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January, 2008: 2 5 12 21 27

Disclaimer - IMPORTANT - Read this first!

Investor's Journal is a diary focused strictly on investments and personal finance issues, primarily from a contrarian and retiree point of view. Follow along with an average guy's failures and successes as he learns, by trial and error, the fine art of value investing.

(The statistics combine portfolio open and closed position results and are effective as of the end of trading 12/31/07. Dividend income has not been included in the portfolios' performance. Commissions, though, have been subtracted from the portfolio asset results, but not from the SPX gains.)

( *since inception, 10/4/04)
(**SPX is used as a proxy for the S&P 500 Index.)

Observations about the portfolio results:

• Even including the dividends, the total return figures would now show the two main tracked portfolios to be quite disparate in their results. With conservative dividend rates of about .5% for the open plus closed position LL assets and about 1.7% for the open plus closed position CV stocks, the annualized LL total return to date would only be around 3.5%, and the average annualized CV total return to date would be around 16.3%.

• As usual, I believe the longer term record of the closed positions more accurately reflects the potential and pitfalls of the respective portfolios than do the short-term swings of the open position assets. If we look only at the closed positions, we see that both the LLs and the CV assets have held up better. The LL closed position performance has averaged 10.88% compounded annually, for a total return of about 11.4% a year, once a conservative LL dividend of 0.5% has been included. The CV closed position performance has averaged 17.95% compounded annually, for a total return of about 19.7% a year, once a conservative CV dividend of 1.7% has been included.

• Thus, for a hypothetical 50/50 CV/LL Blend, the closed position figures would indicate an annualized total return record of about 15.5%. Incidentally, in my opinion this is not so depleted a return, despite the much lower relative performance of the LLs of late, as to warrant one's selling off one's LLs early, so I would continue to suggest that readers (who have been following the entries here and perhaps buying assets I have suggested) keep their LL stocks till either bought out or held a year and a day.

• The 50/50 CV/LL Blend's overall (open plus closed positions) annualized total return, though, is estimated, given the figures through 12/07, at only about 10.1%, roughly comparable to the total return for the buy and hold investment in the S&P 500 Index (with dividends) begun on 10/4/04.

• The 50/50 CV/LL Blend's combined closed positions since inception now number 120. Of these, 44 have turned out to be losing stocks in the periods they were held, while there were 76 winners. The win to loss ratio has thus fallen substantially since the analysis of the portfolios a year ago (when it was 2.10) to a more daunting and risky 1.73. The losers were 37% of the total.

• Although a few more CV stock picks than previously turned out to be losers within their closed position hold intervals, much of the worsening of the overall win to loss ratio has been due to a higher number of losses among the LL assets. In the last quarter alone, there were only 2 winners but 5 losers among LLs that were sold (or bought out for cash) from 10/1/07-12/31/07. Overall, LLs have had just 31 closed position winners to 20 losers, a win to loss ratio of only 1.55. (In contrast, the overall win to loss ratio for the CV assets remains nicely higher, at 1.88, despite the market averages' recent negative and volatile quarter.)

• Since the LL assets have now shown that they are too vulnerable to downward and/or volatile market conditions, resulting in severely increased loss rates and reduced returns, I am no longer recommending that the LL strategy be used. CV assets, however, seem to still be proving their worth and so look like a good way over time to increase one's investment wealth.

• Because there is always the possibility of unforeseen developments spooking the stock market further and causing large losses (at least in paper value) to one's nest egg, I caution that it seems best to maintain a reserve of short-term or cash equivalent assets. The individual may vary the percentage of total financial assets set aside in this manner. My own preference is to begin with one-third in such reserves, two-thirds in equities, then to rebalance if there is more than a 5% shift in the relative valuations due to market strength or weakness.

• With careful selection, especially among exchange traded funds that are often available at a discount, it should now be possible to obtain a roughly 5% or better return on relatively safe assets to be held in a conservative bond, municipal bond or cash equivalent reserves category of assets. If one's assets of this type average around 1/3 of the portfolio, if 2/3 are devoted to a 50/50 blend of previously recommended CV and LL holdings (till bought out or held for a year and a day) plus subsequent CV selections, and if the portfolios' performances to date were to prove the norm, the resulting nest egg should be relatively secure, still safer than a 100% investment in the S&P 500 Index, for instance, and yet one's total return would be roughly 13-15% a year overall, significantly better than the long-term records of the major market averages.

• I caution, however, that with so far only about three and a quarter years' experience, there is as yet too little data to say with assurance that this will be the outcome. The best that may be stated definitely is that the results so far continue to be encouraging for Classic Value assets, while at the same time they suggest that the Leapin' Lizards strategy (of buying low P/S and low debt but high momentum stocks) probably should now be avoided.

1/5/08-With this entry, I am beginning a new hypothetical portfolio, touched on late last month, Wild Wizards (WW), assets that are likely to be rather volatile but have the potential, like the mythical alchemists of old, to turn small dross investments into piles of gold.

As a minimum, WW will have some financial advisor support, low debt, and positive free cash flow. Though not one of the minimum requirements, they will typically also have momentum in their favor. Selections will be the best such picks I can find at the time they are recommended. The expectation is that they will be short-term holdings. My hope, of course, is that, despite WW having individually greater risk than the value picks I make on alternate weeks, the returns will more than offset this handicap. But, as was true for Leapin Lizards (LL), there are no guarantees. This experimental contest may go on for only a few months or for several years. We shall just have to see how it plays out.

I plan to hold WW for at least a month, then sell if they no longer appear to hold a candle to other WW candidates. I shall, up to a portfolio of 25 such assets, recommend enough new WW equities to assure the portfolio grows by one per WW focus entry. Thus, if I suggest the sale of one, I'll cite two for purchase, etc., for a net gain each time of 1, till the ideal portfolio size has been achieved, after which for each recommended sale there will be just one suggested buy.

My top ten equities to mention this time (and these will often include Berkshire Hathaway [when appropriate] plus interesting WW and/or Classic Value [CV] assets) are: AAPL; BRK/A (BRK/B); CF; CPRT; DLB; FSTR; ISRG; JEC; POT; and WFR.

Since the last entry, no prior (CV or LL) hypothetical portfolio purchases have been held for a year or more, so sales are not indicated at this time.

My focus currently is on the first Wild Wizards (WW) selection, Copart, Inc. (CPRT) (recent price $40.64). CPRT's trailing price to earnings ratio is 26.25. Its forward P/E is estimated at 20.02. The asset's market-capitalization size is mid-cap: $3.62 billion. Copart, Inc. has no dividend. Its PEG ratio is 1.47. The shareholder equity to total assets ratio is 0.88. The price to sales ratio is 6.08. CPRT's price to book value is 3.99. There is positive free cash flow. Return on equity is 16.16%. Debt to equity is 0.00. The current ratio is 3.26. In the last 52 weeks, CPRT has risen 32.33% (compared with a less than 1% increase for the S&P 500 Index in that period). This stock has advisor support, low debt, positive free cash flow, and modest momentum in its favor.

Copart, Inc. will be added to our brand new WW tracking portfolio at its market price early on Monday, 1/7/08.

1/12/08-Since the last entry, our Classic Value (CV) pick, FTO, purchased on 1/8/07, has been held over a year. It will be sold at the early market price Monday morning. It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 1/8/07 to early 1/14/08 per share performance. Through the close of trading on 1/11/08, after subtracting a commission (while not counting any dividends), FTO had been up 26.98% in the past 12(+) months.

My top-ten equities for mention today are: AEIS; BRKS; HLYS; KELYA; IVAC; NTRI; NTY; RTEC; TDW; and VSH.

The focus this time is on a new Classic Value (CV) selection, Kelly Services, Inc. (KELYA) (recent price $16.50). KELYA's trailing price to earnings ratio is just 9.08. The asset's market-capitalization size is micro-cap: $595.42 million. Its shareholder equity to total assets ratio is 0.51. Kelly Services, Inc., has a 3.10% dividend, with a dividend payout ratio of 0.29. The PEG ratio is 0.59. The price to sales ratio is 0.11. KELYA's price to book value is only 0.77. There is positive free cash flow. Return on equity is 7.38%. Debt to equity is 0.10. The current ratio is 1.77. This stock has low price to earnings, price to book value, debt, price to sales, and PEG ratio, plus a nice dividend in its favor. It meets Ben Graham value and safety criteria as a bargain stock.

Kelly Services, Inc., will be added to our CV tracking portfolio at its market price early on Monday, 1/14/08.

It may be worth mentioning that, though (for simplicity of tracking and comparing the hypothetical portfolios) I am selling assets once they have simply been held a year and a day, the individual investor may alter this sell strategy to assure a somewhat higher winners to losers ratio. For example, so long as a CV stock still has a price lower than its value (a P/Bk of .8 or below, for instance) at the time of review, unless there is a need for the funds, there may be no particular reason to sell then.

Alternatively, except when shares are given up due to a merger/cash buyout, one might hold CV securities at least a year and a day and otherwise until: they show net profits; or the price to value ratios are no longer in the investor's favor, due to some change in company net assets or profitability (P/Bk 1.2 or higher, to use the illustration above); or the equities have been held for 30 months, whichever first.

At this time, despite the intervening ups and downs of the markets, with simply a minimum hold rule (till bought out or for at least a year-and-a-day), the long-term average closed position total return for our CV suggested assets has been roughly 20% a year, and there have been about 2 winners for each loser.

However, by using a different sell approach, such as that mentioned here, it seems reasonable to expect the profit to loss ratio would be better and that the annual total return might be somewhat higher. (Of course, one also should do his or her own research before buying or selling. Please remember too that in equity investing there are no guarantees!)

1/21/08-Since the last entry, our Leapin' Lizards (LL) pick, SYX, purchased on 1/16/07, has been held over a year. It will be sold at the early market price Tuesday morning. It will then be removed from the LL open positions portfolio, and its closed position info recorded, based on the 1/16/07 to early 1/22/08 per share performance. Through the close of trading on 1/18/08, after subtracting a commission (while not counting any dividends), SYX had been down 49.12% in the past 12(+) months.

My top-ten equities for mention today are: AEIS; ATW; BRKS; CVD; IVAC; KELYA; MON; NTY; RTEC; and TDW.

My focus currently is on a new Wild Wizards (WW) selection, Atwood Oceanics, Inc. (ATW) (recent price $83.65). ATW's trailing price to earnings ratio is 19.14. Its forward P/E is estimated at 7.94. The asset's market-capitalization size is mid-cap: $2.65 billion. Atwood Oceanics, Inc. has no dividend. Its PEG ratio is 0.18. The shareholder equity to total assets ratio is 0.86. The price to sales ratio is 6.49. ATW's price to book value is 4.22. There is positive free cash flow. Return on equity is 25.87%. Debt to equity is 0.03. The current ratio is 3.75. In the last 52 weeks, ATW has risen 82.68% (compared with a several percentage loss for the S&P 500 Index in that period). This stock has advisory support, low debt, positive free cash flow, low PEG, and healthy momentum in its favor.

Atwood Oceanics, Inc. will be added to our WW tracking portfolio at its market price early on Tuesday, 1/22/08.

1/27/08-Since the last entry, there have been no assets held for at least a year in any of our tracked portfolios, so sales are not in order at this time.

My top-ten equities for mention today are: AEIS; BRKS; FTO; IVAC; LNDC; NTY; TBI; TDW; TGIS; and VSH.

The focus this time is on a new Classic Value (CV) selection, Landec Corp. (LNDC) (recent price $9.74). LNDC's trailing price to earnings ratio is just 7.71. The PEG ratio is 0.64. The asset's market-capitalization size is nano-cap: $254.12 million. Landec Corp. has no dividend. The price to sales ratio is 1.06. LNDC's price to book value is 2.37. There is positive free cash flow. Return on equity is 37.71%. Debt to equity is 0.00. The current ratio is 3.69. The shareholders' equity to total assets ratio is 0.79. This stock has low price to earnings, low debt, and a relatively low PEG ratio in its favor. It meets Benjamin Graham's bargain stock safety and value criteria.

Landec Corp. will be added to our CV tracking portfolio as well as our own nest egg at its market price early on Monday, 1/28/08.

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