[21]SDB liquidity #selective cashout

See also (the Rebecca post) the affluent often favor Funds over stocks@@

Before I discovered my system of dividend stock picking in 2020, I was using mostly mufu (and FXO + Oanda).

Q: Over 10-20Y, which group is more solid and financially dependable ? Blue-chips (with or without div) vs mufu such as DIVA? (I won’t compare fixed-income.)

I would say blue-chips are more dependable. Warren Buffett (among many) gave Coca-cola as a shining example. You can analyze the Coca-cola business, the moat, the competitive landscape. No such thing with mufu. A fund manager can analyze and include such blue chips. Anyway, I don’t have energy/absorbency for such analysis.

I once liked and increased my commitment in 1) ShentonIncome, with 5% CDY 2) Unifund 3) AllianzUsHY but in each case, the fund performance was not sustainable.

You can buy-n-forget with a blue chip. You can sink in more fund with confidence. Although mufu also supports the same, there are some differences:

• dividend stability .. see section below
• Churn .. Within 10Y, a fund manager can decide to re-balance a portfolio, update “mandate”, or get closed (perhaps after a 30Y run) and replaced by another fund run by the same fund house. I have seen this many time. I think they do these things to maintain or increase AUM. If your favorite blue-chip is (partially) liquidated as a result, you won’t even notice. In contrast, a single blue-chip is a lot more stable and more dependable.
• diversification improves dependability … A tricky point, deserving a separate section below.

— div safety .. is a key difference between blue-chips and funds. If the dividend income is steady (as with some blue-chips), then buy-n-hold is much easier. With mufu, dividend amount is far less stable. Also, management fee is forever erosive esp. when you invest a large amount like 20k. In terms of carefree buy-n-forget, mufu is less dependable.

Beware .. Most big names pay very low CDY, even cut dividends in bad times. In contrast, many steady dividend payers are small or lesser-known companies.

DPR (Div Payout ratio) explains why mufu dividend is far less sustainable or dependable.

See also my small debate on DIVA

See also My case study on AGD fund.

— high similarity between two funds ..

[1] Consider this analog: If you mix a bunch of distinct colors in 10 different “mandates” (allocation schemes), the 10 resulting colors all look similar.

Selectivity (subtle difference) …. enhances my confidence in a portfolio. Out of 10 broad-based funds I look at, probably 8 are very similar and equally “solid“, so selectivity is low.  It’s hard to find one clear “winner” among the 10. By contrast, my blue-chip stock-pick process is more selective, using more criteria. I tend to use my own criteria to identify my own solid and dependable blue-chip. Sometimes, you could stumble on one that fits like a glove.

Higher diversification (across lots of names) improves dependability of the portfolio, but diversification is defeated by correlation. Using two correlated names to achieve diversification is cheating. Two stocks are more uncorrelated than two funds… therefore a better scratch for the itch.

In a down turn, in my portfolio I am more likely to find one savior stock “above water”, and realize a profit.  The diversification (unimpressive between funds [1]) within a fund doesn’t help, since I can’t cash out one savior stock out of a fund!

The other factors below are less about “dependable”…

In theory, I can  check P/E ratio of a blue-chip and notice when a blue chip is undervalued relative to peers. Even if a mufu is as solid as a blue chip, with the mufu I am not allowed to decide when to buy a constituent stock ! To do that I have to break into the “brave new world” of stock-picking (pre-clearance, account mgmt, commissions…)

— Beware of hidden risks with “reputable” stocks … not always dependable.

• Many China companies are state-controlled. However, Vance Chhoa told me China government clamp-down doesn’t target entire sectors.
• Political factors influence many oil companies.
• big tobacco stocks are subject to legislation risks.

— How about a fund consisting of blue-chips? Well, I have no time to analyze each constituent stock. I think many constituents are not good enough (dependable, solid) by my standard.
— how about solid gold? I’m generally negative about gold:

• If fundamental of a business is sound, its price would eventually catch up with its dividend-derived value. The dividend is a constant beacon of dependability to all market participants.
• bid/ask spread and other transaction costs .. reduces liquidity and hurts dependability
• fundamentals .. is harder to assess. Gold is almost all about SnD, which is less dependable
• holding effort (esp. -ve DYOC) .. makes gold less dependable over long term.

Gold has solid advantages over no-dividend blue-chip :

• no competition no replacement
• solid support by all governments