1/1/12-The following is my regular quarterly (and annual) summary (statistics this time through 12/31/11) of the asset approaches still followed here:
What a tumultuous year this last one was, only to have left the indexes roughly where they began at this time last January! Although the DOW is up 5.8% since 12/31/10, the S&P 500 Index is totally flat in the same period, the NASDAQ is down 1.8%, and the Russell 2000 Small Cap Index is off 4.2%. In an attempt to better the averages I had made scores of trades, yet our own nest egg's net asset value ended within that overall range as well, worth 1.5% less than 12 months ago.
I note that Ben Graham advised that "the intelligent investor" is happy to have stock prices falling, since then there be bargains! He or she supposedly looks askance at bull markets, for they lead to folly and to fewer safe places to put one's hard earned funds. It was indeed our good fortune that in 2011 lucrative stock deals were often on offer. I used our non-equity reserves more lavishly than usual. The current holdings, if I am not too mistaken, reflect a variety of the low cost gems which made an appearance. With luck, once the present skittishness over virtually all things equity begins to wane, these nuggets' prices will appreciate well.
Meanwhile, our current equity portfolio's total market price to total book value, at 0.9, is consistent with reasonably good safety margins.
My intention with equity book value (BV) for 2011 was to have it rise by at least 13.5%. We achieved and exceeded that target. The assets now held have a combined BV of $889,895. For 2012, I am not trying for gargantuan leaps, simply to assure a steady, stodgy, year after year increase of 13.5% annually. So my target by the end of the new year is just over $780,000 in BV.
I want the annual combined effect of the book value increases and total equity dividend yield to be 15% or better, pre-tax. This is under my control and has real meaning. What the markets may do with our portfolio's quoted worth is not up to me, but also matters less.
Of course, it may be observed that our portfolio already exceeds by a considerable amount this year's end-of-year BV target! I shall not regret the outcome if it turns out that we do remain above and beyond the $780,000 goal by 12/31/12. However, by targeting the more conservative level of annual book value growth proposed last year, I am glad to have the flexibility, in case it may prove useful and wise, to reduce our equity exposure in 2012 and raise reserves again, ideally doing so as prices rise, so that I have "dry powder" with which to later purchase yet more bargains when the markets plummet, as they no doubt will do, over and over, in future, just as they have in the past.
Concerning the monitored investment categories in the above table, the performance of a strictly buy-and-hold investment in the S&P 500 Index has been relatively good, if one had stayed out of the bear market that preceded this upswing and then simply bought at the right time, around the spring of 2009, and held on regardless of what the markets have been doing.
However, it is worth remembering that this period was largely a reaction to the bashing investors had taken from the S&P 500 in 2008 and early 2009. The index's longer term record has been less forgiving. Since 6/3/05, for instance, the long-term buy-and-hold S&P 500 performance has averaged but 0.77% a year.
Since we began following the S&P record coincident with the start of our actual assets' Low Price to Book Value portfolio, though, I leave it in the table to remind myself and others that we can never take things for granted in investing. Just as there are times when a several years' run-up on the price of gold, or some other volatile category, outstrips even the records of super value investors, there will inevitably be periods when we just cannot outperform the trends in a market. I am not discouraged, though. Patience is certainly in order, yet it should also be well rewarded.
At least there have been sustained rewards shown in the performances of both our Low Price to Book Value and our Selective Six Percent Plus portfolios since the previous quarter. An equal blend of the two would by now be showing both relatively pleasant gains for our value holdings and quite satisfactory yields.
The average dividend of the Selective Six Percent Plus portfolio assets (presently MDP, RVT, SSL, STM, TEI, TICC, UMC, UVE, and VOD) is 6.3%. It was even higher at the time the shares were purchased. Capitalizing on the superior deals which bearish periods expose, we shall continue to add reasonably lower risk "six percent plus" value assets when we can find them. Even if this current slow growth, high unemployment phase persists and uncertainty is further engendered by ongoing incompetence and dysfunctional partisanship among national and international political leaders, the shares of companies with excellent yields, decent prospects, and comparatively low debt offer income substantially better than Treasuries.
This is true but to a lesser degree for most of our Ben Graham Dividends w/Value assets as well. These stocks are for the most part a little less risky than those in the Selective Six Percent Plus portfolio, though they also come with lower dividends, yet they mainly have terrific 3-5 year estimates of profitability.
I have included Berkshire Hathaway here this time both since I have long believed it one of the best run and value oriented companies and to show how, even in a period of "bla" performance for the general market, the selective purchase of shares in good companies can lead to better than average returns.
I am not starry-eyed about BRK/A or BRK/B. I recognize that Warren Buffett, while still a genius, is now in his eighties and making decisions which are from time to time at odds with his own oft repeated warnings or advice. At the same time, should he die or lose the capacity to continue as Berkshire Hathaway's chief investment officer and promoter, it is unlikely his successor(s) will be able to do as well what he has done for 47 years now, increase the company's book value at about 20% a year, increase its intrinsic value by even more, and lead it (not infrequently through internal and external crises that might have overwhelmed lesser men or women) to stunning, hard to beat market values. Buffett likes to buy companies that can be run by "a ham sandwich," but it clearly will take a good deal more even than a club sandwich to safely steer Berkshire Hathaway through the shoals which will appear after he leaves the scene.
However, at some price BRK/A and BRK/B, even once we discount for the risk of losing Buffett, remains good value. By some conservative estimates, BRK/B, though now quoted at around $76, is worth about $102, others say $110 or better. Buffett prefers his stockholders to be buy-and-holders "forever," yet these days I like the notion of buying Berkshire Hathaway at $75 or below and selling at $125 or above. Buffett himself is making the trader's job easier, buying in shares of Berkshire Hathaway while prices remain significantly below the company's intrinsic value, thus increasing the worth and earnings of the remaining shares outstanding.
The drubbing has been ongoing among our Jim's and Phil's 10 for 10 (combined) portfolio stocks. I continue to think that on average they will do well over the long haul.
Concerning the Low Price to Book Value record, as always I think the closed position results are a more reliable measure of a value investment strategy. As indicated before, the day to day or even quarter to quarter fluctuations in a group of open positions can be wide in either direction, but only become relevant to investment results when equities are sold. Usually one need not accept negative returns but can instead wait for the price one wants before selling.
Through 12/31/11, the Low Price to Book Value closed positions have averaged 33.25%, 32.81% on an annualized basis. With dividends included, these results would likely be about one percent higher in each case.
Who knows what the new annual cycle may bring? All too typically, I can see a number of dark clouds on the horizon. Maybe the surprises, though, will be favorable ones for a change. We shall see.
In any case, it seems well to follow good value investing principles over the coming 12 months. If we do so, things may go right. If not, though, they should at least not go too far wrong for us as investors in 2012.
I wish everyone a successful and happy new year!
1/15/12-On 1/11/12, our Low Price to Book Value asset, LAKE, purchased on 9/28/09, was sold for a net gain of 13.17%, since it had already been held for over two years and I had found an asset with which to replace it that now appeared to have better potential. Info on both LAKE's cost basis and performance from 9/28/09 through 1/11/12 has been added to the Low P/Bk closed positions spreadsheet, and LAKE has been deleted from the record of Low P/Bk open positions.
My current top-five low price to book value stocks are: AEL; HIG; MT; PLFE; and SYA.
My new favorite from among them is American Equity International Life (AEL) (recent price $10.37). It meets Benjamin Graham's bargain stock safety and value criteria.
American Equity International Life will be added to our nest egg at its market price in early trading on Tuesday, 1/17/12.
I have a new pick for our Selective Six Percent Plus portfolio as well: Central Gold Trust (GTU) (recent price $63.35). GTU is a closed end fund with a dividend of 23.67% and a 5-year annual total return of 20.6%, based on its net asset value (NAV). It has a price to NAV premium of 4.2%, with a 5-year average premium of 5.0%. Its expense ratio is 0.4%. I do not think GTU is low risk. Indeed, it is likely to be volatile and also to have an unreliable dividend level. However, when it is down will be a good time, in my opinion, to buy more shares.
1/30/12-On 1/23/12, our Low Price to Book Value asset, NWPX, purchased on 12/1/09, was sold for a net loss of 11.20%, since it had already been held for over two years and I had found an asset with which to replace it that now appeared to have better potential. Info on both NWPX's cost basis and performance from 12/1/09 through 1/23/12 has been added to the Low P/Bk closed positions spreadsheet, and NWPX has been deleted from the record of Low P/Bk open positions.
My current top-five low price to book value stocks are: AEL; FLXS; HDNG; JBSS; and SCX.
My new favorite from among them is L.S. Starrett Company (SCX) (recent price $14.19). It meets Benjamin Graham's bargain stock safety and value criteria.
L. S. Starrett Company will be added to our nest egg at its market price in early trading on Tuesday, 1/31/12.
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