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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.

3/3/02-Have decided to include this among online diary entries, but with its own site, relieving the regular diary, Dove Feathers and Dog Hair, of any further personal finance info., which may well be dull for the general reader.

Last month I noticed that one of my favorite professional value investors, Wallace Weitz, of Weitz Partners Value Fund (we own about 3800 shares), had accumulated holdings of Citizens Communications (in which we already, for a number of years, have had a significant investment - indeed, my folks had at one time over a million dollars' market value of CZN's parent company, Citizens Utilities).

His fund's assets also included Qwest Communications, Adelphia Communications, Liberty Media, Washington Mutual, and Six Flags. After researching these companies some myself, I have added shares in each, over the last few weeks, to our portfolio.

I am well aware that amateur investing is not without significant risks and that I am not immune from the slings and arrows of outrageous "value" fortune. Perhaps everyone else is right when the price of a company's stock has fallen. They may well know something I do not! In the last several years I have been badly burned by investments in businesses that appeared to meet strict value criteria. We bought about $14,000 worth of Fruit of the Loom, for instance, and saw almost all of our investment disappear, good for nothing but tax write-offs. Now, after the company's bankruptcy, we notice that value investment guru Warren Buffett, through Berkshire Hathaway, is buying all of Fruit of the Loom for a little over one billion dollars. He clearly knew the right time to buy good value!

So it is by no means with certainty of success that I mention our holdings in Qwest, bought for about $7.80/share in Feb. of this year, but with an apparent book value of $22. Today, though, I noticed a feature article on the company in the current "Barron's." They write that, although it is far from a sure thing, some value players are beginning to gather up the low cost shares.

The same issue of "Barron's" also notes that there is value investor interest in Adelphia Communications.

With Fran's encouragement and help, got most of our taxes chore done yesterday, though we still must follow-up for a couple forms and so forth.

3/6/02-During this past month I completed a book value analysis of our equity portfolios. This has now been updated. Combined total equities' book value is estimated to have been $421,000 at the end of last year. Intending a ten percent increase by the next year-end, the target for 12/31/02 is $463,000. As of today, it stands at $429,000.

Over the weekend we completed our budgetary review for the first couple months of 2002. Although the political aftermath of the Enron collapse had done to the markets early this year what neither the terrorism of 9/01 or the so-called "recession" of last year could do, dramatically lowering market averages in the first weeks of the current quarter, losses in market value of our portfolios had been only mildly affected, dropping to an asset total of $564,000, a six percent loss in paper value. (Thanks to a new equity market surge last week, our current assets now stand at $585,000, about 3% below the year-end level.)

Our monthly income and expenses review showed disconcertingly high (over budget) levels of spending or other expenses for January plus February. However, this period also had an unusually high level of income, as I have been receiving both my retirement annuity and the final two checks for 2001 wages, including one lump sum payment for almost $5000, for unused annual leave. Overall, we are ahead by about $4000, which has been used mainly for debt retirement.

In 1987, just prior to the famous black Monday, 10/19/87, crash in stock prices, I had just "discovered" margin investing and bought a large number of shares of stock using significant credit, instead of paying directly for the new purchases. During the period from 10/87 to 12/87, we lost tens of thousands of dollars exclusively because of all this margin debt and calls, so that assets had to be sold at their lows, to avoid further assets being confiscated by the broker to pay the debt obligations.

This was a terribly painful lesson. I had then very little net asset value left in our total portfolio. Indeed, after the margin call losses, we were again back to almost nothing, no better off than we'd been a couple years earlier, when Fran and I had gotten married, having between us only about $5000 each in IRA mutual funds and home equity.

Perhaps surprisingly, however, we did not give up entirely on margin investing after 1987. Indeed, the bargains were so apparent in early 1988 that I could not resist buying up several thousand dollars worth of them using credit. It was somewhat risky, except that the stock values were superb. This investing formed the profitable core basis for our subsequent retirement nest egg. By the end of 1990, our total assets had swelled to $100,000, including a $10,000 gift from my folks.

Along with continuing to invest half of our earnings, mainly in tax-deferred accounts, we maintained a policy of moderate margin investing through the 1990s. But, as equity prices got completely irrational toward the end of that decade, we did more selling than buying and kept our level of margin debt at about 5% of current assets. (An additional approximately $35,000 in total gifts from my folks or, after Dad died in 1995, from my mom alone, have also certainly helped our bottom line.) Currently, after recent market losses and new purchases, our margin debt stands at 6%.

3/7/02-I have recently joined the American Association of Individual Investors (AAII). In fact, I got a lifetime membership. Yesterday I received a package of explanations of the benefits of AAII membership. The first, from my point of view, was learning that I still have a good life expectancy, not a meager matter for someone already 58 years old. AAII indicates my life membership will be until 2027. Alright! Besides that, instead of the annual $49 fee, plus another $30 or so for special online membership services, I get all twenty-five years of mailed as well as online benefits, plus community services, for just $490. Since I am a true blue value investor and I'm thereby getting a quarter-century of comprehensive membership in one of the finest investor service organizations at ¼ the normal price, I thought I'd pass this great price-to-value deal on to journal readers.

3/9/02-Today placed an online market order to purchase 92 shares of Papa John's International (PZZA). At its recent $27.27 per share price, price-to-earnings is 13 (63% of "Value Line" median P/E), price to historical high price is 58%, price-to-earnings ratio divided by growth rate is 59%-80%, depending on the valuation service, 5-year projected earnings growth is 17%, return on equity is about 33%, debt to equity is .8, price to sales is 0.6. The company claims three years in a row of being tops in American customer satisfaction. I like their pizza and everybody else I know does too! Several rating services indicate it is a low risk business. Standard and Poor's gives it a 5 (highest) rating and indicates that current fair value is 37.40, well above current price. Although some analysts indicate they think it will underperform the market in the year ahead, "Smart Money," in its 4/02 issue, p. 105, rates it 5th among its top value stock picks for the coming decade. Based on its projected growth rate, a reasonable intrinsic value per share, and 3-5 year target, is arguably $58. Current price to this target is 47%. A risk free government bond after five years would likely only yield $7.50 or less on the $27.27 per share investment, for a total of $35. Double the $7.50 risk free return is still below the $58 3-5 year target less current price ($30.73). Exit Strategy: If the enterprise value of the asset or its value fundamentals do not make it a buy at that time, based on other value criteria, intend to sell when the P/E is 20.8 or above (60% above current level) and the asset is at or above the $58 3-5 year target or if/when the business substantially deteriorates, so that its intrinsic value falls below the then current price.

3/12/02-Up most of the night due to a bad cold, with fluid in my throat (each time attempted lying down) preventing sleep, I logged onto AAII and checked out its stock valuation and screening options. There is a lot of useful information there, as well as low-cost software for in-depth research. Among other things, I found numerous stock purchase candidates that met a variety of profiled value asset criteria, along with charts showing how the performances of the respective portfolios compare. The classic value Benjamin Graham non-utility portfolio, for instance, was up almost 120% in the last four years, not bad considering how the major market averages have done in that period!

3/13/02-There's an interesting article by Andrew Gluck in "Investment Advisor," the 3/02 issue, pp. 34-38: "Arnott Asks, Why Not?" Rob Arnott is the CEO of First Quadrant, a money management outfit. Mr. Arnott has been a prolific writer of financial papers and his company bio. indicates he's won the Association for Investment Management and Research Graham and Dodd Scroll four times. He seems to speak with authority on investment matters and recently offered some challenging (to conventional investment "wisdom") conclusions about risk premiums, retained earnings, and high dividend payout ratios.

Mr. Arnott's research leads him to believe that:

1. While there is an equity risk premium, it is not 5%, as often thought, but around 2.5%;
2. When dividend payout ratios are low and retained earnings high, it turns out that "the reinvestment gets sloppy and subsequent earnings growth becomes atrocious;"
3. High dividend payout ratios usually correlate with relatively high earnings growth.

Since most personal finance retirement calculations, and those of institutions controlling the trillions of dollars in assets set aside for future retirees and their retirement annuities, are based on 8-9% average total returns on stocks, a huge shortfall will likely occur in the years ahead.

With Benjamin Graham, in The Intelligent Investor, it is Arnott's impression that retirement portfolios of all kinds need to be generally much more conservatively allocated than is presently the norm.

3/18/02-Over the weekend, received latest (4/02) issue of "Money" magazine, in which, on pp. 39-40, there is another article on Qwest Communications, "Qwest: Don't Hang Up Yet," this one indicating that, although there are risks to investing in its stock, the intrinsic value is at least twice the recent price of about $8.00 per share.

Recommended reading:

• Magic Numbers: The 33 Key Ratios That Every Investor Should Know, by Peter Temple;
• Value Investing: From Graham to Buffett and Beyond, by Bruce Greenwald.

Placed a market order today for one share of Berkshire Hathaway, Class B (can't yet afford the $75,000 or so per share price of Class A!).

Buy Rationale: $10,000 invested with Warren Buffett, who runs BRK, in the mid-1950s would today be worth half a billion dollars, before taxes and fees. Even after all "frictional" costs and tax payments, it would be worth over $200,000,000. Wallace Weitz, whom I've already indicated I think is one of the best value mutual fund managers, says Buffett's record is as far above his as his is over the average mutual fund manager. Analysis by folks much more knowledgeable than I in evaluating stocks indicates that Berkshire Hathaway is actually worth more than it appears. The compound annual return on its "float," since Buffett took over in the sixties, has been around 22-23%, a record that probably cannot be matched. Even though it is certain Buffett and his co-manager, Charlie Munger, cannot continue this level of performance now that Berkshire Hathaway is huge, the odds are good they'll at least continue to beat the S. & P. 500, which is more than about 90% of money managers can say.

Exit Strategy: Intention is to never sell, to hold "forever."

3/22/02-Received mail notification that the bankruptcy court had determined that my shares claim to the division of assets of Fruit of the Loom were "without merit," meaning I'll get nothing from the settlement Berkshire Hathaway is making with FTL and that my 2000 shares will be worthless as soon as the settlement is effectuated. Attempted to sell them online, just in case this were still possible, but was unable to do so, there being no quote with which the computer could complete the transaction. Called my brokerage customer service. They had to call to "the floor" but were able to obtain a current quote of 11.1 cents a share. They also quoted a commission via phone trade of $17. I placed a market order to sell the 2000 shares, and it went through at 11.1 cents. Needless to say, I have for awhile now been much more cautious and careful in selection of shares to purchase. For better or worse, mostly worse, this at least helps, for taxes next year, to offset profitable sales of shares earlier in 2002 of USA Today, Citigroup, and Fannie Mae.

3/26/02-Today I began a rather immense project, that may take a few years to complete, making the cost basis calculations for the hundreds or thousands of stock and mutual fund trades, or share changes from reinvestment of dividends and capital gains, since we began investing, in 1985.

Of course, in retrospect, it would be good if we'd not made many trades and/or if we'd kept up with the cost bases along the way. But that is not the case. And we must assure that the task does not become too onerous, so that it is so like work I might as well not even be retired. Accordingly, I intend to complete at least one cost basis calculation a day, or five a week, perhaps with Fran's help after, in May, she retires as well, until we are caught up, and thereafter to remain up-to-date on this essential part of the investing process.

The only ways to get out of the chore, tax reporting requirements being what they are, are, first, to die before they have been done, in which case the cost basis for one's beneficiary becomes the price of the asset as of the date of death, or, second, to give the assets in question away as charitable gifts, in which event it becomes the problem of the recipient to sort out all those records and the scores of lines of figures, shares, changes in stock or mutual fund name, spin-offs, mergers, etc., that follow the trail of each particular purchase through the decades to the current per share price. But somehow neither of those options has much appeal at the moment, for, either way, I do not get to enjoy the fruits of all the investing and portfolio management.

I expect I'll look on this task as like a part-time job which, along with the more enjoyable aspects of the investment process, sustain and enhance the income ("wages") we shall eventually be receiving from our retirement nest egg.

But, dear reader, like Scrooge's deceased partner, Marlow, who came in chains to warn, though it was too late for him, I admonish you not to fall into this trap of mine, but to keep your cost basis calculations current as you go. Done that way, it is but a pin-prick compared with the pain of doing it once the transactions of a whole career of investing have accumulated.

On a somewhat brighter note, from my analysis of our finances over the weekend, I see I have not adequately considered the tax consequences of trades I'll need to be making in the next two or three years. This is good news because, despite my problems with Fruit of the Loom, it turns out most of our recent and prospective trades have been or will be profitable. Unfortunately, the bad news is that it could result in about $5000 a year more going out in taxes than I had anticipated, when thinking I could pretty well offset the profitable trades with losing ones and then leave the remaining moneymakers invested indefinitely. Yet, for example, a single stock, purchased for only about $2000 and recently worth over $14,000, but which now far exceeds its intrinsic value, really must be sold (to be replaced by assets selling for significantly less than their intrinsic value). If I wait, the market may suddenly price the asset as it deserves, many thousands of dollars less. And so it goes. If I keep a lot of old dogs that are hyped up to far more than they are worth, our portfolio can get at best about 6-8% a year. Yet if I replace them with assets selling below their true value, the profit picture is much more promising.

But that extra, estimated $5000 a year, amount of taxes must come out of the funds we had expected to be available for our retirement expenses. The belts will have to be tightened by that much, roughly ten percent. Oh well. It is short-term frugality for long-term gain.

Meanwhile, we are at least well ahead of our target, based on a ten percent increase per year, for the book value of our equity portfolio. By 12/31/02, equity book value should be at least $463,000, by a year later, $509,000. On average, share prices are running at least twice book value. And the $5000 deficit represents just 1% of the equity portfolio. So, in perspective, things could be a lot worse.

3/29/02-Completed the week's investment analysis yesterday, the end of a short market period as today is Good Friday. Bad earnings news had dropped Parametric Technology's price significantly. This had been a "perfect 10" stock I'd purchased a number of years ago but which has not worked out well, highlighting the risks to the investor for technology companies, even when initially it seems to be a "perfect" growth asset at a bargain price. More reliable and classic value equities are out there. So, I sold it. This asset had already had about five years to prove itself, to no avail. It might still turn out to have been a good investment, but how many more years would be required?

Similarly, this week I sold Berger Growth Fund, bought many years ago when I thought one should have as much invested in "growth" as in value assets. Unfortunately, once reinvested dividends and capital gains are added to the cost basis, this mutual fund was a loser during the greatest bull market for stocks in history. Nor are its prospects very good going forward.

We intend to concentrate on low price to earnings and low price to book value stocks. These turn out to be better for the average investor than momentum assets or stocks selling for higher ratios to earnings and book. Exceptions to the rule include a handful of niche or franchise businesses of the type that geniuses like Warren Buffett find attractive. AAII has software for a spreadsheet with which to analyze stocks approximating ones in which that guru would be interested. (A similar screen used by Standard and Poors has resulted in portfolios that have done better than 22% per annum, on average, in recent years.) I'm quite curious about the possibilities using this tool.

Some of our assets are not usefully analyzed using information from "Value Line" or the "American Association of Individual Investors." These are equities recommended at near their purchase prices by at least two world class value investors, folks like John Neff, Warren Buffett, Wallace Weitz, Michael Price, or John Templeton. Washington Mutual (WM) was such an equity in which we recently invested.

Since a sell price cannot be easily determined on such positions, I've chosen the following sell strategy: unless by then the asset can be readily analyzed as being below its intrinsic value (which level would be a later sell price) or it has recently again been recommended by at least two excellent value investors, the asset will be sold after two years or after price appreciation of 100% or after a value investor indicates it has reached a sell point, whichever first.

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