Transcript of Sam Subramanian’s interview in Dick Davis Investment of the Week

Dick Davis Contributor Interview Series: Sam Subramanian

June 26, 2012

Today we have another installment in our Dick Davis Digest contributor’s interview series. Here’s my conversation with Sam Subramanian, editor of AlphaProfit Sector Investors’ Newsletter.

Chloe Lutts: Let’s start at the beginning. How did you get into investing?

Sam Subramanian: I grew up in Mumbai, India’s financial capital. I naturally got interested in stocks in my childhood. When I came to the U.S. in the early 1980s for my Ph.D. in Chemical Engineering at Syracuse University, I was determined to succeed as a self-directed investor. After completing my Doctorate, I applied my Chemical Engineering skills in research at Ford Motor Company and received 16 U.S. patents.

I then focused on honing my financial expertise. I earned my MBA from the University of Michigan. My work at ExxonMobil, McKinsey and Unocal helped me deepen my expertise in trading and risk management, asset valuation, mergers and acquisitions and bankruptcies.

In 2003, I founded AlphaProfit Investments. I also completed the Series 65 regulatory requirement for investment advisors.

CL: Sounds like you had an wide-ranging career. Why did you decide to found AlphaProfit Investments when you did?

SS: I founded AlphaProfit to help others prosper with the ValuM system, through subscription-based investment newsletters. I developed the ValuM system in the early 1990s to manage my personal investments. The ValuM system helped me build wealth during the boom as well as the bust by investing in the right sectors. This contrasted with horrifying stories of some of my acquaintances losing their lifetime savings in a trice. I felt I should help others build their wealth as well.

CL: Tell me more about the advice you offer.

SS: Currently, I edit and publish two investment newsletters under AlphaProfit’s Premium Service: The flagship AlphaProfit Sector Investors’ Newsletter and the AlphaProfit Fund Investors’ Guide. In the Sector Investors’ Newsletter, I give recommendations on Sector ETFs and Fidelity Select funds. I also offer two sector ETF and two Fidelity Select model portfolios. Additionally, I provide stock recommendations.

In the Fund Investors’ Guide, I give recommendations on best of breed no-load, no-transaction-fee mutual funds. They span domestic, foreign and specialty categories. I also offer a mutual fund model portfolio.

CL: How do you pick the funds and stocks that go in each newsletter?

SS: I select ETFs and sector funds, stocks and mutual funds using the ValuM system. I adapt this holistic system for each investment type: sector ETFs and funds, stocks and mutual funds.

I look for sectors with attractive valuation, strong price momentum and favorable news quality. In news quality, I look for catalysts like regulatory changes and new products or technologies that can spur growth. I select ETFs and sector funds best suited to play the investment thesis. I apply a disciplined sector rotation strategy to ensure the sector portfolios always include the right mix of sectors and industries for maximizing risk-adjusted return.

I evaluate stocks on both fundamental and technical factors. I analyze fundamentals to make sure companies are worthy of committing dollars from quality, valuation and growth perspectives. Technical analysis helps to provide precise buy and sell price points. Lastly, I prefer stocks with unique catalysts that can reduce the time to realize profits while minimizing risk.

In analyzing mutual funds, I go beyond historical performance and expense ratio. I focus on fund management, their investment strategy and risks they take. I look at the near-term prospects for the fund’s holdings relative to the macro-economic milieu. I systematically rotate into funds with favorable market capitalization, investment style and regional characteristics and try to maximize risk-adjusted return.

CL: So what are some of your favorite investments today?

SS: In the U. S., I have been recommending housing-related investments for some time. I continue to like housing. I believe the housing recovery has further to go. Given high levels of uncertainty both in the U. S. and abroad, I also like defensive areas of the market, like utilities and dividend yielding stocks. From a capitalization perspective, I prefer small caps because smaller U. S. companies tend to have less foreign exposure. Among foreign markets, I prefer Asia to Europe.

CL: What have been some of the highlights of publishing the AlphaProfit letters?

SS: With reference to the AlphaProfit Sector Investors’ Newsletter, I consider winning Hulbert Financial’s #1 rank on 12 occasions and being named by MarketWatch as a top-10 investment newsletter as my biggest successes.

I am happy with the value I have been able to add to my subscriber’s accounts. As of April 30, 2012, a dollar invested in the sector model portfolios in 1994 is worth $30.49. This is more than seven times the value of the same investment tracking the S&P 500 index.

Over 80% of the stock recommendations I’ve made since the start of 2009 have made money. On average, each stock recommendation has netted subscribers a 15% gain with a three-month holding period. The No Load NTF Growth model portfolio has gained 64% from the end of 2008 through April 21, 2012, beating its domestic and foreign market combination benchmark by 16%.

CL: What do you see as the biggest challenges for individual investors right now?

SS: As I see it, there are three challenges investors face now. The first challenge is generating enough retirement income. Interest rates are low and this makes earning safe returns difficult. While investors value safety, they are taking more risk to boost their income. Investors are putting money in high-yielding stocks and junk bonds and using covered call strategies in an attempt to boost income. Some are also relying on market timing strategies with leveraged ETFs. In many cases, they do not have an understanding of the risks involved. For example, high-yielding investments may reduce or eliminate their dividends during tough times. Likewise, covered calls do not protect against loss of principal.

The second challenge is striking the right balance between protecting retirement savings and growing them. The 2008 debacle is fresh in investors’ minds. Whenever macro news turns unfavorable and markets become volatile, the immediate tendency is to protect assets by selling investments. This kneejerk reaction has proved costly during the post-2009 rally. By missing the better opportunities, panicky investors are earning lower returns and failing to beat inflation.

The third challenge I see is taxes. Next year, income tax rates are expected to go up for most people above the poverty line. Taxes on dividends are likely to be higher. High-income households could also be subject to a new 3.8% Medicare tax on investment income. Then, there is the whole issue of tax law changes likely over the next couple of years. Limits on tax-free income from municipal bonds and value of personal deductions could be in the offing. So too are higher estate and gift taxes. Many investors would find it challenging to work out a sensible investing strategy for the changing tax landscape.

CL: Is there anything else you would like to add?

SS: Yes. I think it would be useful for readers to know that when someone subscribes to the AlphaProfit Premium Service, he or she will receive stock, ETF, Fidelity Select fund and mutual fund recommendations from systems I have personally developed to protect and grow wealth. I have tested these systems for many years using my own money. I continue to invest my money in each of the recommendations I provide to Premium Service subscribers. I firmly believe in eating my own cooking. In addition to the Premium Service, AlphaProfit also offers a free newsletter, MoneyMatters. To receive the free newsletter, readers can sign up by clicking this link.