Mr. Wonderful’s "O Shares" Offers a Diversified, Dividend-Focused Approach to Investing
CNBC’s Jim Cramer, host of "Mad Money," sat down with Kevin O’Leary, the popular "Shark Tank" investor, to discuss O’Leary’s new rule-based ETFs, dubbed "O Shares," and how they offer a unique approach to investing in the current market.
O’Leary, known for his blunt and often controversial opinions, is a vocal advocate for diversification in portfolios, particularly for those who have not yet accumulated a significant nest egg. He advises these investors to focus on index funds and ETFs until they reach a certain level of capital, typically around $10,000.
However, for seasoned investors, O’Leary believes there’s room for a more targeted strategy. His O Shares ETFs focus on dividends, seeking out high-quality dividend stocks within the S&P 500 that are 20% less volatile than the broader market and have healthy balance sheets.
"Over the last 40 years, dividends have produced 70% of the gains in the S&P 500," O’Leary states. "So this strikes me as a pretty good plan."
Since its inception last July, O Shares has outperformed the S&P 500 by 4%, including dividends. "It’s not surprising to me," Cramer said. "This is exactly the kind of diversification that investors need in a volatile market."
O’Leary’s decision to focus on dividends stemmed from his observation that many traditional ETFs can become overly concentrated in a few large-cap stocks, violating his personal principle of never holding more than 5% of any one company in his portfolio. To address this, O’Leary collaborated with FTSE Russell to create an "rules-based" ETF, ensuring that no single stock exceeds 5% of the portfolio and no sector exceeds 20%, while prioritizing dividend payments and a focus on quality of cash flow.
The conversation extended beyond O Shares, touching on the current market climate. O’Leary dismissed the recent market volatility driven by concerns over North Korea as a "permanent Dr No movie," arguing that the real driver of Asian market growth is its robust earnings performance.
O’Leary also shared his positive outlook for the US economy, specifically highlighting the potential for strong growth in sectors outside of energy, which is currently experiencing pressure due to low oil prices. "I’m saying to everybody, look, it’s terrible for oil, I get it, but the other nine sectors of the S&P are going to rock because oil is free," O’Leary said. "If you give me an economy that has no energy costs, I’m loving it."
Finally, O’Leary discussed the surprising demographic shift in "Shark Tank" viewership. The show, which originally aimed to educate young entrepreneurs, has become increasingly popular among young women, particularly those aged 9-18. O’Leary believes this surge in interest reflects the increasing drive and ambition of young women, attributing their success to their "better time management skills, lower risk profiles, and goal-oriented nature."
"I’m not trying to be sexist, I’m trying to make money," O’Leary said, adding with a laugh. "Women kill it in business."
This interview provides a fascinating insight into the mind of one of the most successful investors in the world, offering a unique perspective on the current market conditions, the importance of diversification, and the growing influence of women in the business world.
Kevin O’Leary’s New Rule-Based ETFs: A Diversification Play for Investors
Kevin O’Leary, the "Mr. Wonderful" of ABC’s Shark Tank, has partnered with FTSE Russell to launch a suite of rule-based ETFs, including one called O Shares (OUSA), focused on the highest-quality dividend-paying stocks in the S&P 500. This ETF only holds stocks with healthy balance sheets that are 20% less volatile than the overall market, aligning with O’Leary’s belief that dividends represent a significant source of returns. OUSA is already outperforming the S&P 500 by 4% since its inception last July. In this interview, O’Leary discusses the rationale behind his new ETFs, his optimistic outlook for 2016, and the surprising demographic driving his success on Shark Tank.
Key Takeaways
- Diversification: O’Leary emphasizes the importance of diversification, especially for investors with limited capital. He recommends index funds or ETFs that mirror the S&P 500 as a starting point.
- Dividend Focus: O’Leary believes that dividends are a crucial component of long-term returns, highlighting that they have contributed 70% of the S&P 500’s gains over the past 40 years.
- Rule-Based Investing: O’Leary’s new ETFs are built on rule-based investment strategies, designed to minimize risk and ensure diversification. OUSA’s rules focus on volatility, quality of cash flow, and sector allocation.
- Optimistic Outlook: O’Leary is optimistic about the future of the economy, particularly for sectors benefiting from low input costs stemming from the declining oil price. He expects robust earnings growth across sectors outside of energy.
- Women in Business: O’Leary highlights the growing number of successful businesswomen, citing data showing that his private deals with women-led companies consistently deliver strong returns.
The Power of Dividends and Diversification
O’Leary makes a strong case for diversification, particularly for investors who are not yet ready to invest in individual stocks. He argues that index funds provide the necessary broad exposure to the market, making them the optimal choice for most investors with under $10,000 in their 401(k) or IRA.
"Like I’ve said a zillion times, investing in individual stocks is not for everybody, and until you saved up at least $10,000 in your 401(k) or IRA, you really got very little business owning anything other than an index fund because that’s the only real way you can get that diversification you need until you have more money to work with," O’Leary states.
He elaborates on his preference for rule-based investing, particularly through ETFs: "The idea here is that this fund will only hold dividend-paying stocks that are 20% less volatile than the overall market and have healthy balance sheets," he says. "Given that over the last 40 years, dividends have produced 70% of the gains in the S&P 500, this strikes me as a pretty good plan."
O’Leary’s Optimistic Outlooks
O’Leary dispels fears surrounding the recent geopolitical instability in Asia, encouraging investors to focus on earnings fundamentals rather than reacting to short-term events.
"What happened today with North Korea or over the weekend is, of course, another test. If you go back and look at every time this leader has done this — surprise the world with an atomic bomb test — 90 days later you’re way up. He’s almost like a reverse buying signal," he explains.
He also expresses a bullish stance on the European markets, highlighting Europe’s outperformance in 2015. O’Leary’s rule-based approach has been applied to his European ETF, further bolstering his optimistic view.
O’Leary concludes by stressing his strong belief in the overall economy’s health, despite the challenges in the energy sector. "I know it’s bad for that sector — grown men are weeping. I get it. Oil’s going to 25; I get it. But what about the other nine sectors of the economy that now have the lowest input costs they’ve ever had? So I’m saying to everybody, look, it’s terrible for oil; I get it. It’s 70% of the S&P; I get it. This earning season we’re about to hit, Jim, I think we’re going to get 5 to 6% growth, ex-oil, ex-energy. Okay, leave energy out of it and look at everywhere else — it’s getting low input costs, so the other nine sectors of the S&P are going to rock because oil is free."
The Power of Women in Business
O’Leary shares a surprising insight into the demographic driving his success on Shark Tank: women. He reveals that the fastest-growing segment of his audience consists of 9-to-18-year-old girls who are deeply interested in business.
"When we started Shark Tank, we never thought a show about business would attract so many young people, right? Now one of our fastest-growing demographics are 9 to 18-year-old women."
Furthermore, O’Leary discloses that his highest-performing private deals are consistently those led or owned by women. This data compels him to seek out women-led businesses, attributing their success to traits like better time management skills and lower-risk profiles.
"Last year, PwC, my audit firm, [said], “Why don’t we check it and have a look at all these ones?” I’ve got over 30 deals now. “Which one of your private deals are working, which ones aren’t?” And they did a study based on the ones that were actually successfully returning capital. All right, get this: not some of my returns, all of my returns are coming from companies led or owned by women."
O’Leary’s insights into the success of women in business, coupled with his optimistic outlook on the broader market, provide a refreshing perspective on the current investment landscape. By emphasizing the power of dividends and diversification, he offers practical advice for investors of all levels, particularly those seeking to navigate the complexities of the stock market.
