Ultimate Bottom Line


A money expert offers wisdom on how best to handle investing.


This is our “Money” issue. In contemplating this theme, my thoughts turned to my good friend Tom Dorsey, president and co-founder of an investment firm based in Richmond, VA. The author of several books on finance and investment, including Point & Figure Charting: The Essential Application for Forecasting and Tracking Market Prices, he is a regular on the financial talk show circuit and the recipient of the Wharton School of Finance Securities Industry Association’s Distinguished Speaker Award. Tom has graciously agreed to step in and take over my column this issue, offering a look at money on the most personal level. —Donna Kelliher, GBTA President and CEO


Tom DorseyMost investors view Wall Street as a foreign entity that is designed only for the wealthiest of us. But that couldn’t be further from the truth. Although investing for one’s future can be complicated, it does not have to be. It can be as simple as understanding basic arithmetic. 


It was once said that the best financial plan is a stock that goes up. Recently the Wall Street Journal did a front page story on me entitled “Money Managers Simple Winning Formula, Buy the Winners.” Since this was a very long piece they broke it up into two different articles. The second was entitled “Everything You Wanted to Know about Investing You Learned in The Fourth Grade.”  Both articles outlined our process for managing indexes at Dorsey, Wright & Associates.


It’s something you are already familiar with. Think about this for a second. If I gave you a list of the 100 best golfers worldwide and asked you to pick who you thought would be in the top 10 at the end of the next quarter, who would you pick? My guess is you would pick the current top ten to be in the top three months from now. Even if I asked you to pick the ones who would be in the top ten after one year, you would probably pick the current top ten. 


At the end of the contest some would have fallen out and some would have moved up, but the majority would still be in the top ten. This is outperformance. It relates to Newton’s Law of motion, which suggests that objects that are in motion tend to stay in motion until an extended force acts upon them. So, in my world this means that stocks that have good fundamentals, in a market that in general is supporting higher prices, and the Point & Figure trend chart pattern clearly shows that demand is in control of the stock, tend to continue to do well. Golfers who have good fundamentals, are in good shape, and at the top of their game, tend to continue to do well. 


Buy the winners.


What if you wanted to keep it even simpler than that? Would you be interested in making an investment in America by buying the whole Standard & Poors 500 (the 500 largest companies in America)? You can do this just like buying a share of IBM. One of the most important investment products that has debuted in the last 20 years is the Exchange Traded Fund (ETF). This product goes back to the 1980s, when the Philadelphia Stock Exchange listed the Cash Index Participation Unit (CIP).


I was asked by the Philadelphia Stock Exchange to travel to 25 venues to educate professional advisors on how to use this new product. There were two CIPs.  One was the Dow Jones Industrial Average, with a symbol of BIG, and the second was the Standard & Poors 500, with a symbol of SNP.  Both were designed to simply track the Dow Jones and the S&P 500 respectively. 


If you wanted to own the Dow Jones Industrial Average 30 stocks, you could now simply buy BIG. Think of it as the 30 Dow stocks wrapped up into a package named BIG and the S&P 500 stocks wrapped up in a package called SNP. Like many things in business, this product was early and thus had a difficult time staying alive. It was later in 1992 that State Street Bank came to market with its ETFs that the investing public was ready to listen. 


The Standard and Poors 500 is made up of the 500 largest companies in America by capitalization. Capitalization is the price of the stock times the number of shares that are outstanding. The symbol for it now is SPX. The symbol for the Dow Jones ETF is now DIA and called the Diamonds. Guess what: 75 percent of all money managers never outperform the returns of the Standard & Poors 500.  What does that mean?  It means that just by buying the Exchange Traded Fund of the S&P 500 you place yourself in the top 25 percent of all money managers. Interesting isn’t it?

 
Now you might be thinking, How do I buy this ETF of the S&P 500? You need a brokerage account. Your bank probably has a discount operation, but if not there are hundreds of companies that provide this service. I’ll bet you’ve heard of Charles Schwab. Or you might have a 401K that provides ETFs in its lineup of funds they offer you for the program. But if not, I’m sure they do have a general stock fund that mirrors the S&P 500.  They all do.  So investing can be as simple as that. Your risk is that if the overall market moves lower, it can produce a loss.  Conversely if it moves up, it can produce a gain.


ETFs also allow you to become more granular in your approach. What if you wanted to just buy leisure and entertainment stocks? There are ETFs that only hold these companies. There are over 6,000 ETFs that trade worldwide. That’s a daunting number, but keep it simple.  Think of ETFs as schools of fish. ETFs are transparent so you can always see what’s under the hood. This is unlike mutual funds, where they typically only produce the top ten holdings. The rest is a secret.  Let’s take a look at the stocks that underlie one of the biggest leisure and entertainment ETFs.


I went to alletf.com and keyed into the search window “leisure,” and “Powershares Dynamic Leisure & Entertainment Exchange Traded Fund” came up with the symbol PEJ.  Digging a little deeper, you will see everything associated with leisure, including restaurants. This is a one-stop place to invest in leisure.

 

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So instead of trying to find one leisure stock, why not just buy the whole group or (school of fish). 

 

Total Holdings of PEJ (30 total)

 

Stock

Ticker

Stock Weighting

Royal Caribbean Cruises Ltd.

RCL

5.32

Restaurant Brands International Inc.

QSR-T

5.14

Carnival Corporation

CCL

4.98

The Walt Disney Company

DIS

4.95

Time Warner Inc.

TWX

4.90

Hilton Worldwide Holdings Inc

HLT

4.88

Chipotle Mexican Grill 'A'

CMG

4.88

Wynn Resorts, Limited

WYNN

4.02

Dave & Busters Entertainment

PLAY

3.01

Speedway Motorsports, Inc.

TRK

3.00

Diamond Resorts International, Inc.

DRII

2.98

Orbitz Worldwide, Inc.

OWW

2.96

The Habit Restaurants Inc

HABT

2.88

HSN, Inc.

HSNI

2.83

Jack in the Box, Inc.

JACK

2.82

Norwegian Cruise Line Holdings Ltd.

NCLH

2.82

Fiesta Restaurant Group Inc

FRGI

2.79

Choice Hotels

CHH

2.79

Vail Resorts Inc

MTN

2.78

Denny's Corporation

DENN

2.77

Brinker International Inc

EAT

2.75

Wyndham Worldwide Corporation

WYN

2.73

Scripps Networks Interactive

SNI

2.72

DineEquity, Inc.

DIN

2.72

Domino's Pizza, Inc.

DPZ

2.71

Marriott Vacations Worldwide Corporation

VAC

2.67

BJ's Restaurants Inc.

BJRI

2.65

Sonic Corporation

SONC

2.64

Popeyes Louisiana Kitchen Inc.

PLKI

2.63

Starz-Liberty Capital

STRZA

2.30

 

To find out exactly how this ETF is managed and everything else you could want to know, either Google PEJ or put this internet address in your address bar. https://www.invesco.com/portal/site/us/financial-professional/etfs/product-detail?productId=pej

 

When you become more familiar with ETFs you can begin to piece your total portfolio together. It’s kind of like making dinner. You might have a main course, (Standard & Poors 500), a side dish (Leisure & Entertainment, International Developed and Emerging Markets) and possibly round out the dinner with dessert (a treasury bonds ETF). It’s really fun and easy. Guess what the best way to learn all about it is? Just Google “Exchange Traded Funds” and you are on your way.