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January, 2011: 1 9 16 17 24 30

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.

Here is the Low Price to Book, Low Price to Earnings, Five-Star Stocks, Double Winners, and S&P 500 Index performance summary, through the final quarter of 2010:

(The statistics combine portfolio open and closed position results and are effective as of the close of trading 12/31/10. Dividend income has not been included in the table's performance figures. Commissions, though, have been subtracted from each of the portfolio asset results, but not from the SPX performance.)

( *Analyses are for the following portfolio investment durations: Five-Star Stocks, 5/14/09-11/29/10 (when our final two Five-Star Stocks were sold); Low Price to Book Value, 5/14/09-12/31/10; Low Price to Earnings, 1/14/10-12/31/10; and Double Winners, 11/29/10-12/31/10.)
(**SPX is used as a proxy for the S&P 500 Index and its buy-and-hold performance in the period 5/14/09-12/31/10.)

Observations about the portfolios:

• As usual, these results should be viewed with caution. Some believe records of ten years or longer are required to properly establish a particular investment strategy's efficacy or to compare different approaches with statistical confidence.

• Nonetheless, it is heartening to have again seen a substantial improvement in both the Low P/Bk and the Low P/E portfolio records since the end of the last quarter, as we had also noted three months ago. Enthusiasm about these increases is tempered by awareness that one might have done better in the same period to have simply invested in the S&P 500 Index. It is likely though that, on a risk-adjusted basis and once multiple purchases' commissions and fees (for buying a S&P 500 Index mutual fund, closed-end fund, or exchange-traded fund on each of the purchase dates for which one of the low price to value methods had purchases) and dividends (for the Low P/Bk assets) are properly factored in, to make this more of an apples to apples comparison, the Low Price to Book Value strategy, at least, would beat that of a S&P 500 Index investment under most market conditions.

• It is also instructive to look at closed position results for the value approaches. To me, the records once assets have been sold are of more practical relevance than when combined (as with the chart above) with open positions, for the latter as yet represent incomplete or potential, rather than actual, returns. As Warren Buffett or Ben Graham have noted, in most cases the investment "batter" can "wait for the right pitch," so to speak, not selling until a stock price meets one's sell criteria, whereas the current market price may well be and often is significantly below this level.

• For 5/14/09 through this just completed quarter, the Low Price to Book Value closed positions were up 26.65%, with an average hold period of 0.94, for an annualized return of 28.55%.

• From its inception (1/14/10) through 12/31/10, the Low Price to Earnings portfolio closed position return was 36.90%, with a hold period of 0.30, for an annualized return of 184.89%.

• The 5-Star Stocks portfolio (exclusively closed positions, since assets in this portfolio have now all been redeemed) remained noteworthy to the end. These were assets which at the time of purchase possessed both Ben Graham classic value qualities (low debt plus low P/E and/or P/Bk and/or high dividends) and 5-star ratings by the MSN/Motley Fool CAPS rating system. The assets' absolute return of 31.33% in 0.82 years is at least encouraging. With a conservative annual yield estimate of 1%, the 5-Star stocks in this small sample thus would have had an absolute return of over 32% and an annualized total return of about 40%.

• In this case especially, though, significant conclusions cannot be drawn from the figures, first, because most of the purchases were made while the market was as yet low from the financial meltdown of 2008-2009 and, second, because just nine 5-Star Stock purchases were made in the period under review.

• The Double Winners portfolio is still in its infancy, barely more than a month old. It is intriguing to see results such as it has provided, but they must be viewed with great skepticism and are not at all statistically pertinent. This portfolio consists of five stocks which at the time of purchase met at least two Ben Graham value criteria (hence the term "double winner"), had debt to equity less than one, current ratio at least 1.5, positive return on equity, dividend payout ratio (if there are dividends) of 0.50 or below, and shareholders equity to total equity at least 0.50, with balance sheet records no older than 6 months. They are to be rebalanced, with old assets sold that no longer qualify on these guidelines and new ones added that do, if and when the portfolio as a whole is up 5% or more. The portfolio thus potentially involves frequent trading and so is more appropriate for a tax-deferred account.

For those interested in how the Jim's and Phil's (my) "Ten Stocks for a Decade" portfolios have performed since inception on 5/14/10, on average they are now up 12.40% in their thus far 0.63 year holding period. This works out to an annualized return, excluding dividends but net of commissions, of 20.39%. In the same period, the S&P 500 Index is up 10.74%, for an annualized return of 17.58%. And if commissions had been subtracted, the S&P 500 record would of course be worse.

And here is our 2010 year-end summary for my wife's and my nest egg:

• On 12/31/08, our equities stood at only $431,400. In early March of 2009, at their low, they had actually fallen to only $300,000. As of the close of trading on 12/31/10, they have risen 84.26% (since the end of 2008), to $794,900. Part of this rise was due to equities already in our nest egg having appreciated, but part was due to the use of cash reserves during periods when markets were down to obtain more securities at bargain prices. The latter approach has left us with fewer reserves than usual, however, so I shall now be gradually redeeming stocks and increasing our non-equity reserves, in anticipation of the next drops in the markets, when such reserves will again come in handy.

• Our total nest egg had fallen to $726,900 at the end of 2008 and to less than $600,000 at the low point in early March, 2009. Since 12/31/08, though, it was up 20.4% to $875,200 by the end of 2009. Without counting the new, final quarter of the year mutual fund share distributions, it was then up 14.2% to $999,600 by the close of trading yesterday, 12/31/10. Once those 10/10-12/10 mutual fund shares are added in, the end of the year total will easily top $1 million, the first time our net end of year value has been that high.

• Since our net asset value lows in March, 2009, the nest egg has thus risen more than $400,000 or 67%, an average monthly increase in that period of around 3%. (I do not expect to ever again see that kind of sustained performance. I hope I never do, for it almost certainly would mean that, just prior to it, we would once more have had to endure a severe market threat accompanied by hazard to the entire economic system, such as was experienced in the late 2008 through early 2009 period.)

• The debt on our house is now down to about $12,000 or roughly 1.2% of our nest egg value. One might ask why we would not just pay off that mortgage. However, the interest on the debt gives a small tax deduction. Also, the note carries only a 5.5% interest level. I believe I can continue to get a better return by investing the money.

• We also have margin debt of $33,000, or about 3.3% of the total, so the sum of our indebtedness stands now at 4.5%.

• My wife and I increase our total equity book value by at least 12.5% annually. It is now 28.1% higher than on 12/31/09. The new minimum book value target (for 12/31/11) is $865,000.

May we all have a happy and prosperous 2011.

1/9/11-Since the last entry, there have been no new portfolio sales or stocks ready for sale among assets followed here. So, no redemptions are indicated at this time.

My top-five current low price to earnings stocks are: BKI; KTCC; LACO; SKX; and WRLS.

My favorite among them is Telular Corp. (WRLS) (recent price $6.77). It meets Benjamin Graham's bargain stock safety and value criteria.

Telular Corp. will be added to our nest egg at its market price early tomorrow morning, 1/10/11.

1/16/11-Per the rules indicated in December, 2010, for our then new Double Winners portfolio (inception 11/29/10), it was time to sell LACO on Friday, 1/14/11. Although I have been enjoying LACO's gains, those portfolio rules simply call for a mechanical trade out of equities that no longer meet Double Winners' buy criteria, replacing them with ones that do. In this case, LACO exceeded the low price to book value criterion of 0.66 during the day on 1/14. Meanwhile, the portfolio as a whole was up at least 5% and there were other qualifying Double Winner asset candidates available for purchase to replace LACO in the portfolio. All of the sell criteria being met, LACO was accordingly, early that afternoon, sold for $3.51 a share and its open position removed from the portfolio.

Its purchase and sale records were then added to the spreadsheet for previous Double Winner portfolio closed positions. LACO had gained 43% in the short time it had been held.

All of the open and closed Double Winner portfolio asset results have now been recalculated as of the close of trading on Friday, 1/14/11. To date, the overall (still open plus closed positions) Double Winner average results net of commissions (but not counting any dividends) show a gain of 12.04%, which, given the short average hold period, translates to annualized gains of 315.46%.

Considering only the four closed positions, the average gains were 18.64%, with an average hold of just 27 days, for an annualized rate of growth of 929.85%. I mention this only for interest, of course. In reality, sustaining such an annualized rate would be virtually impossible, and we can assume that in relatively short order the gains will be coming back to Earth.

The Double Winners portfolio had a cost basis at inception of $24,654 and just prior to the sale of LACO the open positions' total market value stood at $28,590. Since I replace sold assets with the average value of the portfolio assets before each sale, I shall early on Monday, 1/17/11, be replacing LACO with about $5700 worth of shares in a new Double Winner asset, WRLS. WRLS has a low P/E, a hefty regular dividend, and a low dividend payout ratio.

My new Double Winners portfolio, rebalanced with info evaluated today, will be as follows: AOB; ELNK; HQS; SUTR; and WRLS.

The Double Winners portfolio remains experimental. I am simply following the rules set up for it initially in selling out LACO at this point, though it remains undervalued (just less so than at purchase) by more than one standard. The rules simply call for the removal from the portfolio of any asset that no longer qualifies on the initial buy criteria. However, those criteria are rather stringent, and it is quite possible assets that no longer qualify as buys will continue to see substantial price increases subsequent to their removal from the portfolio.

Thus, for anyone trying to follow the buy and sell transactions noted here who does not need the funds from the sale of one asset to buy another, I would personally advise continuing to hold shares in LACO, and any other still undervalued Ben Graham type securities, so long as the market value remains below their fundamentals' value on such standards as low price to book, low price to earnings, and high dividend to price.

1/17/11-The day and date from the following in yesterday's entry should have read "Tuesday, 1/18/11." I had forgotten about the holiday today affecting the U. S markets. "...I shall early on Monday, 1/17/11, be replacing LACO with about $5700 worth of shares in a new Double Winner asset, WRLS. WRLS has a low P/E, a hefty regular dividend, and a low dividend payout ratio."

1/24/11-I am beginning two new actual account experimental portfolios, similar in format to the Double Winners started on 11/29/10 (and explained in my entry dated 12/12/10).

The first of these is called "Earnings Estimates Increase - 5% Plus." It will consist of a portfolio of five assets chosen from among stocks for which recent reporting of earnings estimates has shown at least a 5% increase from the just prior earnings estimates. Through 12/10/10, a portfolio of such assets followed by the American Association of Individual Investors (AAII) Journal has shown an 18.9% risk-adjusted return (not counting dividends) since inception (1/1/98). With dividends, the average annualized risk-adjusted total return may well be 20% or better.

From among assets meeting this initial earnings estimate increase, I am choosing only from those assets which also meet the following standards: 1. Debt to equity must be 0.99 or below; 2. Current ratio must be 1.5 or above; 3. Return on equity must be positive; 4. Balance sheet info must be within the past 6 months; 5. Shareholder equity to total equity must be 0.5 or above; 6. If there is a dividend, the dividend payout ratio must be 0.50 or less; and 7. The asset must be one of the top 5 remaining assets based on the result of a formula: return on equity divided by a figure derived from the product of the trailing P/E and the P/Bk, and that product reduced by the asset's dividend percent, if any.

As with the Double Winners Portfolio, such assets will be held until the portfolio as a whole is up at least 5%, one or more of the assets no longer meets all of the portfolio's buy criteria, and there is a replacement asset available (for each security being sold) which does meet said requirements, at which point the portfolio will be rebalanced to again include only qualifying stocks.

My first five Earnings Estimates Increase - 5% Plus assets were purchased over the period 1/20/11 through 1/24/11, and the resulting portfolio consists of: DSW; IRBT; IRF; STEC; and WLK. Through the close of trading today, the portfolio as a whole is up almost 3%.

The second experimental portfolio is called "Five-Star Stocks." I had stopped formally following this type asset before, when the portfolio consisted of assets bought approximately once a month, since at the time I felt it would be too difficult to attain enough qualifying assets for an annual or longer portfolio of at least 12 securities. Nonetheless, the record of the nine stocks purchased using the original criteria (better than 31% on average, with a mean hold duration of less than a year) was good enough to warrant a new look in a different portfolio format.

For this one, as with the Double Winners and Earnings Estimates Increase - 5% Plus portfolios, it will consist of a portfolio of just five assets. To qualify for the portfolio, each stock must at the time of purchase: 1. Hold a Motley Fool CAPS rating of 5 stars; 2. Meet at least one value criterion, such as low P/E, low P/Bk, or high dividend, in each case with figures sufficient to meet the Ben Graham standards for a bargain security; 3. Current ratio must be 1.5 or above; 4. Balance sheet info must be within no more than 6 months; 5. Shareholder equity divided by total equity must be 0.50 or above; 6. If there is a dividend, the dividend payout ratio must be 0.50 or below; and 7. Debt to equity must be 0.33 or below.

As with the other experimental five-stock portfolios, such assets will be held until the portfolio as a whole is up at least 5%, one or more of the assets no longer meets all of the portfolio's buy criteria, and there is a replacement asset available (for each security being sold) which does meet said requirements, at which point the portfolio will be rebalanced to again include only qualifying stocks.

My first five 5-Star Stocks portfolio assets were purchased today but unfortunately have not gotten off to a bang-up commencement, already down about 1%. They are: BSPM; CPHI; EBF; SPA; and SPU.

My hope is to ultimately find a set of five strategies which as a blend provide excellent overall risk-adjusted returns. So, for now then, this potential but as yet experimental blend consists of: 1. low P/Bk stocks generally being held till up at least 50% each (unless merged or bought out for cash) and with P/E of 12 or above plus P/Bk of 1.2 or above; 2. low P/E stocks, also generally being held till up at least 50% each (unless merged or bought out for cash) and with P/E of 12 or above plus P/Bk of 1.2 or above; a five-stock Double Winners portfolio; a five-stock Earnings Estimates Increase - 5% Plus portfolio; and a five-stock 5-Star Stocks portfolio.

I intend to provide the results of these approaches in my quarterly reviews.

1/30/11-Since the last entry, a Low Price to Earnings pick, TDW, purchased on 8/2/10, was sold on 1/27/11 for a net gain, not counting any dividends, of 37.51%. It has been removed from the Low P/E open positions portfolio and its closed position info recorded, based on the 8/2/10 to 1/27/11 per share performance. This asset had not achieved the usual sell criterion of a 50% or greater price increase. However, since its August purchase its fundamentals had weakened so that the P/E was at the time of sale almost twice its bargain level in early August when the shares were purchased.

Based on a recent review, my top-five current low price to book value stocks are: AOB; CSKI; HQS; HWG; and JGBO.

My favorite among them is The Hallwood Group, Inc. (HWG) (recent price $25.40). It meets Benjamin Graham's bargain stock safety and value criteria.

The Hallwood Group, Inc. will be added to our nest egg at its market price early tomorrow, Monday, 1/31/11.

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