TheDumbMoney (56.63)

Why I Purchased VHT

February 25, 2011 – Comments (0) | RELATED TICKERS: VHT , JNJ , ABT

I just posted this in a pitch as well.  Happy February everyone!

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As part of my monthly stock investment, I am investing the first third of my montly allotment in VHT, which is another low-cost Vanguard ETF, this one focusing exclusively on the health care industry.  It has not escaped my attention that three of the four largest holdings of the ETF are stocks I already own:  JNJ, PFE, and ABT.  I continue to think the first and third of those in particular are undervalued.  But by investing in VHT I can greatly diversify my health care exposure, while still maintaining my bet on the investment future of the health care industry in this country, which is based on its current relative low valuation, and the not-original idea that baby boomers are going to consume a lot of health care.  VHT is probably the best way to bet on that, unless one is a genius stock-picker, which I have increasingly begun to suspect I am not.  As a bonus, it has strongly underperformed the SPY over the past year, as sexier sectors have led the stock rally.  While that underperformance may continue in the short term, if we have a downturn its relative low valuation should provide some insulation, and in the longterm I must keep faith that long-term returns will be greater if a purchase is made at a lower p/e, other things being equal.  The 5-star CAPS rating doesn't hurt, either, as apparently not a single all-star currently downthumbs it, even though all who have upthumbed it are eating red....  I'll post my other two picks for this month later, when I purchase them, likely on Monday.  As always, all my picks are my real money portfolio, and are my only real life picks.  They constitute a small portion of my total assets, the rest of which are in a 401ks, in my house, or in cash emergency savings.  Happy picking!

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I'll add the following:  I continue to think the market is approaching overvaluation.  I continue to think non-superior companies are outperforming superior companies.  Pragmatic Capitalism has a nice little blog up today about the increasing leverage in the market, as shorts collapse and longs get longier: we're at the highest level of leverage since the Lehman collapse.  So speculators can buy on, but long-term investors should be cautious, in my view.  I generally invest every month, but I have four levels:  1) market super undervalued in my view, invest fully each month; 2) one tier more expensive, invest 50% of what I would invest at tier one; 3) market one tier more expensive, invest 25% of what I would invest at tier one; 4) market insane, no monthly stock investment.   Right now I am at tier two, considering shifting to tier three.  Even in my personal-investment portion of my portfolio, which is what is in CAPS, I am starting to build a cash balance, which is currently at 10% of my fund total, and which will increase in coming months. 

Amongst stocks, I along with vastly smarter people, including people like Yachtman, think the best value is in large cap quality stocks.  This guy, at Bronte Capital, has an excellent recent explanation for why, in part, that is true.  In short, when you are buying small caps you are competing with private equity firms, who are buying all of the ones that are undervalued, which drives up the value of small caps, and has particularly done so since private equity firms took off.  So unless you are speculating or just playing CAPS, treat with caution the Fool's seemingly constant exhortation that you will do better buying small caps than buying largecaps, and that large caps are typically efficiently priced.  I doubled my holding in XOM in 2010 between $58 and $65/share, and it's now at what, $85?  While that is somewhat temporary, don't tell me large caps are always efficiently priced.  Statistically, the only thing proven to generate higher returns over time is buying at a generally lower P/E and PEG ratio, and right now large caps quality stocks are, by-and-'large,' where that opportunity exists, to the extent it really exists anywhere right now.

On another totally irrelevant note:  isn't it interesting that the buy thesis for ARMH is both that mobile phone computing will deccelerate the use of standard (laptop, desktop) computers, and that MSFT has included support for it in its next version of Windows for standard computers?  I find that a bit curious, though I understand that even in a declining market for standard computers an increase in ARMH-licensed market share from zero to X will still be a boon.