The Word for 2012: Tanstaafl

By STEVEN M. SEARS | MORE ARTICLES BY AUTHOR

Remembering that "There Ain't No Such Thing as a Free Lunch" can boost your portfolio's performance.

The tyranny of time momentarily eases as each year ends. Just about everyone, everywhere, reflects on what transpired in the last 12 months, and thinks about what might occur in the New Year. It is cathartic. It is, at least on a personal level, often catalytic.

On Wall Street, the interregnum is neither cathartic, nor particularly catalytic, unless you find it financially refreshing to always be hopeful. If that is true, you are probably a bad investor and horrible trader, so read on.

By mid-December, most banks, large and small, release New Year investment outlooks. They hold media lunches. They get a lot of press. Never mind that many predictions prove wrong, or that most sell-side strategists are always bullish about something, and most stockbrokers are always optimistic. And let's never discuss the reality that the performance of most investors' portfolios always trails that of the benchmark indexes.

YET, INVESTORS RARELY TIRE of the old-wine-in-new-bottles routine. This isn't because they are stupid. Each year's set of predictions about which sector is poised to advance appeals to them, because most are trapped and need to make money to retire or send their kids to college or pay for other big-ticket items.

Since most predictions prove wrong—who thought the financial sector would still be on life support at the end of 2011?—it is better to focus on what is known to work, not on what might work. Make Tanstaafl—There Ain't No Such Thing as a Free Lunch—your 2012 mantra. Rather than wagering on what might be, look for disciplined approaches made truer by time.

Focus on dividends, and yield-enhancing options strategies. Rather than trying to make the next big score, look at stocks that pay healthy dividends. Dividends, after all, account for about 45% of historical equity-investing gains.

Many sophisticated investors did just that in 2011. Some even bought the SPDR S&P Dividend ETF (ticker: SDY), made up of the 60 highest dividend-yielding stocks in the S&P 1500, and shorted the SPDR S&P 500 (SPY). (For the year through Thursday, SDY was up 6% and SPY was up 0.77%.)

In 2012, rather than taking the risk of shorting the Standard & Poor's 500, use the SPDR S&P Dividend list for long stock ideas. Top holdings include Pitney Bowes (PBI), AT&T (T), Leggett & Platt (LEG), Consolidated Edison (ED), Kimberly Clark (KMB), Sysco (SYY) and Clorox (CLX).

At the same time, resolve to master yield-enhancement options strategies. Visit optionseducation.org, a Website funded by the options industry. Study the covered-call strategy that studies have shown to outperform buy-and-hold investing. By selling calls against stocks that they own, or are interested in buying, investors can potentially increase their returns.

SOME COVERED-CALL SALES can generate more money than the actual dividends on the underlying stocks. If the stock isn't called away, the money received for selling the call increases your investment returns.

If the stock is called away, sell a put and try to buy back the shares at a lower price. If you can't repurchase the stock, keep selling puts to generate more conditional dividends. Again, the money received from selling these could exceed the stock's dividend yield. If you do buy the stock because it slid below the put's strike price, the premium will have lowered the purchase price and increased the shares' dividend yield.

Such strategies aren't exotic; some critics might even call them stodgy. So be it. Disagreement makes markets just as surely as focusing on what is known to work, not on what might work, makes good financial sense.

Comments: steve.sears@barrons.com

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花果山

2011年12月25日