January, 2009: 1 12 26
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.

1/1/09-Here's our own nest egg 2008 year-end summary:

I thought 2007 was volatile and challenging, but last year of course was far worse. In fact, I believe for the economy, housing, financial institutions, the domestic auto industry, commodities, and equities, taken together, it was the most difficult 12-month period in my lifetime. The NASDAQ, for instance, fell 40%, its most severe one-year decline ever. Most of the losses occurred in just the final one-third of 2008. Among several more severe outcomes, the traditional rule that the stock market can be depended on to go up in presidential election years was clearly shattered.

Perhaps due to low debt and being well diversified among investment classes before the stock market's cascade began in September, then low price to value purchases (using our cash reserves or bond funds) once the decline had commenced, and a modest rally in stocks during recent weeks, our overall portfolio's losses were limited to 17.7%, about comparable to those we had in 2002.

There is no guarantee we have now seen the end of this bear market and that 2009 will end with a great turnaround. In fact, a case could be made that, just as in the early years of the Great Depression, any rallies experienced going forward might in retrospect wind up looking more like good selling opportunities than reasons for encouragement. Are we just at the beginning of a similar deflationary debacle? Time, as they say, will tell. However, historically, when the stock market has been down a great deal one year, it is significantly up in the next year or two. May it be so in this instance as well!

Personally, I do not believe we are out of the woods. If the economy gets much worse, it is likely the stock market will be seeing new lows before things get much better. But I also cannot counsel getting out of the market. Rather, dollar-cost-average investing in excellent price to value securities and otherwise maintaining a low debt, well allocated overall portfolio seems the way to go. If we are fortunate and there are major surges in stocks, these might be good times to reallocate some, keeping one's preferred allocation percentages, and thus selling high what was purchased low.

Our overall portfolio of equities plus non-equities is up 29.6%, after subtracting excess expenses (those beyond a modest retirement income) since I retired on 12/31/01, and 53.5% since the end of 2002, the low year of the last bear market. By contrast, the S&P 500 Index is down 21.3% since 12/31/01 and up only 2.6% since the end of 2002. (Were it not for needing to use some of our principal for expenses, the last seven years' performance would be significantly higher.)

The nest egg's total equity book value now stands at $530,700 or 13.8% higher than its level a year ago. (The target remains an annual rise in our stocks plus stock mutual fund book value of at least 12.5%. So far, since the end of 2002, its compound average annual gain has been 14.1%.)

The equity holdings' price to book value stands at a record year-end low for us of 0.81, well under both the current and historical average P/Bk for a broad index of U.S. stocks, lending support for the nest egg continuing to outperform the major markets, with less overall risk. At equities' deepest down part of 2008's final quarter, our price to book value had temporarily dipped to only 0.74. We have regained $67,000 in market value since then.

Non-mortgage debt at the end of 2008 is zero. Our 5½% fixed rate mortgage balance is $27,526. So, total debt is just 3.8% of net assets.

And here is the performance summary for the tracked (hypothetical) portfolios, through the fourth quarter of 2008:

Portfolio or BlendAverage Asset
Hold Period
Classic Value*0.86 year+0.37%+0.43%
Leapin' Lizards*1.00(+) year<3.95>%<3.94>%
50/50 CV/LL Blend*0.93 year<3.58>%<3.51>%
SPX* **4.24 years<20.44>%<5.25>%

(The statistics combine portfolio open and closed position results and are effective as of the end of trading 12/31/08. Dividend income has not been included in the table's performance figures. 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 show the two main tracked portfolios to be 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 be a loss of around 3.4%, and the average annualized CV total return to date would be around +2.1%, a difference of about 5.5% in CV's favor.

  • I believe the longer term record of the closed positions more accurately reflects potential and pitfalls of the respective portfolios than do the short-term swings of the open position assets. In this case, there are no more LL open positions, since we had focused on our last LL assets, and all of them now sold, over a year ago. Thus, the above figures already include all that portfolio's closed position holdings.

  • For the CV assets, the closed position figures show up relatively well vs. their open plus closed positions record. The CV closed position performance has averaged +6.21% compounded annually, for a total return of about 7.9% 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 +4.5%, still a much better return than that of a buy-and-hold S&P 500 Index approach since 10/4/04.

  • There have so far been 90 CV closed position assets and 74 LL closed positions. Of these, 40, or 44.4%, of the CV assets and 41, or 55.4%, of the LL assets turned out to be losers by the sale date. (As indicated before, I no longer believe it worthwhile to pursue a LL investing approach. It will therefore not be followed here in future.)

  • It is a good and open question whether there would have been significantly fewer losing positions among CV stocks if the hold period had been longer. This has been quite a turbulent period for equity investing. It might turn out that returns would have been even lower with a two-year hold period. I do not know. The pioneer value stock researcher, scholar, and investor, Ben Graham, had suggested for the average investor who chooses to trade individual stocks (as opposed to mutual funds) that he or she sell value assets once they have attained full value within their market prices, or once up 50%, or by the end of the second calendar year after purchase, whichever first. However, in practice, he and his firm would often simply hold assets until their prices reflected full value, rather than selling earlier if they were up by an arbitrary 50%, etc. As yet, I do not know what might turn out to be their best sell strategy. It is clear, however, that any of several approaches can be profitable, usually more so than for the general market.

  • As has been dramatically illustrated over the past 12 months, because there is always the possibility of unforeseen developments spooking the stock market further and causing large losses to one's nest egg (at least in paper value), 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, and then to rebalance if there is more than a 5 or 10% shift in the relative valuations due to periods of market strength or weakness.

1/12/09-Since the last entry, there have been no assets held for at least a year, so sales are not now in order among the Classic Value (CV) portfolio securities.

My top-ten equities for mention today are: ANF; CDI; ESV; FRD; GIFI; MEI; MOV; MUR; SCHN; and SYNL.

The focus this time is on a new Classic Value (CV) selection, Murphy Oil Corp. (MUR) (recent price $45.28). MUR's trailing price to earnings ratio is just 4.79. The forward P/E is estimated at 11.85. The PEG ratio is only 0.29. The asset's market-capitalization size is large-cap: $8.63 billion. Murphy Oil Corp. has a 1.80% dividend, with a dividend payout ratio of 0.09. The price to sales ratio is low at 0.32. MUR's price to book value is 1.39. There is positive free cash flow, with a price to cash flow of only 3.70. Return on equity is above average at 31.91%. Debt to equity is 0.16. The current ratio is 1.58. This stock has high return on equity, quite low P/E, P/S, P/CF, and PEG ratios, below average P/Bk, and low debt in its favor. It meets Benjamin Graham's bargain stock safety and value criteria.

Murphy Oil Corp. will be added to our CV tracking portfolio, as well as our own nest egg, at its market price early on Tuesday, 1/13/09.

1/26/09-Since the last entry, our Classic Value (CV) pick, KELYA, purchased on 1/14/08, has been held over a year. It will be sold at the early afternoon market price on Monday (today). It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 1/14/08 to 1/26/09 per share performance. Through the close of trading on 1/23/09, after subtracting a commission (while not counting any dividends), KELYA had been down 40.00% in the past 12(+) months.

My top-ten equities for mention today are: BHI; CIR; ESV; GIFI; ISIL; IXYS; LUFK; MUR; TDW; and TIE.

The focus this time is on a new Classic Value (CV) selection, Lufkin Industries, Inc. (LUFK) (recent price $33.69). LUFK's trailing price to earnings ratio is just 6.16. The forward P/E is estimated at 7.96. The PEG ratio is only 0.42. The asset's market-capitalization size is micro-cap: $500.46 million. Lufkin Industries, Inc. has a 2.10% dividend, with a dividend payout ratio of 0.18. The price to sales ratio is 0.71. LUFK's price to book value is below average, at 1.15. The shareholders equity to total assets ratio is 0.78. There is positive free cash flow, with a price to cash flow of only 4.50. Return on equity is above average at 20.76%. Debt to equity is 0.00. The current ratio is 4.28. This stock has above the norm return on equity, low P/E, P/CF, and PEG ratios, below average P/Bk, and zero debt in its favor. It meets Benjamin Graham's bargain stock safety and value criteria.

Lufkin Industries, Inc. will be added to our CV tracking portfolio, as well as our own nest egg, at its early afternoon market price today.

Disclaimer and Disclosure Statement
Much as I'd love it to be otherwise, I receive no payment of any kind for disseminating investment information unless, by some fluke, millions of folks, on the strength of these entries, start buying shares of stock I own, a possibility only slightly less likely than our being destroyed by a large meteorite. Do not follow any suggestions made in Investor's Journal as if I were a professional.

Neither I nor Investor's Journal will be responsible for losses by anyone who obtained ideas from this site.

This diary is intended for personal interest and general information only. You are advised to do your own research (as well as to consult highly compensated professionals) before spending money on anything.

I know of no reason anyone should take my financial musings seriously. At best I am a dedicated amateur providing a bit of investment-related insight and entertainment, at worst an amusing diversion.

My wife, Fran, and I may at times own shares of some of the assets mentioned here. But neither of us receive any benefit from reference to them, unless you count the mutual misery when we get it wrong, or the opportunity to gloat when we get it right.

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