{{Subject on Tape}}



|Where to Find Higher-Yielding Investments |

|Neil George, Profitable Investing |

|Tape 4 |

|investorPlace MEDIA |

NG: So, for the fourth session I’m going to be talking about high yield and where to find some higher-yield investments. So here I’m going to be covering a variety of different types of securities and give you some different names and some different approaches that are going to be new to the Profitable Investing letter. So, the idea is that I’m looking for higher yields, and I’m also looking for where you can get some appreciation.

The reason I have Tom Wolfe’s book up here, why I really lamented his passing of recent, is I greatly enjoyed the book, The Bonfire of the Vanities as well as A Man in Full as and some of the other great books where he really immersed himself in his subject matter, but as a former bond trader, I particularly appreciated the story of Sherman McCoy, the protagonist in the film who they were able to coin the term that I basically took on as my mantle back in my youth, as a master of the universe (Laughter) where I would come in with my double-breasted suit and my red suspenders, and I’d have my two phones in my hands and my switchboard in front of me and all my screens. I could do nothing wrong. (Laughter)

So, I would be screaming at one phone, screaming at another phone, bashing the phone on the one side. I was not a nice person, but I thought I could solve all the world’s problems. Nothing was small in vain, and of course with Sherman he had the same sort of feeling, although he ran into a few problems.

Again, it’s a good book, and then the movie later with Tom Hanks (Tom never turns in a bad performance), and again there’s a great little adage that was paraphrased and I think better developed in the film in which Tom and his wife – I forget who was playing her at the time – the wife was telling their little daughter of what daddy does for a living, and so she basically said, “Well, daddy takes a cake and he cuts it in little pieces, and he sort of passes it around, and as he passes it around, he collects the little crumbs that fall from each plate.”

Then Tom Hanks’ character, Sherman McCoy, says, “Yes, but some of those crumbs are pretty big.” (Laughter) “I can use them to form a pretty big cake myself.” So, the idea, and we’ll get to a couple of the permutations of that, but I always thought that was a great way of explaining how bond trading works. In other words, cutting various securities and collecting those crumbs, and again some of those crumbs can be quite good.

But again, starting off a little bit further, right now a lot of people are thinking about the bond market, and they’re thinking about it as just being the Treasury market. As I mentioned earlier, a lot of people are thinking that Treasury yields are going to be going a bit higher because they should, the idea that we have a growing and expanding economy. It’s not a unique situation in the U.S. We do have slightly higher core inflation, not out of control but slightly higher, and we do have the Federal Reserve which is going to be trying to direct interest rates to a more normal fashion and, therefore, that’s leading towards higher yields.

Also, the demand for Treasuries isn’t as attractive because if you’re in more of a growing economy, it means that companies that are issuing debt as I mentioned, corporate issues, become much more certain and, therefore, the yields they offer are much more attractive, not just in nominal terms but for further appreciation. Therefore, there are better opportunities.

There are also other opportunities in a growing marketplace in other types of securities, so the idea that it’s a market of bonds, not a bond market, and I’m going to talk about we have bonds for growth. We have what I term is secret bonds which I’ll talk about in a few moments. Then we’re going to talk about bond-like stocks, and then we’re going to look at some of the high cash-generating stocks that I think are either in or potentially gone the way into the portfolio.

Now I’m going to start off with one of the newer additions that I brought in as a replacement for the PIMCO Income Fund which made its change both in the actual funds themselves and the fee structure for the fund. Now many of you might very well have owned the PIMCO Income Fund. It was a fairly good fund, very opaque as I became aware of the fund and had to do my diligence on the fund, having some 475 individual positions along with a handful of sub funds of dubious origin and some bonds that I don't know how they’re there that are issued by various Russian corporate entities that seem to be in violation of some order but nevertheless they’re in the fund.

When they started to charge the front-end load and to change how their fund was for new buyers, I couldn’t very well tell existing subscribers, “Well, you’re special. Anybody new is going to have to do something else.” So, the idea that I also looked at, what is basically the criteria for being in the multi-bond segment? Remember when I talked earlier about the process of picking funds in which mutual funds should basically replicate a particular process, and so you’re looking at what the index is that they use.

When Richard basically had the multi-sector bonds as part of the fixed income of the Total Return portfolio, he wanted to have a bond market that would be able to go anywhere and be in what was the most strategically advantageous and be able to make their bets accordingly based upon the market conditions. Therefore, I looked at what was occurring within the PIMCO Income Fund, and I saw that post the departure of Bill Gross in 2014, the returns were not as stellar as they once were.

But I also looked at the underlying index that they tracked, and I pulled up the index, and with my Bloomberg Terminal I could go through and map out and find all the various leading funds that tracked that various index. So, then I could basically identify, okay, I’ve got this universe of funds that are in this multi-bond segment that track this particular index. Then basically I can identify the ones that have the better outperformance.

The ones that I came up with that had one of the most consistent not just performing with the index but also outperforming the index and even providing comparable returns with a lower cost for buying the funds was the Osterweis Strategic Income Fund, symbol OSTIX, which I replaced the PIMCO fund with. Here we are for the past ten years performance of the Osterweis fund as opposed to the index fund which is the Bloomberg Barclays US Aggregate Total Return Value Unhedged USD Bond Index. That’s what everybody uses, and so Bloomberg Barclays US Aggregate Total Return Value Unhedged US Dollar Index has literally about 6,000 bonds in this sucker, and so it literally is the entire bond market.

Believe it or not, there’s actually an ETF that tries to replicate this thing, and it’s in the BlackRock family, and there are these two ladies that run this thing. They pretty much have to be at their desk like 24/7, and they’re constantly running algorithms to try to keep up with what’s happening with 6,000 bonds at any given time. It was really pretty amazing. It also confirms to me that it’s really kind of a fool’s errand to follow some of these ETFs that have to try to do something like this.

But what attracted me to Osterweis not just from its returns and its risk characteristics but where it was focused right now, because where it was focused right now in its allocation – because it can go a wide variety being in a multi-sector bond – it was very much on the corporate front as far as taking advantage of finding corporate bonds that have lots of current yield now and price appreciation going forward.

Remember what we talked about earlier, the idea that corporations, whether they be in the U.S. or elsewhere, if the globe and/or the U.S. is expanding in their economy, corporations are going to see more revenue, and they’re going to be able to service their debt better and, therefore, their credit conditions are going to get better. So, more yield now and better credibility and higher bond prices as their yield spread comes lower and comes more in line with Treasury yields. That’s what Osterweis is really focused on right now. So, to me, it’s ideally structured.

The other thing I like about Osterweis is that its portfolio is very transparent. In other words, it has only two pages of its bonds on its portfolio. I could pull into and I’ve looked at each one. Each one maintains a fairly good amount of liquidity and, therefore, as an open-ended fund as we talked about earlier, the fund managers need to have the ability to raise cash if a bunch of shareholders want to get out at any given time without having to just sell the farm in order to raise that cash.

So, they have that liquidity that’s very attractive to me as opposed to the PIMCO one that had a lot of things that were very illiquid and, therefore, that caused a bit of a problem for me, because one of the things I want always with a mutual fund is not only to have safety, the opportunity as well as the income but also the ability to get out of something if necessary so we’re not stuck somewhere. So, the Osterweis is one of those first that sort of takes advantage of that bonds for growth.

So, for right now, they’re very focused on the corporate front, and I think they’re doing a fairly good job of it. The yield, because it’s an open-ended fund, is not as compelling, and I will be rolling out some closed ends that have some nice portfolios, and you’ll be seeing those in coming issues going forward, but for now I like the Osterweis.

The other part as I talked about a few different times now is the growth and income, not only the corporate side but on the municipal trends. So, I rolled in these three closed-end funds, two of which I followed for a number of years. The third one I added because of the AMT or alternative minimum tax characteristics that impact some of the subscribers. So, what’s attractive and what we’re looking at here is this is the overall index for the Standard & Poor’s main municipal index market for municipals. So, if you look at the last five years, we’ve really started to see a continual uptrend in the muni market. So munis have actually been performing better because the economy has gotten better.

We’ve seen that tax authorities are pulling more revenue, and with the further growth it means that states and cities and counties and so forth that used to be somewhat dicey as far as where they were back in the early part of the 2000s and certainly coming off of the backs of 2007, 2008 are much more flush and, therefore as a result, the yield spreads against Treasuries are coming down, meaning the prices are going up, that and the high yield that’s being offered by munis in which many munis are actually paying more than what you get from Treasuries even without the tax benefit.

Therefore, what I liked about the closed end is that we get to buy these at a discount to what the actual bond portfolios are, and the discount is compressed, so right now the discount for BlackRock is about three percent, and the discount for both Nuveens is about seven to eight percent. So, the BlackRock has been picking up a little more in value in the stock market standpoint.

But the other part of the equation is they have that fixed amount of capital, so we can buy in now at the discount price and not be worried about being diluted by other funds coming into the muni market through an open-ended fund, and the idea that all of these throw off the nice dividend stream that’s smoothed out with all those munis bond that are sitting in the portfolios. So, we’re getting the yields right now.

We’re looking at five to nearly six percent, and again if you’re looking at grossing that up, if you’re looking at the higher income tax brackets, you’re looking at seeing yields in that eight, nine, ten percent range on a taxable equivalent basis. So that’s very attractive to me. As I said, with further improvement from tax revenues that keep flowing in, I think the muni market is going to continue to see further investment.

Then one more closing thing on this is that as I mentioned earlier with the bank reforms. Banks now are allowed to carry more municipal bonds on their books as capital against some of their other trading positions and, therefore, it picks up more yield for them to buy and own these versus having Treasuries. So that gives them a little more yield but, more importantly, it also gives more demand for municipal issues going forward, and I think that’s going to be important going forward.

Now another area that I’m looking at, I’m not recommending now. I want to sort of make my case, so you’ll be seeing about this going forward is looking at emerging growth in the bond market. So here we’re looking at one of the global funds, a closed end that I followed for a number of years, and what the graphic is showing you is as a closed end you have the portfolio price, and that’s the performance of the portfolio, and then you have the stock price of the closed end. This is the difference or the discount which has gotten bigger and bigger and bigger, which means the bonds have held up fairly okay.

The stock price of the closed-end fund which is run by one of my favorite asset management companies, AllianceBernstein, has gone to nearly a 13 percent discount to buy the shares than what the underlying bonds are priced at, and you’re getting a little over seven percent yield. So, what this fund and a few others like it buy are bonds from emerging and transitioning nations, so bonds from Indonesia, bonds from the Philippines, bonds from some of the more successful Latin America countries, so Chile and others, Colombia.

Therefore, each one of these things basically plugs in. So, they can be largely dollar denominated, so you’re just playing the credit changes that are happening in these particular countries. Therefore, what I’ve seen over time is as the general first world continues to see further growth, the emerging markets get to cash in on that by manufacturing and exporting more things to the developed market and, therefore, they get to get back on the train of emerging again.

Moreover, another interesting thing particularly in southeast Asia as well as some of the African and Latin American markets, you’re seeing a lot further Chinese infrastructure and other funding investments that are helping to develop the economic resources for these countries and, therefore, giving them an additional boost.

So right now, the market doesn’t like this segment because it sees the dollar as being very strong and limiting some of the ability for these economies to fare better because they’re fearful of some of the local currency problems and, therefore, they’ve been raising interest rates and tightening their money controls to bolster their currency. Therefore, that’s caused some trouble. I think you’re going to see a turning point not long from now whereby these are going to basically see much more of a turnaround reflecting really the truly improved fundamentals. So not now, but it’s something that I’m watching going forward.

This is what I was talking about, what I referred to as the secret bond market. These are securities that I first came across back in the mid 2000s in which I came across an issue, kind of stumbled across it like I mentioned I stumble across certain stocks now and certain companies. I came up with a symbol and a ticker for something. I kept thinking, what is this? It looks like a preferred stock, but it’s not a preferred stock. It actually is a bond, and so I looked at the prospectus and found out it’s actually a bond.

They have different structures, and some of them have changed over the years, but where I found them was what is more commonly or used to be referred to as the New York Stock Exchange’s garage. This was the annex for the New York Stock Exchange, and so the idea that this was the area of the New York Stock Exchange aside from the main floor you see on the closing and opening bells in which the things that kind of trade by appointment are sent with their market makers. So, there’s our 24-hour parking garage in New York City.

What these are is that they are either bonds that have been issued in $25 face value that are sold in an IPO fashion on the New York Stock Exchange with a ticker symbol and so forth that makes it appear like it’s a stock or looks like when you pull it up as being a preferred, but it actually is a corporate bond with a fixed maturity, in some cases the call price because they can be called away, but they all trade for in the low to mid 20s, and they’ll trade sometimes into the mid to upper 20s depending upon the call provision or if there’s one at all. They come from a wide variety of different industries.

There also are some of these that have been taken by an investment bank, so Morgan Stanley or Bank of America Merrill Lynch will take a corporate bond for a major company like News Corp, and it’ll take a New Corp, a thousand-dollar face value bond, and they’ll cut it into little $25 items, and they’ll turn each one of those $25 items into an individual security that’s then listed on the exchange.

There’s enough arbitrage for them to do that that they can make money by selling these things in the marketplace. So, whether they’re issued by an individual company, or whether they’re done synthetically through an investment bank, they create something which is ideal for individual investors, and because these things are so small, they don’t show up in anybody’s index. They’re not in anybody’s ETF, and they tend to trade by appointment because they tend to be bought and owned. So, you’re looking at yields that range.

They’ve come down a bit over the years, so some of them will be in the five or six, and there are some other ones that are in the seven or eight percent range, and so the idea that you can buy one of these on a regular exchange, pay your 7.95 on TD Ameritrade or whatever you might use for your brokerage, and basically park them in your portfolio and just collect the interest payments. The other interesting thing is whether they’re created by the issue or created by the investment bank, they are structured so they pay their interest not semi annually as a traditional corporate bond or annually, but they pay it quarterly. Therefore, you get the regular cash flow.

The other part of the equation is you might say, “Well, Neil, are we seeing some interest rate risk here with these?” and there are two reasons I would say no. One is they’re on the corporate side, so again there’s an argument for growth but, B, no one will find these. (Laughter) I’m not making that up. The bond traders don’t know where these things are. They’re brought in the marketplace and then they’re kind of left there, and so as a result these things, again, not a lot of trading volume, and when I do recommend some of these, I’m going to be very specific on my recommendation.

I’m going to tell you to put a limit order in, and do so in small sums. Don’t just tell people I want to buy 50,000 of these things because you’ll see some whipsawing in pricing and, therefore, you want to buy a collection of these sort of things, but there are great ones which you literally just park them in your account and then just watch the cash flow.

Moreover, even when the full-size bonds of the same company are in the marketplace, and there are these mini bonds ... so I brought up News Corp earlier, and in the case of News Corp, there had been a lot of calamity going on with the Murdock people, a lot of lawsuits, some jail time, and therefore, there’s been a lot of calamity as far as what’s going to occur, what’s going to happen with the company. Therefore, if you look at each one of the instances with their full-size corporate bonds, the full-size News Corp bonds will go up and down. They’ll get knocked around in the general bond market because bond traders know where those are, and they will basically either attack them or speculate on them.

They also will plug into various other bond indices, so they will basically be picked up by various parts of funds (Inaudible) track certain indices. Nobody knows where the News Corp mini bonds are. They’re sitting in individual accounts just sitting there and, therefore, they will basically just sort of putter along without any major change. So, to me, these are perfect for people who just want to have a base of cash that’s coming in with not a lot of up side, and so these are some of the things that are coming attractions that I’ll be bringing you that’ll kind of plug into some of these cash alternatives.

Q: Do those have a maturity date?

NG: They do and so I’ll mention that. Most of them have maturity dates that are far into the future, so the duration or the interest rate risk should be much higher, but in reality, they don’t trade by duration. They will typically come with a call and a call price, so I look at the call price. I look at what that will do to the impact on the total return and what you’re getting in the coupon.

So, let’s say a bond is trading at 25 and a quarter, and it has a call price of 25 in 2022. So, I’m going to look at what the coupon is and then what’s going to be the yield to that call price. So, it still might make sense to give up that quarter if you’re getting enough yield that still makes it warranted. This brings up another part of the …

Q: One more question on follow-up. Where would you find a quotation for these?

NG: So, the symbol that you saw, so if you were to type in TDA, you’ll see it basically pop up in telephone and data. Now one of the things that I mentioned earlier, I have the Bloomberg Terminal that I can pull up anything on the planet. What’s disappointing to me increasingly is that websites like Yahoo Finance or Google Finance seem to be dropping a lot of quotation and other information on different types of stocks including preferred shares. So, in some cases you might pull this up, and you might not see it on some sites.

So, what I’m also doing is looking at other websites that people can actually see the data for some of the lesser trade things like preferred shares or like the mini bonds. So, you’ll also see a discussion with that. One of the websites that still works fairly well is The Wall Street Journal site as far as giving you a quote on preferreds and some of the more oddball stuff but for now. Again, there seems to be sort of a movement afoot to give away less to the individual investor.

Q: (Inaudible Portion/Not Mic’d) to make sure I’m getting the right data.

NG: Believe me. I will give you the ... the other part if you notice, when I brought the one preferred stock in which we’re going to be talking about next is the idea of I put the CUSIP and not just the symbol because different systems or different brokerage companies will have different ways of quoting a preferred share, and so the one you can always use to get that information is the CUSIP number which we started providing like for the Digital Realty preferred and/or the security number which also can be pulled up. So, we are cognizant of those challenges, and so I’ll keep adding that information, so stocks like bonds.

So preferreds are another way that I like to participate in the market because in an improving economy with stocks and so forth doing fairly well, preferreds give you the ability to get a little bit more of an appreciation from the relative value of the underlying companies but also with the idea of cashing in on their higher yield from their improving credit. So, I mentioned earlier about Digital Realty and their preferred, so we have the DLR.J is the preferred ticker, the one that we added to the Niche portfolio, and that is basically sort of percolating along in the garage of the New York Stock Exchange.

Then another one which I find very interesting is Seaspan Corp, both its common shares and also its preferred shares, so SSW in the E class shares which pays a dividend yield I think sitting at about seven and a quarter, seven and a half percent right now. What Seaspan does is in the international shipping, so basically both container ships as well as some dry bulk ships but primarily in the container ships.

So, they are basically not in the business of operating the ships. They don’t have captains or anything else that are under contract to move things around, so they’re not like a Maersk, but instead they lease the ships. So, look at them as kind of like a REIT for international shipping properties and, therefore, all they basically do is they collect the leases on the ships and then pass it through to us as shareholders. So, the common is very attractive, but the preferred is another one of the examples.

Then another one which I see coming into the portfolio fairly soon is the closed-end alternative funds. So, one in particular is a fund management company in Pasadena that used to be around the corner from when I had an office in Pasadena when I was in the fund management business in which its Flaherty & Crumrine Preferred Income Opportunity Fund. It’s a terrible name for these two people; I feel badly for them. (Laughter)

So, it trades on the symbol PFO, and again it is in my opinion the best or one of the top two or three in the preferred space as far as the consistent outperformance with both yield and some price appreciation. Again, it gives us the ability to have some of the further price appreciation as well as some nice current income over time.

Now the next space is an area that I find very interesting, and I know we already have exposure through Main Street Capital that Richard had in the portfolio. So, these basically come out of the Investment Company Act of 1940 in which they effectively are business development companies.

So, these are companies that effectively are set up as private merchant banks where they effectively get to invest in companies by making loans in different fashions and also taking warrants or other equity participation in the individual companies. So, they invest in these let’s say smaller or midsize companies. They lend to them and the best ones will guide these companies along towards coming to the public market or develop themselves to then eventually sell themselves to some other entity.

Now one of my favorites in this space is a company called Hercules Capital, so the symbol is HTGC. So, they’re based in Palo Alto, California, so the tech Mecca in which their job is they get in their cars and they drive around and look in people’s garages for the guys in the hoodies. They try to pick out what’s going to be the next new, new thing that they can get involved in. So, they’ve had a few companies that they’ve done okay with. They had a little company called Google. (Laughter) They had some other companies like Box and Dropbox and other things like that, lesser successes but household names and various other tech centers. So, they have a pretty good idea of what’s going to work and what’s not going to work.

Share price again over the last five years has been generally positive. It did see a little bit of a correction with the general segment selling off with the BDCs, or the business development companies, because the fear was that after the ’08 fiasco, that credit would basically be cut and, therefore, they wouldn’t have the ability to fund themselves. That basically quickly got rebounded from February on just like many of the other parts of the income market in early 2009. So, you’re seeing an entity that basically invests in and participates in the tech segment.

They also have a very strong presence in Washington, here, where they’re focused very much on regulatory consultation, and they also represent and lobby on behalf of their investments back in Palo Alto. So, they know the power of the helping hand of government when it comes to technology. So, they help to guide these companies along, and they have a fairly good track record as you’ll see. So again, it throws off a yield just shy of ten percent, and again interesting track record of the companies that they buy into and eventually sell out of.

The other company has a famous name because BlackRock is one of the larger investors in the mutual fund and general fund management space. They had acquired a company called Kelso Capital, and originally, they had this business development company called BlackRock Kelso Capital Corp. That’s the symbol BKCC. They more recently changed the name just to BlackRock Capital to make things simple, so it’s just the recognition of the fund company. Again, this is a little more generic, so they’re not focused on tech. They just focused primarily in the middle market segment.

So, what they identified is that traditional business and corporate banks that focused on middle market lending, so midsize company private and public that were dealing with corporate loans and other sorts of equity participation, banks really had left that segment. Therefore, they saw an opportunity to step in and expand that. So, they’ve been buying into and making loans to nuts and bolts sort of companies, everything from local ironworks companies, aluminum fabricators, hydraulic parts, whatever, basic machinery of businesses throughout the country. So, they make their loans. They lend. They take an equity participation, and they work these through to maturity.

So, they basically have been doing quite well from a business standpoint. They throw off a yield in the low teens, but from a share standpoint they’ve been kind of sold off of recent largely on the fears of rising interest rates, because the fear would be that they are going to basically be squeezed, but I would counter this. While they might very well be squeezed from a higher cost of funding just like some of the banks will, they also have the ability to charge more for their yield just like banks are.

So, the same arguments I make for banks – has to be able to benefit from lending in the middle market space to businesses and corporations – BlackRock has this same ability and arguably a better track record of recent because they have not been encumbered by the regulatory constraints that the banks have been. So, a lot of the talent might very well be lacking in the big banks that is very well active in BlackRock’s offices. So, I think they have a lot more potential, and again the shares are very cheap, sitting at about six and change, and again we’re looking at a low teens dividend distribution.

So, I see Hercules Capital coming in because of the tech and their success and BlackRock. I’m doing my further diligence, and I’ll keep you informed as far as if you’re going to see them coming forward in the portfolio.

Q: How does this compare with the CODI recommendation?

NG: CODI is not a business development company, so CODI basically buys the entire company or they buy a controlling interest in the company. So, they’re not in the loan business versus these people primarily are in the merchant bank business, so they lend the money and also can have some equity participation.

Now next up is just like I mentioned with Sherman McCoy and The Bonfire of the Vanities, of collecting those crumbs, the idea that one of the other areas for income that I find very appealing are fund manager, so the idea that as a fund manager, whether you’re running a mutual fund, whether you’re basically being paid to run a pension fund or whatever other sort of fund, it’s all about the assets you have under management.

So, you don’t have to be that good, but you just have to be good at keeping the money in the fund and, therefore, you basically keep a percentage of the overall assets sitting in the fund. So, the more assets you have parked in your fund, the greater your earnings are going to be and, therefore, the bigger the crumb you’re going to get month after month. So as an investor, we effectively can be part of that process, so AllianceBernestein, which I talked about earlier, with one of their closed-end global funds.

AllianceBernstein is an interesting fund set up as a pass-through under the symbol AB. So, they don’t pay any corporate tax, and they do the majority of distributions back to the unit holders. So, we see effectively a nice dividend yield in the upper single digits, and as you know as they’ve been building their asset base – so it’s currently sitting at just shy of $600 billion and climbing – they have more and more crumbs to collect and pass our way.

So again, they don’t have to be good; they just have to keep it. Therefore, that’s one of the things I like about them. They do fixed income and they also do equity management and, again, they continue to grow if albeit slowly their fund business, but again it’s another one of those great cash cow types of businesses that I think would fit nicely into the Incredible Dividend Machine. So, we’ll be seeing how that fits in going forward.

Then one of the last areas that I find very appealing, and I mentioned the New York Mortgage Trust as being one of the mortgage REITs, so the idea of a REIT that’s structured to make investments in mortgages and other loans to mortgage-backed securities in which mortgages actually have a great deal of appeal during rising Treasury yields. What we’re seeing is that with mortgages, yet mortgage rates have been creeping up, but what that means is that if mortgage interest rates are gradually creeping up, it means that the people that have mortgages on their homes are less likely to refinance and, therefore, they’re more likely to stay with their existing mortgage.

Therefore, when you’re managing a mortgage portfolio, if you can have more stability in your portfolio, you have more certainty about what the cash flows are going to be and the value of your mortgage with more certainty is going to be higher in price. When you see mortgage rates and refinancing either jumping around or dropping off, that means that the cash flows or the prepayments when someone refinances, they take the whole mortgage and they give it all back to the mortgage holder and, therefore, you’ve got to then reinvest that money.

Therefore, if you have more and more uncertainty about your money coming back to you on any given day, that mortgage bond is going to be worth a lot less than something whereby you can lock it up and know exactly what’s happening. So, when people are monitoring and modeling their mortgages in the mortgage portfolios, they’re looking for how do I actually control and value what the mortgages are. So right now, I think the mortgage market is very appealing for investors.

Moreover, with a growing economy and things being good for consumers and wages being good and properties generally reflecting higher values, you’re having fewer people handing back the keys to the houses. Therefore again, even if things are insured, you get that prepayment back and, therefore, that’s more erratic. So, if you can have them staying in their homes, continue to service their mortgages, therefore the certainty of being paid is going to be that much better. Therefore, that’s also helping the mortgage market.

One of the best in the business in a cross-section of mortgage securities is a firm out of New York called MFA Financial. The symbol is MFA. It was profitable even during the 2007, 2008 mess, so that’s a good testament for how they basically manage their risks. So yes, this is a one-year chart, and so this is the sell-off when everyone said REITs are not a good idea and, therefore, they dumped with everybody else, but they also are participating nicely and strongly with that REIT recovery.

(Background Conversation)

NG: So, they basically have a pool of mortgage securities. They pay out monthly distributions, and again you’re looking at the high single to low double-digit yield, and again a great track record of even during the fiasco times and again somewhat on the cheap as we talked about earlier. The REIT segment is still relatively inexpensive. So, it’s another one I see basically being added at some point in some part of the portfolio, potentially in the Incredible Dividend Machine.

So, with that I’m going to open up, and we have the room for some time, so you can start firing away with your questions. I’ll start with you. I can hear you. I’ll repeat it.

Q: So, on a muni bond you avoid federal taxes, but in order to avoid state taxes you need to own one that’s in your state. Is that correct?

NG: So, the question is if you own a muni fund, you’re basically exempt from federal taxes, but you are still subject to your state taxes. Yes, that is the truth, so the muni funds that I talk about, they’re national funds and, therefore, you’ll save on your federal taxes but, depending on where you are in the country, if you do have a state income tax you’ll still be subject to it.

One of the ideas that I was talking with some of you last evening was looking at for some of the high-tax states that have high populations for subscribers like New York, California, New Jersey of actually looking at and talking about some individual funds that are state-specific that would give you the exposure to not only save on the federal tax but also on the egregious SALT tax or state and local taxes for some of those states. I don't know if that would have appeal. Anybody raise their hand if you’d like that.

Q: (Inaudible/Not Mic’d) in California. That was my question.

NG: So, there are a lot of them like that. Again, it would be a matter of my doing the diligence in picking out the ones. Again, I’ll be floating that and see what my publisher has to say.

Q: As I mentioned to some people, I’m interested in understanding better how to sell, because I currently have a mutual fund of individual stocks of my own, and I need to consolidate and bring that down to a fairly stable, good income portfolio, and I was wondering if you could go over some of your thoughts on how to review stocks in order to see if they should be sold. You could use Johnson & Johnson as an example or just general.

NG: So, in the second presentation, I talked about when to sell, so the idea of when things change for that particular company, the idea that I constantly review the portfolio. In other words, I look at each position. Would I want to buy this all over again at what price? If I say no, then I need to do more review to see, A, if I need to start working it out.

So how do I get out of this position and in something else, or do we need to sell it now and move on because some further damage is going to be? So, with that in mind, the idea that you take each position that you have in your own portfolio just like I do in Profitable Investing, and I say, how is the company doing? What are its sales? How are its operating margins? Are we seeing further improvement? Are we seeing threats?

What’s happening on the credit side? How is it valued? What’s it price to book? How does that compare with its peer group? What is the price to sales? How does that compare to its peer group? Where is the dividend? Are we seeing rising or falling dividend? Are we seeing threats to the income statement from higher costs or less sales? How is the company dealing with that?

All these things go into that equation and, therefore, whether we have X amount within Profitable Investing or you have X amount in your own portfolio, I kind of encourage every time you get your statement or on some regular basis go through your portfolio and ask yourself, would I buy it all over again? Why? Explain it to yourself in a sentence or two and at what price, and that more likely if you have, as you mentioned, numerous positions, you probably have some redundancy within certain segments that you could pick the best one.

One of the things is when we look at the current portfolio, there are a collection of some drug stocks that have some challenges. You mentioned Johnson & Johnson which we recently had to sell. We also have a collection of the consumer goods which I talked about why we had to sell initially Kraft Heinz as well as the ETF to try to reduce some of the damage, but at the same time there are some of the ones in the space like Mondelēz that at least have a plan, and I could see the ability to be able to work some of these things out versus just doing a fire sale.

So again with Johnson & Johnson, the impetus for why we wanted to get out that, even though some of you might have owned that for many years and your cost basis might be much better, I look at it from the perspective is that I don’t care what I paid for the stock; it’s where the stock is going and, therefore, if you paid a lot less or you paid a lot more, I don’t care if you’re sitting on a loss or a big gain. It’s the idea that what’s the company going to go forward with.

Now Johnson & Johnson was a very expensive company relative in its space on a price to book and a price to revenue basis. It had very high costs and, therefore, its margins were getting squeezed compared to its peers, and its product mix was not the best, and it’s also under a great deal of legal threat from its liability in several of its product lines. So, all of that basically comes down to it’s got threats. It’s expensive.

Its margins are not as good and, therefore, there are other companies in this space and, therefore, let’s reduce this particular one in the consumer segment that gets us less exposed to there and gets us out of a problem situation which doesn’t seem to have a plan for fixing the problems. At least I couldn’t see it yet. Robert, since you’re right there.

Q: I’ve been listening to these wonderful opportunities to invest money, and I’ve asked myself maybe a question I should have asked myself a long time ago. I know it’s by no means your job to tell me how to invest my investments, how to choose my investments, but it seems to me that I have to make a decision that I hadn’t realized until today. I have to make a decision as to how much of my investments I put in the Total Return portfolio and how much I put somewhere else. Maybe it’s plain to everybody else but not me.

NG: I think (Inaudible/Not Mic’d) each part of Profitable Investing has a different purpose and, therefore, the Total Return is the overall core portfolio. Therefore, that’s really what you should focus on for the growth with income. The Incredible Dividend Machine is really structured just for income, and going forward I’m going to want to change the focus a lot more towards the income. So, if I can gradually find some opportunities that fit into each one of those cycles that bolster the income from a dividend of two or three up to that four, five or six percent and something that’s stable, that basically could be used to focus for investors that really want to focus on income, so if you’re retired or if you basically want to increase your cash flow.

Q: But if I have something that I’m comfortable with in the Total Return portfolio, then I can put some stuff in the Niche Investments or I can put something in the Incredible Dividend.

NG: Now the Niche section, the Niche Investments, that was an area whereby it’s been for people that already have other positions. As I’ve been reviewing where things have developed for the newsletter, it seems like it was a combination of both opportunities as well as stuff that was in the main portfolio that was being kind of moved around.

So, what I’m trying to cultivate with that, because I’ve done another full review, and I’ve made some changes and I’m getting ready to sell some of the funds, is make the Niche whereby I’ll put some of the new things to test drive. So, you’ll see some of the newer opportunities that will go there first. We’ll make sure that everything works well and the idea that I would encourage people to buy them in small sums so that you get some of the participation.

You get to know them and, therefore, they’re going to either cut their teeth and make it into the Total Return portfolio or justify themselves going into the Incredible Dividend Machine. Therefore, that’s going to be more of those opportunities. So that’s where if you’ve got a little cash where there’s a little bit of speculation where you can deal with a little bit of the risks that Neil made a real screw-up on this new company, that’s where that would be.

Then as far as Total Return, Total Return has income stuff and it has the growth stuff. Therefore, that’s really at the core of what it is, and so the Incredible Dividend Machine is pure income. So, if you look at it from your overall weightings, you’re going to say, “I want to have 75 percent of my stuff in big income, so I’m going to buy the Total Return with more of the dividend stuff from the Total Return, and I’m going to add in the additional Dividend Machine and bring up my overall balance so that two thirds or more of my portfolio is income and only about a third to a quarter is on growth.

So, I don't know if that kind of walks you down the path of where I’m going with this.

Q: Two things. The first one is TransCanada. We have mentioned the pipe toll makers are in short supply. Is there any life left in the TransCanada pipeline?

NG: Again, one of the potential problems with the Canadian part is that you’re transporting the heavy crude which I already talked about the discount in the light crude or intermediate crude coming out of Texas, Oklahoma and so forth. So, the discount is that much further on the really dirty heavy crude. Therefore, there’s somewhat less incentive.

That said, we are seeing the further expansion along with the additional pipes that are going to bring more of that to the refineries, principally some of the refineries in the U.S. that can deal with that heavy crude both in the Gulf as well as some of the other facilities. So yes, there is opportunity in just about all the pipes right now.

Q: Philosophically, are you a growth-oriented person or a value-oriented person?

NG: I’m really an income guy. I focus on getting paid. (Laughter)

Q: I like that. (Laughter)

NG: The reason I say that is that whether you’re young or old, the idea that if you have something that’s paying an ample dividend and it’s from a quality company, that company is going to reflect that in a gradually appreciating side, but also if you’re not taking the dividend, if you’re younger, you’re just stacking it up and reinvesting it. You’re growing the overall value of your portfolio.

So, if you’re in your 30s and you’re investing, by having a lot ... yes, I know you’re only 25. (Laughter) If you’re in your 30s and you’re building up the value, you’re stacking up that dividend and you’re basically building the overall value of your portfolio. That has a lot more certainty in doing that versus making some of the bets, because one of the problems with value investing is that I can find some great values, but if the market doesn’t care, it can stay at a value a long time, and that’s where I talk about that idea of proven.

I want to have proven growth, so the idea that I can see a stock that’s valued inexpensively based upon its peers, based upon the market, but I also have to see that the market sees this and sees what happens year after year and rewards the stockholder with a higher price.

So, as I mentioned earlier as an example, if a stock is trading at X times its sales, and its sales keep increasing, then the stock price is going to reflect that. If its sales keep increasing and its price to sales kind of slips or doesn’t move, then that’s not a really good deal, and so even when it’s cheap, it can stay cheap. That’s why I’m wary of that, so yes, I don’t want to buy things expensive just because there’s a big yield on the front door, but the idea that I want to make sure if the yield’s not as big there’s a real reason why the market’s going to reflect that in a higher price.

Q: Thank you.

NG: Sir?

Q: There’s an allocation bucket in the Total Return portfolio called indexed equities, but if it has things like the core S&P in the basket, that seems redundant (Overlap/Inaudible).

NG: I agree with you. So, the question is in the Total Return in the beginning we have the indexed equities, and we have the iShares core S&P, so it’s the larger cap. So that is kind of redundant, and so the idea that I really could see sort of cycling out of those and putting like I talked about the KBE, the regional bank index and making it more so it’s representative of the near-term opportunities. So, as I’ll show you the opportunities in a particular segment, I’ll give you an ETF that gets you in the door right now while I bring the additional names to you. So, I could see doing that. Yes, sir.

Q: I'm just curious. Do you personally invest in the recommendations you give to your subscribers? If not, where do you invest?

NG: That’s a very interesting question because I had a very nice conversation with my publisher the other week. (Laughter) So I traditionally eat my own cooking. I don’t eat all of it because we all have our different changes, but when I came in, I looked at the portfolio and I was asked, “Well, do you have anything?” I said, “No.” I had W.P. Carey, and then when I recommended the Digital Realty preferreds, I had another preferred that is not part of the portfolio, and the reason I didn’t add that one is because it wasn’t as appealing to buy it new because it’s close to its call day.

So subsequently as I was getting ready to add new things, I was going to start putting disclosures, but the parent company of us has come to a new policy where they don’t want their editors to have absolutely any conflict of interest, and so I’ve had to sell my W.P. Carey. It pained me.

Q: (Inaudible/Not Mic’d) you feel our pain. (Inaudible Portion).

NG: So, I’ve basically always adhered to a rule from an old publisher, and I took it to the nth degree where basically for main portfolio things I waited 30 days to buy something when I told people to buy.

So, what I told you today I’d wait for a month, and if I told you to sell it, I’d give myself 30 days, so that’s enough for everybody to get the newsletter and everybody to have plenty of time to take action so I don’t get any benefit either way. But I do what my boss tells me to do. That way I get to keep standing up here and writing the newsletter. So, I see the rationale for both parts of the equation, so I’m basically, because I’m an income type of guy, I’m going to be more focused on just parking myself in some individual bonds that really wouldn’t fit into a newsletter.

So, I know what you’re talking about, but I do feel your pain because if I recommend a bunch of dog stocks to you, even a Diamond Club member is going to stop writing the annual maintenance fee, and you’re going to tell all your friends, “Don’t subscribe to that SOB Neil George because he’s terrible,” and therefore I’ll feel it in the pocketbook because I won’t get asked to write for Profitable Investing much longer. So, I do have a skin in the game. It’s my job.

Q: I’m wondering when ... go ahead.

Q: Do you have any interest in marijuana stocks?

NG: No, and to be on the record I have never tried marijuana. I have absolutely no interest. As far as the stocks, no for right now. I think there’s a lot of mania that’s there, and you also have a lot of legal uncertainty, and so let’s take for example where things are in the process of being completely above board which is in the Canadian market.

Now in Canada the rule is going to be you’re going to be able to sell marijuana in plain white boxes with black lettering which will have the name and the warning. It’s going to have the name XYZ Marijuana and then you’ll have the warning that this stuff can cause you to go blind, whatever the disclosure is. Therefore, companies are going to be dealing with that in which I don’t know how you’re going to differentiate that product without advertising and without a branding and, therefore, I don’t see how you’re going to value that business.

There might very well be sort of a run towards these things, but I don’t think we’re there yet. When you’re looking at the U.S. marketplace with some of these companies, I think you’re going to see even more stringent problems, and you’re still in violation of federal law. I think that’s a problem. The other way people have been playing it, they’ve been talking about fertilizer companies.

I do like agricultural technology companies. I was a shareholder in Monsanto for many years and loved what they developed in GMO and also in GPS technology, how you do planting, irrigation and harvesting. I think that will play out in the marijuana business particularly since you’re dealing with a very temperamental plant that has to have certain temperatures, certain sunlight, certain watering requirements. So, I’m going to be looking at the ag space, but I wouldn’t be as excited about just the pure marijuana plays because I just think it’s just not there. I think you still are ripe with risk.

Q: So basically, you’re looking at Scott’s Miracle Grow for marijuana.

NG: Well, that’s one of the ones that people talk about, but again the one I think I would be more impressed with would be the owner of Bayer or Monsanto which is Bayer, the German firm. I think you’re looking at seeing some of the other participants in that space like DuPont and so forth. So yes, they’re not going to get that benefit, but they’re part of that.

You also look at some of the companies that are in the irrigation management and provide some of the tubes, piping and monitoring like Flowserve which can be used for more commercial applications to keep the watering of marijuana plants much more in line. So, there are other sorts of permutations, but it also has to have applications not just for that industry. It has to do be doing well in other parts and not just for the marijuana plants, but I really shudder to think that we’re going to see a lot of people walking around smoking marijuana.

I’ve lived and worked in Holland, and that stuff smells horrible, and I’ve smelled it now around Washington. I kept thinking, where’s the skunk? (Laughter) So that’s a problem. Then we also have the problem whereby driving under the influence. There is no proven standardized test that police can use like you can use with a Breathalyzer for alcohol and, therefore, that’s a problem. I think you’re looking at liability there as well.

Q: You’ve got the same marijuana user is using the phone while they’re driving.

NG: Probably. They probably also have Maryland tags on the car.

Q: So Neil, as you’ve become less optimistic about the direction of the market and (Inaudible Portion/Not Mic’d), what kind of general sort of tactics could we expect to hear from you of things like increase your cash position by so much, or buy some funds that move up when the market moves down? What kind of things might you ... ?

NG: So just as I talk about the growth and things that are happy right now, and I see the happy parts of the markets, as things look less happy, I’ll be writing about the fact that things are less happy. The consumer is spending less and that business capital spending is dropping.

Fixed capital investment and buildings and so forth is dropping off. As that plays out, we’re going to see the market is going to have less fun times ahead and, therefore, I’m going to tell you we’re going to start selling off some of the companies that are levered to the growth part of the marketplace, and we’re going to become more defensive by being more on the income part of the marketplace. Therefore, I’m going to direct you more towards the income-producing stuff like the mini bonds that trade by appointment and just kind of sit there.

We’re going to look at some of the varied defensive things. That’s where you start looking at the Treasury market. So that’s when you want to be in the Treasury market because if things are slowing down, that’s when cash starts to go into the safety. I’ll walk you through how this would play out in some of the individual longer-dated securities, some of the strips or the zero-coupon Treasury bonds that can be bought for smaller sums and give you a lot of positive exposure if the yield curve or long-term rate starts to drop and goes inverse which happens in a contracting economy.

So, there are lots of different strategies that we can deploy rather than just holding onto cash and, therefore, you’ll see active positions. When things are less happy, I just won’t be waving the flag saying, “Trust me.”

Q: Just one other quick sort of follow-up. You take a stock like Apple. There are a lot of people who say, “Hey, I don’t care.” I think Richard sort of had the ... I’m not trying to speak for him, but I sort of think with stocks like Apple he had a strategy that I’m not selling this. This is a great company. It’s always innovating.

People get discouraged about where they are with some of their products from time to time, but then all of a sudden something else really great happens. So, I’ll hold this, and if it goes down a lot, I’ll buy some more, but I’m really never going to sell it. What’s your thought process on this topic?

NG: I think Apple’s lost its mojo. I don’t think the creativity is there. The new iPhones have tremendous up-tick in bugs in their software and the operating system, more so than their past products. The unit sales, like I talked about when they came out last quarter, were not impressive. It showed some problems.

I’ve also written about I know the companies in China that either assemble or build the components. I know the same companies that are in Korea that build the components and the other company that builds some of their optical devices in Austria. They’re seeing across the board a drop-off in orders. We’re just seeing another round of some of these reports that are coming out. So, I’m watching that very closely.

I see Apple as floundering to come up with a replacement for the iPhone as being the star attraction. They keep pushing the so-called services, the iTunes and the streaming and so forth, and it still is such a tiny part of the portfolio, and it’s a space that they’re late to the party because there are a lot of other services that are already fired up and much larger in scale.

The other part of the equation is that their gizmos, as I said before, are not as exciting as they once were. They still aren’t fully OLED on their screens which most other manufacturers have been in that segment for many models beforehand. So, they’re not leaders, and again if you were to hold up an Apple iPhone and hold up a competing product from Xiaomi or Samsung or others, I mean to the average person they look the same. They have the same gorilla glass. They have the same sort of neat side metal thing in rose-colored whatever, and so the only thing that’s operating in the background is if you want to live in Apple land.

Now my father is a technophobe. I’m tech support for him. I’m going to keep him in Apple land because I know that I can grab remote control out, and I have everything integrated between his Mac, his iPad, his watch and his iPhone, and so I know when he calls me and says, “Neil, I’m not seeing my texts,” I know what I can do to hit the button that turns the cloud to do its thing, and so for that I think Apple is great, but there are only so many 76-year-olds that (Laughter) are relying on their eldest son to keep them floating.

Q: Or their grandchildren.

NG: Right, but to put it in perspective, I use a phone from a nice Chinese manufacturing company called TCL which licensed the Blackberry system. You’ll see me recommend TCL before you’d see me enthusiastically supporting Apple. That said, I still think there are a lot of disciples to the Apple as you mentioned before. Therefore, I am kind of watching for like Richard would say. Is there something else that’s going to come that’s going to propel it?

It’s not going to be the share buyback because those shares aren’t going to go away. They’re just going into the Treasury, and they’re going to be pulled out to be given for compensation to the executives. We’re not getting it in a dividend. They’re not going to do that because they’re a very selfish management team, and so what’s it going to be? How are they going to compete? The other part of the equation is that you can’t expect to keep raising the price of your flagship product from 1,000 to 1,200, to 1,300 to 1,400, 1,500 dollars.

Your market is just not going to be there for the growth, and it definitely isn’t there when looking at China and Europe where the market’s just not quite the same and where you see better, more aesthetically competitive products that run the ubiquitous Android system that plugs into everything and comes already loaded with wireless charging and comes with near-field communication – pick your gizmo – and has the power of Google world with all of the other related services and all the related services that plug into it. So, I just don’t know where their competitive edge is other than keeping people locked in Apple land.

As long as people are locked in Apple land, they’re going to have a core audience just like you’re still going to have the faithful that are going to keep on Tesla cars even though they can buy a much better German-engineered Porsche for the same price that won’t fall apart or burst into flames. (Laughter)

Q: What’s wrong with that?

NG: But the idea that there are still going to be people that are going to keep buying Apple. So, I see me trying to work us out of that at some point. Yes, sir.

Q: Most of us in this room have had 20 or 25 years of contrarian philosophy and thinking, and I’m pleased to hear that you’ve defined yourself as an income-driven person, but when we make this transition and we think about Richard’s contrarian philosophy, how do you evaluate rate or just simply react to that thought?

NG: Well, again I think the key thing is that I’m similar to Richard in different respects. In other words, a lot of the stocks that I like to follow in the markets are not necessarily in the mainstream. So, whether it’s in the foreign markets whereby basically I can present a company that is a better alternative to an Apple that’s not part of a U.S. tech index that has much better prospects, and its phone sales are doing much better, that’s a different viewpoint. If I can show you the rationale for it and how you can actually execute the transaction and how it fits into a portfolio, that’s different and that’s contrary to what you get from most talking heads that are showing up on CNBC.

The other thing is if you look at my viewpoint on the bond market, it’s very contrary. Most people are saying bonds are all going to go down. I’m basically been explaining and showing you that, no. Different bonds are going to perform in different fashions. The other thing is I will also show you other alternatives that are contrary to common wisdom.

I talked about the mortgage market, and I talked about a couple mortgage names in the REIT segment which again intuitively you think that would be a bad deal, but if you go through and listen to my explanation, you’ll see it actually makes more sense to buy into them than it would be in the years past. So again, there are going to be a lot of other sort of things that are different than what you would traditionally see in a standard sort of growth and income letter. So, I think while income might be there, and with Richard the dividend was always part of the story, with me you’re going to get not only some of the dividend, but you’re going to get some different names that aren’t necessarily ones that you see showing up.

One of the things I want to do there, particularly in today’s marketplace is I’d like to get us out of some of the positions that are so tied to some of the leading indexes that get whipped around with some of the volatilities when you go from a risk on to a risk off day, and all of a sudden the bots and the algorithm traders just start dumping where you’re going from one day plus three or four hundred to a negative 500 on the S&P on some of the other related indices and, therefore, I want to get you away from some of that into some things that are a little more stable.

I think there are a lot of things that are similar because I’ll show you stuff that’s off the beaten track. I answered everything, or are you just that tired? (Laughter)

Q: Just given your outlook for the markets and the economy that you showed us, is ten percent cash consistent with that as the Total Return has a ten percent cash position? That seems high to me.

NG: The reason I had that is I’m going to bring you new stuff issue by issue by issue and, therefore, I talked earlier. I could see reducing some of the indexed ETFs to the general stock market as a way of raising cash. So, I’m going to show you effectively how to use your cash to buy into the new stuff as we also work through some of the stuff that might have to go like some of the consumer staples. So that’s what that’s focused on.

Q: You mentioned being whipped around by the indexes. The Alerian index really does really whip around some of our MLPs. So, could you comment on that please?

NG: So, the master limited partnerships of the past years and so forth, they’ve become sort of the whipping boy for the reasons I said earlier. Because of the tax change, the institutional owners and corporate owners saw less of a tax advantage to having the pass-through versus just paying the regular reduced corporate tax rate and just taking the normal deductions on the corporate level. Therefore, that works for the institutions. It doesn’t serve us at all with few exceptions like the Kinder Morgan Incorporated does have some value, and it fits into a tax-free account.

But for us as individuals, the pass-throughs offer a lot of value, but at the same time I want to be very cognizant if I can get us into more of the pass-throughs that are less beholden to some of the indexes and some of the ETFs, that’s going to be good. The unfortunate part is that the universe for successful MLPs is not that huge, and it’s getting narrower.

That’s a problem for me. I went through this before in Canada in which Canadians had something similar called income trusts and, therefore, they basically had something whereby it was much broader. It encompassed various other industries beyond just the energy and mining things, and they changed some of the tax code that changed the attractiveness of these and pretty much sort of caused the market to continue to consolidate and have them convert to regular companies.

So, I’m very cognizant of what happened then because I went through that and dealt with that, and I’m looking at how that’s playing out now with the MLPs. But at the same time the MLP structure is so appealing for the individual investors, and that’s why I pointed in some of the charts. We’ve seen that gradual improvement as they’re coming off of those lows, and I think that’s going to continue for a while.

Q: Related, you’ve still got the Tortoise Energy Infrastructure Corp in the Ten Minute Retirement. I mean that’s selling at a premium.

NG: Right, and we were talking about this as far as each one of these subsets in the portfolios, I’m going to be making some small changes as far as looking at what’s the best way to get that overall exposure?

So, in the next issue you’re going to see some cleanup, if you will. (Laughter) So again I’m going through this slowly and methodically as far as I’m not going in and just start ripping things apart. That does nobody any good, and so the idea of working through each one of these things. So yes, I’m aware of that. I know what’s going on, and you’ll see some changes.

Q: As individual stocks go up in price and value, is there a point at which you might liquidate some of that position? If say you had 100 stocks and you recommended one dollar in each stock, one percent, and now one position is now at two percent, do you recommend or in your newsletter will you talk about liquidating part of that but not all of it if there’s still a reason to keep it?

NG: So traditionally I have not done that, and the argument piece is that I look at the stock as far as would I buy it all over again, and it’s based upon the value. So, if the price has gone up, but it’s still trading at a relative value based upon its book and its sales and what I expect going forward for what it’s going to do for its book and its sales and its margins, then I’m going to recommend, to keep buying it.

As far as the percentage, I basically argue that one of the things I’d like to see us do in the Total Return portfolio is more create the baskets of things that are broader, so income stuff, growth stuff and more opportunity stuff and have it less finite, because that way it would allow you as the subscriber because I know few that buy everything to the nth degree as far as how it’s allocated.

Therefore, it’ll just provide you more guidance as far as where you should go for the opportunities. Again, one more specific is that just like the lady who was asking me when to sell, time to sell is when a stock is fully valued, and I don’t see that there’s going to be justifiable upside compared to other opportunities. So instead of saying, “Well, I’m going to take 50 percent off the table,” I’m going to say, “It’s time to go. We made our money, and the return was this. Here’s your next opportunity to buy.”

Q: Part of the Dodd-Frank, and you anticipate some changes there, part of Dodd-Frank back in 2010 was the Collins Amendment which really did away with all of the bank preferred ability to be cumulative preferreds. Do you see that staying, or is the chance that’s going to go away?

NG: Well, again I think you’re going to see that it very well will allow that to occur. That’s one of the things that’s going to be in the next round which is right now in various levels of committee in which you’re going to be changing on the actual amount of capital and the types of capital. Therefore, that’s where that’s going to come from.

Q: That would be very interesting.

NG: Yes, and so that’s going to be the next round. That’s going to be a little tougher to get through, and that’s where again midterms are very important. If midterms stay intact, then I see that happening. If midterms are challenged, then I don’t see that happening. Sir?

Q: Thank you. In comparing the PONAX to the OSTIX funds, I understand your reasons for trying to get rid of the opaque structure of the ones that’s off the table. Part of your presentation this morning you said you did a fee structure comparison of apples to apples, and I noticed that there’s a $76 charge in Schwab to buy OSTIX and nothing to buy the PONAX replacement. So, it makes me really reluctant to buy OSTIX because so much of the amount that I’m spending goes into the fee. Am I using the wrong ...

NG: Paying a four and three-quarter percent front-end load to buy into the PIMCO fund just doesn’t make any sense to me. I can never recommend paying a load for a fund on an open-ended basis. As far as the commission, I think it’s a matter of having a different broker, whether it’s another firm that charges the 9.95 or the 7.95 or the 4.95.

Q: So, when you’re comparing the fee structures, you don’t factor in the brokerage fee?

NG: Again, I don’t because I don’t know what all the various brokerage firms are going to charge for any given fund, and so you’ve got umpteen various places out there. I’ve got Joe’s Brokerage in Tacoma that might still be charging $300 a trade to buy IBM shares, and so I have no idea what they might be charging. I also don’t know what Charles Schwab versus TD Ameritrade might charge and, therefore, I make the assumption that most trades are going to be done at the traditional low discounted rates.

So, I compare on the open-ended funds what the fund is charging, and if it’s a front-end load, I’m not going to recommend that. It just doesn’t make any sense to me unless there’s something really nuclear spectacular for that fund that makes it really justify it, but in the open-ended fund (Inaudible/Not Mic’d).

Q: But if you go right to the management company, I don’t think you pay a fee. Is that right?

NG: That’s our understanding.

Q: So, you can get around it.

NG: The other way around it is paying.

Q: Take the money out.

NG: You can wire it or cut a check or whatever. So, if you want to save your 76 bucks, there you go. Again, it comes back to I always compare apples to apples, and I also have to assume all subscribers are on the same boat, and so some might have an expensive broker. Some might have a cheap broker.

Some might be a larger sum where basically if you have a larger sum you can buy some of these funds without the load and the front-end charge, but I’m assuming not every subscriber is willing to put a million dollars in an open-ended fund, but I’ve gotten e-mail from subscribers that were buying PONAX at institutional levels and paying nothing because they were buying in such large sums. I said, “Congratulations. I’m glad you’re doing so well.”

Q: In the Dividend portfolio, is there any reason to consider whether it’s in the taxable or non-taxable account if that is appropriate for an individual?

NG: We did start to put in the T and TF, didn’t we? So, it’s in there now.

Q: Thanks. Thank you.

NG: That’s even more important going forward, and one other comment I had at lunch, someone mentioned the idea that in the recommendation itself, it should be in a taxable or tax-free account. I’m going to start putting that going forward, that way you don’t have to wait to see it in the portfolio table.

Q: That would be great.

NG: Dave has to remind me to do it that way. (Laughter) Dave’s the managing editor.

Q: For the Total Return portfolio, do you have a benchmark as we get used to each other over the next two, three, four years that we should be looking at to see how you’re doing?

NG: No. If you have a suggestion, we’ll take a look at it. I just look at the idea that I have an expectation that given time during a transition, seeing returns sort of targeting returns in that seven, eight, nine percent, that’s kind of where I want to see the returns coming in with income and some dividends. That’s kind of the overall goal, and then with the Incredible Dividend Machine getting that yield up to an average of that six, seven, eight percent.

Q: So, it’s a yield benchmark.

NG: Well total return. It’s total return. You figure if you look at seeing the general market during good times, you’re seeing that six, seven percent. So, I want to get better than the general market with income and also, more importantly, less risk. So, if I can get your performance where I’m reducing the standard deviation of the overall collection of stuff and it gives you less risk and a similar return, that’s a win for you. So, my idea is, reduce the volatility and pick up a little yield and, therefore, it gets you a better risk-adjusted return.

Q: Thank you.

(Applause)

NG: So, I appreciate you all coming to the event. I appreciate the commentary. Keep paying your annual maintenance fees please. (Laughter) I don’t want to feel the pain of being fired. (Laughter) Again, you’ve got the e-mail thing to send in your comments, questions. You can say, “Good job, Neil,” or “Neil, you need to work on this.” Again, I always like getting that stuff, so thank you very much.

(Background Conversation)

(END OF TAPE)

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download