2/3/04-Our total nest egg continues to advance modestly, carried by the current momentum of the market plus the positive dynamics of our most profitable pool of assets, those concentrated in small- and micro-cap Benjamin Graham type holdings with price to book value at the time of purchase .59 or below and debt to equity .33 or below. Meanwhile, with each progressive increment of total return, I'm selling or redeeming from our holdings those with the least retained value for their current prices, figuring that the increased reserves will come in handier when the market drops again than will all these inflated equities, out of which I've come close to wringing the last full measure of gain. Including the profits which must be used to pay our excess (over regular income) expenses, our return after about one month in 2004 has been roughly 6%. Such increases are unsustainable. Otherwise, we could hope for a 70% or greater increase this year, which would be just foolish.
On the other hand, I am inspired by a comment of Wesco Financial's head guy, and Warren Buffett's sidekick at Berkshire Hathaway, Charlie Munger, about a business graduate of Stanford who had no clients yet, but possessed just a tiny bit of capital at first and figured if he would put the same effort into being a good investor that he might otherwise into getting and keeping clients, and presumably getting them to churn their portfolios so he could make a good profit off managing the assets for them, then he had as good if not greater potential for riches with a simple, completely client-free, and consequently low-overhead operation. Munger said that young man is wealthy today and accomplished this strictly with his own money, not by taking from others and reducing their total returns. I lack the Stanford gentleman's youth or education, but I have perhaps at last learned some wisdom and a few things about investing. Thus perhaps I too can earn a living more legitimately by merely overseeing our own carefully allocated holdings than through getting others to give up their hard earned cash to me. Certainly it would seem an ultimately far more satisfactory way of negotiating the world of finance, to be productive on one's own than to be a scavenger, and hence in a way a thief, of others' productivity.
2/23/04-As I am continuing to see the market as somewhat overvalued in view of the domestic economic conditions enumerated here previously, and noting that our Essential Value Portfolio (EVP) holding, Parlux Fragrances (PARL), has seen a price rise to well above its Benjamin Graham value target, today I sold all 737 shares of PARL. The sell price per share was $9.32. Net proceeds were $6839. The cost basis had been $2528. Thus, the gain has been 170%.
There are now seven EVP closed positions (sales from seven initial purchases). With PARL included, the total closed position initial investment was $18,104 and their total net proceeds have been $21,408, for an overall gain of $3304 and an average closed position profit of 18.3%.
After this sale, the close of business 2/23/04 redemptions plus dividends cash position of the EVP was $21,626 and the market value of the total remaining open equity positions (representing 14 purchases) was $39,990.
Given that the total investment in these remaining open positions was $35,866, there has been a gain of $4124 or 11.5% in the open equity investments.
The current EVP total, $21,626 in cash reserves plus $39,990 in equities, is $61,616. The overall initial investment since the 8/18/03 portfolio inception was $53,970. Thus there has been a total portfolio gain of $7646 or 14.2%. For the period 8/18/03 through 2/23/04, the S&P 500 has increased 14.1%.
While I'm gratified that we are very slightly ahead of the S&P 500 Index for this interim and that our portfolio, with its substantial cash reserves, is a lower risk one than were we to be fully invested in the S&P 500, with this most recent sale our cash position is actually too high in proportion to the remaining equities, which are now rather significantly below their current target level of $49,250.
Accordingly, I'll be searching for one or more other assets that meet excellent price to value bargain criteria, and purchasing it or them to replace some of the sold holdings, and so improve our ongoing total return portfolio prospects.
Meanwhile, our nest egg as a whole now stands at $669,000 with no investment debt, an increase of 35.5% from our net asset value as of 12/31/02. In that period we've also used $35,000 from the nest egg portfolio for expenses that were not offset by other retirement income of all kinds. Were that amount included, our nest egg total return since the end of 2002 works out to $210,500 or 42.7% (36% annualized).
Impressive, right? This, of course, is not the full story. I retired in 12/01 and had a regular income through that month. Our retirement portfolio began with a net asset value of $561,000 as of 12/31/01. Since that date, expenses have exceeded non-portfolio income by $55,000. Thus, altogether the gain in the total nest egg has been only $163,000 or just 29% (12.5% annualized) since 2001, and only 19.3% (8.5% annualized) if we do not include the amount of the portfolio gains used for expenses.
Still, it is reassuring that, in a period that included much of the worst bear market our country has experienced in many decades, even after expenses our nest egg has managed an average compound total return of over 8%, comfortably ahead of inflation. This would seem (knock on wood!) to bode well for its viability through the balance of our retirement years and to speak well for the efficacy of a continued value investing approach.
2/26/04-Today I added to our holdings with three new Essential Value Portfolio (EVP) assets, each a Benjamin Graham type low price to book value bargain, as well as a nano-cap (market capitalization below $200 million).
However from an earnings standpoint each also currently looks like a loser. Their P/Es are quite high. Nor do they offer dividends. The expectation, or at least the theory, is that in time they'll be better managed, earnings will pick up, and, with this "surprise" development, their stock prices will turn around too. On average, with a number of such "cigar butt" (Warren Buffett's term, for there is the hope that, though they've already been thrown away and so are available essentially for nothing, they still have two or three rewarding puffs left in them before being discarded again for good) bargain securities held, this tends to occur enough for a nice overall portfolio total return. There is, of course, no guarantee any particular stock will be profitable.
The three bought today are:
Everlast Worldwide, Inc. (EVST) - The purchase price was $2.96 per share. The total investment, with commissions, was $2499. The company's price to book value ratio is 0.60. Its market-cap is $9 million. The debt to equity ratio is 0.22.
Imperial Parking Corp. (IPK) - The purchase price was $25.55 per share. The total investment, with commission, was $2534. The company's price to book value ratio is 0.66. Its market-cap is $47 million. The debt to equity ratio is 0.08.
Taitron Components, Inc. (TAIT) - The purchase price per share was $2.28. The total investment, with commission, was $2529. The company's price to book value ratio is 0.52. (The average price to book value ratio of the three new assets is 0.59.) The market-cap is $13 million. The debt to equity ratio is 0.16.
In general, the intention is to hold each security until the price to book value ratio is 1 or above. Assuming this target is realized through price appreciation, the average profit after commissions would be about 68%.
The EVP open positions now represent 17 purchases, for a total open position investment, with commissions, of $43,428. The new EVP cash amount after today's purchases is $14,065.
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