With expiration upon us, we have several trades to place during the holiday-shortened week. All but one position in our two “passive” portfolios (All-Weather, Yale Endowment) have short calls that need to be rolled. Additionally, there is a good chance that I will sell my 2025 LEAPS and extend my duration through buying new 2026 LEAPS. I like to do this when my LEAPS have 10-12 months worth of life. It is possible that I will wait one more expiration cycle before making the transition, but as always, I’ll let everyone know in my numerous trade alerts this week. It’s going to be a busy expiration cycle and a great opportunity to add some new positions.
Current Positions
Click here to access the “Portfolios” section to view each portfolio’s respective positions.
Portfolio Discussion
All-Weather Portfolio
The latest market surge has left the All-Weather portfolio up a respectable 11.6%, with our poor man’s covered call in the Vanguard Total Stock Market ETF (VTI) continuing to do the heavy lifting, up 30.8%.
Our SPDR Gold Shares ETF (GLD) position has been resurgent of late. After being down roughly 20%, our poor man’s covered call position in GLD now sits 17.7% higher.
The performance of the overall portfolio is certainly nothing to write home about, at least at the moment, but the portfolio has been far less volatile and requires far less capital (65% to 85% less) than a stock-based portfolio using the same underlying ETFs. And remember, we initiated this portfolio shortly after the onset of the last bear market.
Nothing has changed from the last few expiration cycles, both bond funds (TLT and IEF) and the commodity fund (DBC) continue to lag behind, but that is the yin-yang protective nature of the All-Weather portfolio just doing its job. That being said, all of our positions continue to outperform their respective ETF benchmarks, once again showing the power of using a poor man’s covered call approach.
All of our short call positions need to be rolled this week including TLT, VTI, IEF, DBC and GLD. I plan to buy back our short calls and immediately sell more call premium.
Yale Endowment Portfolio
Our Yale Endowment portfolio is up 15.6% since initiating back in early June 2022.
Not much has changed from the last expiration cycle. Our S&P 500 (SPY) position is up 24.8%, emerging markets (EEM) is up 4.11%, and the European Union (EFA) is up 15.8%. The three ETFs have led the way for the Yale Endowment Fund while bonds (TIP) and real estate (VNQ) have lagged, even though both are making their way back to breakeven levels.
Much like I stated above in regard to the All-Weather portfolio, the performance of the overall portfolio is certainly nothing to write home about, at least at the moment, but the portfolio has been far less volatile and requires far less capital (65% to 85% less) compared to a stock-based portfolio using the same underlying ETFs. And remember, just like the All-Weather portfolio, we initiated this portfolio shortly after the onset of the last bear market.
All of our positions have short calls that need to be rolled this week.
Dogs (and Small Dogs) of the Dow
Our first year using the Dog-based approach at Cabot came with decent results.
- Dogs of the Dow: -2.0%
- Dogs X: -2.2%
- Small Dogs: 18.9%
- Small Dogs X: 35.3%
The Dogs of the Dow is an investment strategy that involves investing in the 10 Dow Jones Industrial Average stocks with the highest dividend yields. The theory behind the investment strategy is that the highest-yielding stocks have most likely lagged the market and, as a result, are undervalued and due to outperform in the year ahead.
The strategy is implemented by rebalancing the portfolio at the end of each year, selecting the 10 highest-yielding Dow stocks and making equal investments in each security. Some may choose this route, others may decide to simply invest in equal contracts per the underlying stock.
Another alternative to the Dogs of the Dow is taking the 10 highest-yielding Dow stocks and selecting the five cheapest stocks. The strategy is known as the Small Dogs of the Dow. Both portfolios have outperformed the market over the long term.
There are also two other alternatives that I plan on tracking going forward and that is the Dogs X and the Small Dogs X. The Dogs X portfolio consists of the cheapest seven of the Dogs of the Dow stocks. The Small Dogs X consists of the cheapest three out of the five Small Dog stocks.
The returns have been quite impressive. According to DogsoftheDow.com, “Since the turn of the century, the Dogs of the Dow had an average annual total return of roughly 9.5%. The Small Dogs of the Dow have fared even better — gaining an average of 10.0% per year — notable considering that the time period involved included the dot-com bust, a historic financial crisis and a pandemic-induced economic shutdown.” The Dogs X and Small Dogs X have performed even better on average, although portfolio diversification in both approaches is somewhat compromised which can lead to greater volatility.
And when you consider that adding on a poor man’s covered call strategy can increase returns on average by 3-5 times, well, I think all the Dogs strategies are approaches worth using.
The 2024 Dogs (and Small Dogs) of the Dow
Dogs of the Dow and Dogs X
- Amgen (AMGN)*
- Cisco Systems (CSCO)
- Chevron (CVX)*
- Dow (DOW)*
- International Business Machines (IBM)*
- Coca-Cola (KO)
- Johnson & Johnson (JNJ)
- 3M (MMM)*
- Verizon (VZ)*
- Walgreens Boots Alliance (WBA)*
*Denotes stocks that reside in the Dogs X portfolio
Small Dogs of the Dow and Small Dogs X
- Cisco Systems (CSCO)*
- Dow (DOW)
- Coca-Cola (KO)
- Verizon (VZ)*
- Walgreens Boots Alliance (WBA)*
*Denotes stocks that reside in the Small Dogs X portfolio
We recently added all 10 positions that make up the Dogs and the other variations. If you would like to view the 10 trades, please click the following:
Dogs of the Dow Trades: Part 1
Dogs of the Dow: Trades: Part 2
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Warren Buffett’s Patient Investor Portfolio
At the moment, we have three positions (AAPL, GOOGL, TXN) and intend to add several more over the coming weeks, if the market cooperates … again, a statement we’ve been making for quite some time now.
Back in late June we added Alphabet (GOOGL). Since adding the position, we are up 56.5%, while the overall stock is up only 18.6%.
I wish we could say similar things about our position in Texas Instruments (TXN). Our position started off great, but a few sour earnings reports several cycles ago pushed the position lower and, as a result, TXN has yet to fully recover. Our position is down 14%.
Our longest-standing position, AAPL, is up 4.9% after being down close to 25% just a few months ago. But only a month or two ago our position was up over 20%. A rally will obviously help to push our position back to recent highs, and until then we will continue to lower our cost basis by selling more and more call premium.
As I have written in our last few issues, I will be building out the portfolio to a minimum of five positions over the coming expiration cycles, and remember, because this is an active portfolio, we will be rebalancing every month around expiration, with the next one occurring around the January 19 expiration cycle.
James O’Shaughnessy’s Growth/Value Portfolio
Absolutely nothing has changed since last expiration – except the returns. Like the Patient Investor portfolio, my Growth/Value portfolio continues to take a cautious approach. My hope is to add at least two to three positions over the next few expiration cycles. Of course, we’ve been planning this approach for several months, but our indicators and low options premium have kept us on the sidelines, and thankfully so.
However, we did have the good fortune to add a position in TotalEnergies (TTE) back in late June and, thankfully, locked in gains of 60.4% just a few weeks ago. Our average return per trade in the portfolio currently stands at 35.5%.
The market is beginning to accommodate our cautiously optimistic stance, but we’ve said this before only to have Mr. Market pull the rug out from under us. I’ve allowed the passive portfolios (All-Weather and Yale Endowment) to do a lot of the hard work.
Next Live Analyst Briefing with Q&A
Our next Live Analyst Briefing with Q&A is scheduled for today, January 16, 2024, at 12 p.m. ET, where we will be discussing the options market, giving a detailed look at open positions, strategies used, and will have a follow-up with live questions and answers. Register here.
The next Cabot Options Institute – Fundamentals issue
will be published on February 12, 2024.
