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March, 2011: 6 11 31

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.

PDS was not sold because I am certain its price will not continue to increase. On the contrary, I would not be at all surprised if it advances substantially from here. However, it seems best to maintain the integrity of our buy and sell regimens. They have served us well over the years. PDS was bought for the Low P/Bk portfolio as a "cigar butt" investment. It was selling then for significantly less than full value as measured by price to book value. In keeping with Ben Graham principles, such assets are in general best sold once they have provided a few extra "puffs" and achieved price to book value and/or price to earnings at least 50% above their levels at the time of purchase. To hold them longer risks on average other factors coming into play, such as market sentiment, momentum, etc., that may adversely affect the price once an asset no longer has a good margin of safety. (The sample is small as yet, but so far the closed positions in our Low P/Bk portfolio are up at an average annual rate of better than 45%.)

Interestingly, however, I do retain 386 shares of PDS in another portfolio, since it was a pick in one of the "10 (assets) for 10" years experimental portfolios purchased on 5/14/10. Unless they are among the worst performing assets in the respective portfolios, shares of these stocks are not due to be sold until 5/14/20. I am hopeful the remaining PDS shares we hold may serve us quite well in that context.

My current top-five low price to earnings stocks are: JGBO; KLIC; NEWN; UFS; and WRLS.

My favorite among them is Domtar Corp. (UFS) (recent price $88.40). It meets Benjamin Graham's bargain stock safety and value criteria.

Domtar Corp. will be added to our nest egg at its market price early on Monday, 3/7/11.

3/11/11-Since the last entry, a Low Price to Book Value pick, ELMG, purchased on 1/20/10, has been sold effective 3/8/11 using a stop limit sell order, for an average gain, not counting any dividends, of 52.19%. At the time of sale, the asset's P/E exceeded 12 and its P/Bk exceeded 1.2, my usual sell standards once an asset's price is up at least 50%. ELMG has been removed from the Low P/Bk open positions portfolio and its closed position info recorded, based on the 1/20/10 to 3/8/11 per share performance.

My current top-five low price to book value stocks are: AOB; HQS; JGBO; KTCC; and VOXX.

My favorite among them is Key Tronic Corp. (KTCC) (recent price $4.40). It meets Benjamin Graham's bargain stock safety and value criteria.

Key Tronic Corp. will be added to our nest egg at its market price early today, Friday, 3/11/11.

3/31/11-In late February, I began an experimental portfolio, Net Nets, for which I purchased shares of CRC, on 2/24/11, and of LOAN, on 3/23/11. Net Nets will have normally a new investment added monthly (when one is available then that meets the buy criteria). Basically, Net Nets are assets meeting the Ben Graham standard for a bargain investment using the price to net current assets (current assets less all debts) criterion of 0.66 or below. Such holdings shall be sold once up 50% or after 12 months (or 12 months-and-a-day in taxable accounts), whichever first. So far, there have been no new purchases or sales for the portfolio after buying those two equities.

On 3/28/11, I added yet another experimental portfolio, my final one for awhile, Small-Cap Momentum with Dividends. This is a five-stock portfolio which will be rebalanced once the portfolio as a whole is up 5% or more (net of commissions, but not counting dividends) or after three months, whichever first. The portfolio consists of stocks that are of nano-cap to small market-cap and that have been surging in price, have some dividend, and have a dividend payout ratio of 0.5 or below. When there are a number of candidate stocks meeting these criteria, which should normally be the case, the ones with relatively good value characteristics will be chosen. On 3/28/11, the following stocks were purchased for this portfolio: DNBK; GLDD; IDT; RELL; and RGR. Recent research reportedly shows that smaller capitalization stocks with dividends tend to outperform the market. This is an effort to see if selections of such stocks that also have momentum and certain value characteristics perform well too.

The following is my regular quarterly summary (statistics through 3/31/11) of the asset approaches followed here:

The average of all the portfolios being followed (not including the S & P 500 Index), both losers and winners, turned out to be a little over 5% in about 0.4 year, once adjustments were made for the different portfolio durations. This works out to an average annualized gain of around 15%, net of commissions but before dividends. While this is not a terrific overall return, particularly when the S & P 500 Index annualized performance was over 23%, it is not considered bad for a relatively short-term outcome among experimental sets of assets.

Nonetheless, the lowest performing two experimental portfolios, the obviously misnamed Double Winners as well as Five-Star Stock Portfolio (a 5-asset portfolio) are disappointing enough that they are being discontinued. In my personal nest egg, their assets will be retained until they are at least profitable on average. Since I cannot recommend either approach, they will receive no additional investments and will not be monitored here further. It is only speculating, but I think the reason these turned out to be poor performers may be that so few stocks met the criteria that the ones still in the filter had too little going for them. In other words, there may have been good reason for their having been low in price initially. It is possible that eventually they will come through, but for now they are noticeable for having done substantially worse during the recent downturn and yet also for not having joined the rest of the stocks in the more recent bounce back from the initial concerns over Middle Eastern unrest, oil price spikes, and the tragedies in Japan.

The Low Price to Earnings Portfolio has sufficiently under-performed both the S & P 500 Index and the Low Price to Book Value portfolio that it too will receive no additional funds. Since it has been ongoing for over a year, for comparative purposes I shall nonetheless keep monitoring it till the last of its assets have been sold, just in case later developments in the portfolio could partially redeem it.

Despite the amazing annualized performance projections of some of the above experimental portfolios, note that the statistics are less reliable in proportion to the shortness of the portfolio assets' average hold periods. At this point, it would be best to disregard projections higher than 30%. Time will tell what the actual performance will be, of course, but it certainly will NOT be higher than 50% a year. In fact, chances are the best of the bunch will not in the very long-run exceed around a 20% annual total return.

In the next day or so I expect to have a little more information on my wife's and my net total assets as of the end of 2011's first quarter.

I wish everyone good results over the next three months!

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