Adjusting Portfolio Strategy – A 2023 Update

Author’s Note: This portfolio strategy article was Published on iREIT on Alpha at Christmas of 2022.

Dear subscribers,

2022, despite everything that has been going on, has been a successful year of investment for me. I say this because my core portfolio has outperformed the market by more than 38% on average, and for parts of it, more than 49% YTD. Both are, therefore, in positive as things stand.

We have a few days left until the clocks and the calendar announce 2023, but I don’t foresee a massive shift in these few days – I believe this is the whereabouts we’ll find our annual performance at.

Value Investing

Now, this performance was made possible through value investing.

That’s really it. There’s no big secret or strategy beyond that. That’s not the same as it being easy, of course. It’s my job to analyze and value companies, and I keep track of a substantial amount of them. Parts of my days are spent going through filings, updates, and charts, to make sure that I’m acting with the best of my knowledge. Apart from that, I’m an avid reader when it comes to books on macro and investing overall. The combined experience, expertise and methods are what result in my article and my stance choices, which I enhance with analyst’s tools in the forms of charting, forecast and image software to make things more palatable to the average investor who doesn’t (or can’t) devote the same sort of time to this.

Value investing works – and here’s why

• Value investors seek cheaply valued stocks, using metrics to determine intrinsic value, and to make certain to buy well below that intrinsic value.
• Value investors have a longer potential timeframe and aren’t spooked or disheartened by market downturns in the same way other investors may be.
• Value investors have dividends from their investments, which even in times of peril, enhancing potential returns from capital appreciation with payouts, allowing reinvestment or other investments.
• With my own strategy as a value investor, I tend to pick companies that have a level of foundational safety that while not guaranteeing, precludes them from most cataclysmic sort of events that would cause complete bankruptcy.

Because we pick good companies that pay dividends, and we make sure that we buy them at a good or great price and go in with the expectation of holding them until appreciation, I argue that the chance for long-term capital loss is greatly reduced.

That has been my battle cry for the past 8 years, and while my risk tolerance and margins of safety have seen significant change over the past few years, the core has mostly remained the same. This is probably why I have never, ever suffered a capital loss above 0.1% of my portfolio (realized), or above $1,500 in pure cash.

That, of course, doesn’t mean there isn’t massive room for improvement with my strategy and approach. I am far from perfect, and I’m always looking to improve.

The reason for my market outperformance this year has been exactly this – investing in businesses like Fortum (OTCPK:FOJCF), and realizing gains in businesses I invested in last year that have outperformed during this, like the pharma industry including Bristol-Myers Squibb (BMY).

I’ll go through some more of my winners in the later portion of this article, but I want to re-emphasize that this strategy tends to work – it’s worked during up-years even though I – by not going for tech – missed out some of the insane growth that came from the 2020-2021 periods. But I also missed out on the massive drop that came after it – this year, specifically, which pushed me above most of those returns in the end anyway.

Some additions to the strategy

So, as I said, I’m going to be enhancing and adding things to this strategy going into the new year. Neither of these things I’m adding are new, or something I haven’t done for years. The difference is, I’m going to be doing them more as a rule than an exception, and I’m tripling and quadrupling my estimated allocations to the strategy.

I’m talking about the selling of options.

For years at this point, I’ve been utilizing this in small batches and amounts spread across the year when I’ve seen particularly good investments and haven’t wanted to put capital to work straight away or had a particularly good holding for a call.

However, as of the latter part of this year, and the beginning of 2023, this is going to be more of a norm for me.

This doesn’t mean I’m no longer just buying common shares. Given how my portfolios are constructed, and the fact that I operate accounts that given their legal specificities cannot trade options, the fact is that at best this will always be a split down the middle. I operate both a private and a corporate portfolio and the corporate portfolio (that can’t invest in options) is one that has seen more than quadrupling of its invested capital in 2022. As things look now, it will double that again in 2023, and again potentially in -24, meaning there are mounds of capital that will need to be invested across the world in stocks – and why you can expect me to essentially continue on as normal.

I’ll also continue buying in my private portfolio, but there the addition will be a 10-15% allocation to options, and specifically, selling them.

Why selling options?

Selling options is a strategy that, to me, fits the type of investing I do like a glove. That is also probably why plenty of dividend-oriented investors add to their recurring incomes through the use of options selling.

Options selling can be used as one of the most profitable ways to earn additional income to what you already have, while at the same time, as I argue, potentially lowering your risk profile.

By selling options you control all aspects of your capital, including risk outcomes of potential plays. While selling options definitely requires time investment for understanding what it is you’re getting into.

First, and the shortest possible explanation I can do (because there are thousands of sites on the subject) – the selling of an option means that you’re selling someone else the right, but not the obligation to either buy your stocks (Call) or Sell stocks to you (Put) at price X before, or at date Y. You charge a fee (premium) for a set amount of shares (100x per contract). You are the party with the obligation.

That means in order to efficiently and safely sell options, you must either have the underlying shares of the company you’re selling (Call), or you must through cash or margin, be able to put up the buying power to cover the cost of the potential purchase (Put).

Everything else is “naked” – i.e., when you don’t have cash or shares, and that’s something I don’t do.

For more info on the subjects of selling puts and calls, visit some of the resources out there.

The benefit of selling options is the stacking of income or the creation of a steady consistent revenue stream. Option sellers take advantage of the emotional side of trading with counterparties wanting to mitigate risk in their own trades, which together with the market and individual company trends and option specifics, is what drives the premiums for options prices.

Selling options means that you’re capitalizing on volatility and the supposed overstated nature of complexity. Let’s say that stock X drops or rises a massive 7% in one day – there might be a perfectly valid reason for this movement, but the market has a very strong bias towards overreaction – in either direction. I’m already taking advantage of this overreaction in my current investing strategy.

However, we can do this even more if we also include the potential of options.

Example #1:

Instead of buying an attractive Swedish forestry company the day it fell 7.5%, yielding nearly 3.5%, I wrote 8 contracts worth of Put options at a hefty premium for only 39 days, which gave me annualized returns of nearly 16.5%, as well as the potential to buy the company at 12% lower if it fell more. I would be perfectly happy buying the company at the lower price – just as I would have been happy buying it at the higher price – but now I’m beating the annual yield for the company by a very high multiple, I’m not putting cash on the table, and I’m potentially buying 12% lower still.

Example #2:

I already knew I wanted to rotate a Swedish bank, and I could have sold at a decent price with profit. However, the yield is safe and the forecasts look good – so I elected for writing 3-month Call options instead, adding nearly 4.9% annualized to an already good yield (dividends), and also potentially locking in a sales price that’s 11% higher than the current one. I won’t be unhappy if it goes up – I’ll already have collected my premiums, and I might even see the dividends, and I want to sell anyway.

You may see why this is attractive, and why skilled investors use this strategy both to generate additional income on top of already-existing dividends, as well as make it part of their buying or selling of stocks – instead of selling straight away, offering the company up for sale by writing call options.

I only write options – puts or calls – on companies that I want to own or want to sell. I go in with the assumption that the option may or even will expire ITM (in the money, get assigned). Some traders write options willy-nilly, which can result in catastrophes of owning stocks you don’t want or selling stocks you don’t want. That is something I avoid.

The practice of selling options is something I see as an advantage from several perspectives.

• It’s a good proxy for buying and selling attractive companies at even better prices than today while getting “paid to wait”. Instead of putting money down or selling straight away, you’re getting “more” by just waiting for the price to improve the way you want – and usually, the money you get outperforms potential bond yields or interest accounts by quite a large margin.
• It’s a great practice to add income to an already-existing revenue stream of dividends. I enhanced my own dividend income for 8 companies by around 1.3x to 5.5x over the past year simply through the practice of selling long-dated calls.
• I’m already looking to take advantage and to react to massive volatility in either direction. This only adds to that. It’s my view that the selling of puts and calls at the right times can not only add to but transform your portfolio RoR from decent to far above decent.
• Options are yet another way to make money while you sleep. You know what Warren Buffet says about that.

However, selling options won’t make you rich. I would argue that there is an 8-17% annualized “cap” of the sort of rates you can get from selling conservative options even with good timing. Options buyers will talk about potential returns far, far higher than I am. This isn’t a “Home run”, sort of strategy to use a baseball analogy.

Instead, see selling options like reaching first base – a single. And then another single. And another. And another. Drip after drip after drip.

Do you get the picture?

It’s victory/profit through perseverance. You’re collecting small paychecks from, potentially, dozens of contracts. At the end of the day, it’s all about getting that cash in your portfolio. Whether you do it through buying options, selling steel futures, dividend stocks, or this, doesn’t really matter.

Selling options to me is an addition that brings consistency and resilience to my portfolio, while providing great income.

Provided you pick great companies, your loss potential is extremely small. It’s not a loss to me to get to buy a company at a great price, nor to sell one at a good trim price, because it represents choices that would have been attractive to me anyway.

Who shouldn’t sell options like this and why?

A few disclaimers though.

#1.

First off, options require capital. Given that you’re going in with contracts, each of which is essentially a block of 100 stocks, the cash or the stock position you need to have on hand can be rather substantial depending on your circumstances.

To write a single put option in Intel (INTC) for instance requires you to put $2,600 of buying power on the table for the duration of the option, for every contract. To sell a covered call, you need 100 shares of Intel in your portfolio.

And as you can imagine, if stocks get expensive, this can become insane. Amazon (AMZN), when it was the most expensive, was above $3,000 per share. That means that to sell a single put contract on Amazon, you needed to have $300,000 in buying power ready, or in stock value for the call.

This is why selling options may not be suited for all portfolios, especially if their value is below $10,000 or $50,000. I would personally say that a good time to do options is when you can put no more than 5% of your available buying power or holdings at risk at any one options trade.

#2.

Secondly, fees. You may ask why I haven’t been clear on this “option thing” before now.

Well, a very good reason for that.

Up until fairly recently, the commissions, clearing fees, and administrative costs for options trading, especially where I am based, have been completely prohibitive. For a $5,000 put options play with an 11% annualized RoR and a 30-day time, the total trading and clearing fees would have been just north of 28% of my total pre-tax premium.

So you can see why this hasn’t been in my sight earlier.

But with updated fee structures and some negotiation to a better customer status, I have been able to get my native fees down to less than 3.5% for a $5,000 contract, and less than 0.9% for my typical sizing, which is around the $10,000 mark with a 30-60 day timeframe.

The lesson here is to look at what options fees you have – because some brokers take an arm and a leg, especially for small-volume traders, when they want to play around with options.

Interactive brokers (IBKR) offers some fairly competitive rates on a global basis – but they do, for instance, not offer the option chains for Scandinavia that I trade with in my broker. Hence, I need both.

#3.

Third, the obvious risks.

No play is without risk – and neither is selling options. The risk you face when selling puts and calls is that you may be forced to either sell your stock at a cheaper price or buy a stock at a higher price. The company you look at may drop further or climb higher than you expect. You of course have the option of buying back options, but this isn’t a practice I personally do (at least not now), given that my view is that I want to either buy or sell the companies I write on in any case.

In theory, by selling a $35 strike put option on Verizon Communications (VZ), and if Verizon were to go bankrupt in whatever your option timeframe was, you’d still be forced to buy your now-worthless stock at $35, just as a stock could “moon” and you’d be forced to sell lower.

So keep that in mind – and check if this is for you.

Some portfolio thoughts & data

Those of you following my work and the chat know that while I don’t go into specific allocations or data, I do speak generally about where I am and where I want to be going.

For instance, my dividends by far, easily cover more than 500% of my average monthly expenses on an average basis, up from the 100% it reached back in early 2019. Those dividends are at record levels for this year, with major dividend contributors such as:

• Tele2 (OTCPK:TLTZF)
• Telia (OTCPK:TLSNF)
• Yara (OTCPK:YARIY)
• Telenor (OTCPK:TELNF)
• Altria (MO)
• Simon Property Group (SPG)
• AT&T (T)
• BASF (OTCQX:BASFY)
• British American Tobacco (BTI)
• Realty Income (O)
• Munich Re (OTCPK:MURGY)
• Allianz (OTCPK:ALIZY)
• LyondellBasell (LYB)

This is also the very first year that my annual dividends including options income, are above $100,000 in total – which of course is an absolute major milestone for me. The companies above are a big part of why that is possible. Many of my “winners” are also included there – such as Yara International, Munich Re, Allianz, Altria, British American Tobacco, Simon Property Group and Realty Income. Others, and most of my major winners, are not – such as Fortum, Alstom (OTCPK:ALSMY), Bristol-Myers, VICI Properties, Gaming and Leisure (GLPI), Amgen (AMGN) – though Amgen is now sold, Merck (MRK), Kimberly-Clark (KMB), Deutsche Telekom (OTCQX:DTEGY) and others.

2022 hasn’t been a year of major outperformance in terms of new investments- rather, older investments from 2020-2021 came into their own and really pushed the envelope. It’s also been a year for positioning for the future. That is what I have been doing, buying stock in finance companies, in basic materials, chemicals, industrials, communication, and utilities.

2023 will be an exciting time to see these investments move and see which ones bear fruit first – because I do believe that all of them eventually will, even those that are most pressured at this time.

2023 will also be a year of implementing the new options strategy as a major part of my portfolio. I said 10-15% of my total allocation – but I expect around 40-50% of my actual inflow of private cash to be, in one way or another, used that way for the time being.

The volatility of the market makes this, as I see it, a perfect time to utilize options to either get income or to buy companies at even more attractive prices than the market is currently giving us.

My current portfolio balancing is a bit out of whack as well – I’m looking for higher exposure to REITs and Real estate in general (at least 20%), and a higher than 25% total in combined basic materials and industrials. Financials is fine at 21%, and Communication stocks are “where it is” at 19%. I seek to rebalance this a bit with a heavier hand going into RE next year, as well as pushing down Telco and finance just a bit with more staples and utilities. Where I am extremely cautious are the areas of cyclicals (with exceptions like LVMH (OTCPK:LVMUY) as well as most healthcare and pharma, with quality exceptions.

I expect my current cash position of 4.9% to increase as the year goes on, simply due to the fact that more will be allocated as buying power safety for options plays, but I never want to see it in the double digits – and that’s even with me having locked down a 100% risk-free interest rate of 2.25% for my cash position, which in Sweden is not easy.

Summarizing

I hope I’ve given you a glimpse into my mind and my way of thinking for this year, 2022, and the coming year, 2023.

The biggest thing I want to convey to you here is that: I never stopped investing. Not once.

Even as the market crashed or as we saw wars begin (and I live fairly close to it – I was even close to Russia/St. Petersburg during the initial phases of the conflict and helped a friend of mine get to Sweden before the borders closed), I still invested cash inflow into the market, into dividend-paying attractive companies across the globe. In fact, I did investments while near St. Petersburg and witnessed some very frightening flashbacks to what I can only assume was how things must have been in the Soviet Union.

And despite investing in what was inarguably a negative year for the overall market, I still managed to eke out if not a massive gain, a decent one – and one that most certainly, with dividends, beats inflation.

I do not believe that 2023 will be as negative as 2022, in terms of average index returns. I believe it will be negative – but not as negative. And I believe that many of the companies I’ve invested in will start seeing reversals to normalcy in terms of valuation.

Or, if they do not, that’s fine for me as well.

I already know I will have considerable net cash flow incoming both on the private and corporate side next year – cash that I am eager to put to work in whatever opportunities turn out to be the most lucrative at the time.

I am confident – and I believe you can be exceedingly confident, because:

• You are part of a community led by a team of multihyphenate finance professionals from a variety of backgrounds and a myriad of competencies across the entire globe.
• While we cannot forecast the market, I believe we do a good job sifting through the noise and picking out opportunities that more often than not, result in long-term positive RoR and dividends.
• When we are incorrect, we try to correct that as quickly as possible.
• We are transparent, communicative, and open to your feedback and wishes, where we can fulfill them.

And I strongly believe that there are very few places on Seeking Alpha – or the rest of the “finance web” – where you would be better served and helped than here, at the same competitive prices we offer.

It has been an honor and a privilege to talk with, to interact with, and to publish for all of you in 2022 – and I hope you will be around for an exciting 2023 as well when we have many new exciting things planned.

Above all, we’re here to make money. And my intention is to continue to do exactly that – more and better than others, for you, and for myself.