tell my children that I can’t afford something they want right now.

I’ve enjoyed competitive returns on those funds over the years, but the high savings rate has had a much bigger impact on my ability to grow my capital base than my returns.

As another example, I bought 288 shares of cialis canadian pharmacy Realty Income (O) in 2009 that I swore at the time I would never sell. I committed to reinvesting my dividends into new shares and letting it compound… for the rest of my life. My children may sell the shares when I’m dead and in the ground, but I never will. When I’m old and gray, I’ll simply turn off the dividend reinvestment and take them in cash instead.

Well, after a little over nine full years of dividend compounding, those 288 shares bought for an initial purchase price of $6,620 are now 454 shares worth $32,383.

Using conservative assumptions on dividend growth, I would expect my investment to double every eight to ten years. So, in another 20 years, when I’m getting close to retirement, I’ll have something in the ballpark of $140,000 in Realty Income… still trucking along and throwing off dividends. And all of that on an initial investment of just $6,620.

Now, I’m not recommending you run out and buy Realty Income. I wouldn’t make a major new purchase at today’s prices. My point is simply that having a good plan – in this case buying and holding a high-yield dividend stock bought at crisis prices – works when you actually stick to it.

Disclosure: Long O.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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How to Build “Old School” Wealth

If you’ve read my work, you probably know that my grandfather was my inspiration for getting into this business. He did well in the stock market, and his enthusiasm for investing rubbed off on me.

My grandfather lived by his own homespun version of Peter Lynch’s advice to “buy what you know”; he had a strong preference for the shares of local companies.

Well, as it happened, my grandfather lived in Fort Smith, Arkansas, and there was a certain local company up the road in Bentonville that was shaking up the retail market in the 1970s.

You might have heard of it… goes by the name of Walmart (WMT)!

My grandfather never retired. Working was such an important part of his identity that he continued to go to the office until the very end. But the modest investment he made in Walmart shares ended up paying for my grandmother’s retirement, my college education, my sister’s college education, and my mother’s modest retirement today.

The funny thing is, that was never his plan.

He never expected to hit a home run like that in the stock market. He owned a small warehouse downtown, and he always imagined that, once he was gone, my grandmother’s expenses would be taken care of with the rental income from that property. (He owned that property free and clear of any mortgage, I might add…)

Renting out the warehouse ended up being more trouble than it was worth. My grandmother sold it, and she ended up living on her Walmart dividends, bond interest, and Social Security.

There are some important lessons we can learn here – they are the foundation of what we do in Peak Income.

To start, capital gains are nice, but you can’t assume they’re going to be there when you need them. That’s not something you can control.

As a man who lived through the Great Depression, my grandfather knew that. If you lived through the markets of the 1970s or 2000s, you might have gotten a similar lesson. Between 1968 and 1982 and from 2000 to 2013, the S&P 500 Index went nowhere.

If you’d been counting on capital gains to meet your retirement expenses during those stretches, you might’ve had to move in with your kids.

Second, diversification is critical – and “diversification” doesn’t mean owning five slightly different mutual funds. It means owning assets that don’t rise and fall together.

For my grandfather, this meant tying devoting significant capital to his small businesses and keeping his liquid assets divided roughly evenly among stocks, bonds, and cash.

For me, in today’s market, “diversification” means keeping my assets divided among complementary short-term trading strategies, longer-term income strategies, and income-producing real estate.

For you, the mix might be different. The key is making sure the pieces of your portfolio move independently of one another. It does you no good to save for a lifetime if it all gets flushed down the toilet in a major bear market.

And, finally, make sure you’re getting paid in cold, hard cash. It seems so “old timey” now, but my grandfather carried around a money clip with a big wad of cash in it. I don’t remember ever seeing him use a credit card.

Hey, times have changed. The only people carrying around wads of cash today are drug mules. But that doesn’t mean that cash isn’t king.

Investments that generate regular cash payments allow you to realize gains without having to sell anything. It’s like the old analogy of slaughtering a cow for meat versus keeping it alive for milk. (Remember, my family’s roots are in rural Arkansas…)

With the former, you eat well for a bit… but then it’s gone. With the latter, you can enjoy fresh milk for a lifetime… and you still reserve the right to slaughter the cow for meat later.

Dividend-paying stocks, REITs, MLPs, and other income investments are the same. You enjoy the milk every quarter… and you can still have your steak later if you ever decide to sell.

And, while you’re waiting, that cow just fattens up and produces more milk…

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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LyondellBasell Is Set for a Strong Second Quarter

The following is an excerpt from Best Stocks for 2019: LyondellBasell Is Set for a Strong Second Quarter

As we near the end of the first quarter, the competition is fierce in InvestorPlace’s Best Stocks for 2019 contest. Cannabis product maker http://thematinggrounds.com/about-mating-grounds/ buy viagra without a doctor prescription usa Charlotte’s Web Holdings ( CWBHF) is leading the pack, up 67% at time of writing, but onshore oil and gas producer Viper Energy Partners (VNOM) isn’t far behind at 29%.

Against this competition, LyondellBasell Industries (LYB) and its modest 4% would seem to be getting left in the dust.

But it’s still early, and we still have a lot of 2019 left to go. And I’m expecting LyondellBasell to make it a competitive race, come what may in the market.

LYB Stock Valuation

I’ll start with valuation.

A cheap price is no guarantee of investment success, at least over short time horizons. But it certainly creates the conditions to make outsized gains possible. LyondellBasell trades for 7.2 times trailing earnings and just 0.83 times sales.

To put this in perspective, LyondellBasell’s P/E ratio was over 16 in late 2012; by this metric LYB stock is trading at less than half its valuation of seven years ago despite price/earnings multiples expanding prodigiously across most of the stock market over that same period.

Likewise, LYB’s price/sales ratio has been bouncing around in a range of 1 to 1.4 since 2013. Today’s 0.9 takes the stock’s valuation back to early 2013 levels.

Again, a cheap stock price doesn’t guarantee a hefty stock return, at least not over any specific time horizon. But it certainly creates the conditions that make outsized returns possible.

To read the full article, see Best Stocks for 2019: LyondellBasell Is Set for a Strong Second Quarter

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Why Dividends Matter

I’m old school, and I like my dividends.

Yes, I know. I’m being hopelessly stodgy. Dividends are almost inconsequential these days compared to the returns realized from rising stock prices.
Since bottoming out in early 2009, the S&P 500 has exploded higher at a compound annual growth rate of over 15% per year and is up over 300% cumulatively.

What’s a couple percent in dividends when you’re looking at those kinds of capital gains?

Furthermore, very few sexy, high-growth tech companies pay dividends. Amazon, Facebook, and Alphabet (Google) certainly don’t, and none have immediate plans to start.

But it’s important to keep a few things in mind. To start, the 15% annualized returns we’ve seen over the past decade in the S&P 500 are by no means normal. The long-term term historical average is closer to 10%.

And mean reversion being what it is, having a long period of above average returns means we need to have a long stretch of lower-than-normal returns to get us back to the long-term average.

Not even the glassiest-eyed permabull seriously believes returns of 15% per year can continue forever.

Let’s slice the numbers a little differently.

The returns you achieve are ultimately a product of the price you pay. When you buy them cheaply, you put yourself in position to enjoy higher-than-average returns. When you overpay, you set yourself up to be disappointed.

Well, the S&P 500 currently trades at a cyclically adjusted price/earnings ratio of 29.9. That implies it is priced to deliver losses of about 2% per year over the next eight years, assuming the market returns to its long-term average valuation.

Now, maybe we get lucky and valuations remain at historically elevated levels. Hey, stranger things have happened, and there might have even been legitimate justification for it in lower interest rates and stricter accounting standards.

But even assuming valuations remain 25% to 50% higher than their long-term averages, we’d still be looking at returns in the ballpark of just 1% to 3% per year.

When you’re used to making 15% per year, making 3% (or even losing money) is a bitter pill, particularly if you’re already in retirement and have to take portfolio drawdowns.

This brings me back to dividends.

With and Without Dividends

Sometimes a picture is worth a thousand words. So, take a look at the following two charts. The first is a standard price chart of telecommunications giant Verizon (VZ).

It’s not pretty. Nearly 20 years since the peak of the 1990s internet bubble, Verizon has yet to see new highs. Had you had the remarkably bad timing of buying Verizon at its 1999 high, you’d still be under water two decades later.

Now take a look at the second chart. This is also Verizon, but this chart adjusts stock prices to account for dividends paid. For most of the past 20 years, Verizon has sported a dividend yield of between 4% and 6%.

Suddenly, Verizon doesn’t look so bad. Even buying one of the most overpriced major stocks at the peak of the biggest stock bubble in history, you still would have enjoyed total returns of more than 140% after accounting for Verizon’s massive dividend yield.

Now, my point is not to recommend Verizon. At current prices, it’s not cheap enough for me to seriously consider.

But its performance proves a very important point about the importance of dividends, particularly at a time when stocks are expensive and priced to deliver disappointing capital gains.

You can’t always depend on capital gains. You can do everything right – research your stocks, buy them at reasonable prices, etc. – but you can’t make them go up in value.

Ultimately, the market is going to do what it’s going to do, and it doesn’t care what return you need or expect.

When you focus on dividends, you don’t have to worry as much about capital gains. Sure, you want to see your account rise over time. But you don’t need it to.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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My Favorite Corner of the Market

As you probably know, my beat is income. And in my newsletter, Peak Income, I specialize in finding cash-generating investments that are a little off the beaten path.

Well, one of my favorite high-yield fishing ponds – closed-end funds (“CEFs”) – is looking attractive again, and I’ve been aggressively recommending them to my readers over the past two months.

So, today I’m going to tell you why I like closed-end funds and why they look particularly juicy today.

Let’s start with the basics. What is a CEF?

CEFs are a type of mutual fund that trades on the New York Stock Exchange, and they work a little differently than traditional mutual funds and ETFs.

In a traditional open-ended mutual fund, you (or the brokerage house you use) send money to the mutual fund manager. The manager then takes your cash and uses it to buy stocks, bonds and other investments. When you decide to sell and move on, the manager sells off a portion of the portfolio and sends you the proceeds. There is always money sloshing in and out of the fund.

Closed-end funds are different. They have an initial public offering (IPO) like a stock, and after that point the number of shares is fixed. Barring a secondary offering or a share buyback or tender (both of which are rare), new money does not enter or leave the fund. If an investor wants to buy or sell, they do so on the stock exchange.

From my description, CEFs look a lot like their cousins, ETFs. Both trade intraday on the stock exchange.

But there is one critical difference…

For example, if the ETF shares are worth less than the underlying stock portfolio, the big boys can buy up ETF shares, break them open, sell the underlying stocks they hold, and walk away with a risk-free profit. Not bad work if you can get it!

CEFs don’t have this mechanism in place. This means you regularly get situations where the price of the fund shares is vastly different than the value of the portfolio it owns.

And this is when I get interested. It doesn’t happen every day, but once in a while you can pick up a dollar’s worth of high-quality stocks and bonds for just 80 or 90 cents.

If you’re a patient value investor like me, you can buy the shares and wait for them to return to something closer to fair value… all while collecting dividends along the way.

Three Ways to Profit

Closed-end funds have three components to their returns.

The first is the easiest to understand: the dividend yield.

CEFs are popular among retirees and other income investors because they tend to throw off a lot of cash. It’s not uncommon to see tax-free municipal bond funds yielding over 5%, and taxable bond, preferred stock or dividend-paying stock funds can often sport yields over 8%.

In a world in which the 10-year Treasury note still yields less than 3%, that’s a solid income return.

But that’s just the start. CEFs are actively managed, and the fund managers also try to grow the net asset value over time. When the value of the stocks, bonds or other assets the CEF owns rises in value, the price of the fund generally follows.

And finally, there’s my favorite component: the change in the premium or discount to net asset value.

As I just mentioned, you regularly get situations where the price of a CEF varies wildly from the value of its underlying stock or bond holdings. As a general rule, I never buy a CEF trading at a premium to its net asset value. Philosophically, I have a real problem paying $1.05 for something worth a dollar.

But when the discounts get wide, I get interested. Let’s say a given CEF typically trades at a discount to NAV of about 3% to 5% but because of a short-term market panic, that discount widens to 15%. All else equal, buying the fund at that discount and waiting for it to return to a more normal level can add an additional 10% to 12% to your return. And that’s on top of the dividend yield and any improvement in the value of the portfolio itself.

When you time these right, it’s not hard to pocket total returns of 20% to 30% in a year.

Not bad!

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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