(Part 2 of the series, please read By George I Think He Got It Right, the previous post, before reading this one)
What to do with the George Fund? My first inclination is to make no changes, to treat it as a treasured heirloom. It was my grandfather’s, and then my mother’s and now mine. What right do I have to change it? Then the light went on, actually the whole room lit up. Last time I wrote that I never could figure out why my mother never sold the stocks in 30 years of ownership, now I know why. If I was having these feelings now because this was my grandfather’s, her feelings were even more intense. I think she viewed the portfolio as sacred. This reverence was no doubt expressed to me by voice tone and facial expression when she talked about the stocks. (I’m amazed by how you suddenly understand your parents’ difficult decisions when you unexpectedly have to make those same decisions in your life. Also, we communicate values to our children not by what we say, but what we do, including “how” we say it).
The decision about what to do still remained tough. It was almost if the stocks were “alive”. They grew some days, shrank some others and sent gifts (dividend checks) almost every month. Was I going to just sell assets, or was I going to perform surgery?
I needed guidance. Who to go to? I decided to ask the person who knew the fund better than anyone. I decided to ask George. The moment I asked two questions: “What would George think?” And “What would George do now?” I started to make progress. Yes, I tied to “channel” George. This is ironic because I am an investor because of George. As I wrote about a year ago, I have owned stocks literally my entire life because George gave me three stocks when I was born. Also, I had a great uncle who was a day-trader in the 1920’s. How did you day trade then? You caught the trolley every day to the brokerage house downtown. You negotiated a bulk trading rate (wonder how close it was in real terms to $7 trades today) and you watched the “stock ticker” and traded away. He made a good living doing this until the 1929 stock market crash.
What Would George Think?
George would be proud that the fund has done so well over the past 40 years. But I think George would then say, ”Yes, this is good, but somebody needs to do something about these “dog” stocks. Why are they still here? Boy, you’ve got some work to do!”
What would George Do Now?
To answer this one, I had to study the George Fund in careful detail. It is similar to an archeologist studying a find that had been well preserved for a long time period.
You always hear that you should invest what you know. What George knew was food products and retailing. The portfolio does not include any company in these sectors. I think George had seen many companies in these sectors come and go and thought they were not solid investments.
The companies in the George Fund are all (except one) industrial manufactures. There are several “heavy” manufacturing firms. It is also diversified among industrial sectors. There are oil companies, pharmaceutical companies and chemical companies as well. I determined that all of the companies paid dividends when George originally bought the stocks. The only service firm was a railroad company (you have to transport all that heavy stuff).
Before making any changes it is important to establish the purpose for me of this investment. The George Fund will be for me the classic “basket of dividend stocks” that you often read about. The dividends will help pay living expenses in retirement (along with my IRA and 401-K) and the stock portfolio value can then be passed on to my decedents.
What Gets Dumped?
The first part of this is easy. Any company that no longer pays dividends will no longer be in the fund. Of course if the company had to eliminate its dividend, it has had some financial problems and is a weak performer anyway.
The second part of the divesture strategy is brutally tough. Because the top stocks have performed so well, the fund is out of balance. The top stock (a pharmaceutical firm), now makes up over 25% of the portfolio. To maintain diversification and balance, holdings in the top performers must be reduced. This is very difficult to actually do. In addition, some holdings in stocks where the dividends were low will be reduced also.
What to Add?
Obviously no consumer goods or retail stocks will be added. I will add at least one utility and maybe two (Exelon and First Energy look good). Utilities weren’t publically traded when George was buying stock, so that’s why there are none currently in the fund. Utilities make stuff (energy) and pay nice dividends. I probably need a high-tech company to bring the portfolio into the 21st century. It’s difficult to find dividend stocks in this sector. I’m thinking maybe Intel. I also need some healthcare product companies to modernize the group. I’m looking at Baxter and Johnson and Johnson. I may even add a service provider. Both AT&T and Verizon are possibilities. They pay good dividends and should be around for a long time. The other candidates are a natural gas company and a mineral mining (stuff to make stuff with) firm.
The New George Fund
The New George Fund should have around 20 stocks (like the original) that pay decent dividends. I will have changed about 25% of the fund, which means the “base” 75% remains solid. The portfolio will be more diversified, balanced and stronger with less risk than when I began the process. I think George would approve of the changes and that’s far good enough for me. Now it’s time to get some lemonade and enjoy the summer!