Welcome to the 15th episode of the AMM Dividend Growth Podcast. I’m Glenn Busch the lead portfolio manager for the AMM Dividend Growth Strategy.
And I’m coming to you from my new recording studio also known as the laundry room. I had some mic and sound issues with the home office set-up but this set up seems to work and I can start making episodes again.
If this is your first time listening this podcast is an essentially an audio diary of how we’re managing a concentrated dividend growth portfolio. What we’re buying and why, what we’re selling and why, and general updates on positions and our thoughts on how it affects a position in our portfolio.
This episode is short and sweet. It’s a portfolio update episode about why we trimmed Microsoft (MSFT) and Costco (COST).
But first I need to read you our disclaimer.
The short and sweet answer as to why we trimmed Costco and Microsoft is these were rules-based trades. Just like when we trimmed Apple, Visa, and MasterCard earlier this year. Checkout episode 10 for those ones.
We only traded in accounts that had overweight positions in Microsoft or Costco.
We’ve owned Microsoft since the start of the AMM Dividend strategy. We made our first purchase when it was trading below $20 per share. Since then it has enjoyed a tremendous run as the new CEO Satya Nadella transformed Microsoft into a software as a service (SaaS) company and its Azure division into a cloud computing juggernaut.
Before this market correction, Microsoft was already breaching our rules for maximum position size. Then during the correction Microsoft, with its strong cash flow and the surge of people working from home, helped the company outperform during the selloff. Microsoft became too overweight in accounts.
We follow our portfolio rules in good times and bad.
With the recent rally, we took the opportunity to trim Microsoft back down our target weight range.
I’ve said before. One of the hardest things for us to do as a portfolio manager is to trim a winning position. If it continues to go up after we trimmed it, we feel bad. It’s the pain of missing out, it’s our regret aversion kicking in.
Buying into the selloff was only painful because of the stress of managing other people’s money. You know that this is their savings, their retirement money that you’re putting to work and there’s that little voice of doubt and fear questioning your moves. If it was just my money, then it’s game on.
As I record the market is experiencing a nice rally after the initial coronavirus sell-off. And Microsoft continues to perform well. Yeah, we would have been better served letting Microsoft remain overweight and letting it run during this rally.
But, again we created our portfolio rules so that we would follow them in both bull and bear markets.
The rally right now seems like relief rally as maybe the actual human toll of the coronavirus will be better than expected due to the actions of state and local governments with lock downs and social distancing efforts. Don’t get me wrong, I think the human toll so far is unacceptable and could’ve been mitigated further with quick, strong, and decisive leadership. But that is a topic for another type of discussion.
Again, the rally seems like a relief rally because the economic fallout of bringing our economy to a complete stop still needs to work its way through our system. And just like a sell-off can get too extreme and price in the most disastrous outcome like it did, a rally can get ahead of itself and price in only the best outcome.
Every bear market is unique but usually you get a lot of chop. Emotions run high and you get a lot of exaggerated moves.
That being said. We don’t know if this is just a relief rally with another sell-off coming or if that was it.
What we do know is the capital raised from our overweight position in Microsoft can be redeployed into positions we already own that haven’t recovered as much yet and are still trading below our estimates of fair value. Or what we think a normalized estimate of fair value should be. Or we can use this capital to invest in a new position.
Microsoft, like Visa and MasterCard, is still a high conviction idea and it continues to have an overweight position in our portfolio. Our target is 4% for accounts that are 100% invested in the AMM Dividend Growth Strategy.
Costco is another position that outperformed during this sell-off. If you’re going to lock yourself in your house for weeks on end and you need food and supplies where else are you going to shop? And because of this Costco became overweight in some accounts too.
The Costco trade only affected a handful accounts. To trigger a trade an account needed to be overweight and not subject to a short-term capital gain. The few Costco trades were mostly triggered in tax deferred/exempt accounts.
Again, the capital we raise from the sale of Microsoft and Costco will be used to add to other positions in the portfolio or to new positions that we’ve been waiting to buy. We’re also eyeing a couple consumer finance companies that got taken to the woodshed during the selloff.
We think the containment and recovery from the coronavirus will take time, with the economy coming back online in fits and starts. It sounds like it’ll be a trial and error process of lifting stay in place orders, testing religiously, and trying to put down infection flare ups until we have a vaccine or herd immunity. We should have ample opportunity to deploy the capital we’ve raised from these sales.
Although the max pain trade would be for the market to rip higher taking out everyone waiting to buy the next dip and people sitting in cash expecting the next great depression.
We offer the AMM Dividend strategy to individuals and as a separately managed account. Right now, we’re on the Schwab SMA platform so if you’re an advisor that custodies at Schwab or you’re an individual interested in our dividend growth strategy, please give me a call at (858) 755-0909.
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Until next time.