April, 2002: 1 3 8 12 19 24 25 28
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.

4/1/02-Today I purchased 94 shares of Korea Electric Power, ADR (KEP), for under $1000, increasing the book value of our equity portfolio by at least $1500. "Value Line" indicates the company's per share book value is about $16. AAII shows it as almost $20. Besides the low price to book (.62 or .51, respectively), this company has an above average dividend yield (over 2%), a total debt to equity of 0.38, price to sales of less than one (0.9), a low price to earnings ratio (6.1 per V.L.), and a projected increase in earnings in 2002. It appears to have average risk, primarily due to being a Korean enterprise, but meets basic Benjamin Graham value and safety criteria. Given the discrepant book values presented, the exit strategy is to sell once the price is at or above the average of the book values given by the two investment services or if/when fundamentals substantially deteriorate. If book value increases 5-10% per annum, this could result in a total return of over 100% within the next few years.

We also got our tax return and IRA contribution figures back from our CPA today and prepared for mailing $4468 in combined contributions to SEP and regular IRA account equity mutual funds, increasing our equities book value further by that much, and $2000 in a contribution to a regular IRA bond index fund, through Vanguard.

I note that, in its 4/15/02 issue, "Forbes" recommends Papa John International (PZZA), in which I'd bought shares a week or so ago (see earlier entry), as a growth at a bargain asset.

4/3/02-This morning we analyzed our budget results for the first quarter of my zero-work-hours status: income exceeded expenses by almost $1400. So, despite some unexpected outlays, we remain in good shape.

I also used the Social Security Administration site's retirement calculator to get a rough estimate of my SSA benefits if I take them starting at age 62, which I intend to do. Even using very conservative figures, it shows I should receive over $8000 a year, starting about three and a half years from now. With my retirement annuity, this will be over $30,000 a year, besides any gifts or inheritance, dividends from our assets, sale of profitable investments in regular brokerage accounts, distributions from our retirement accounts, and any income Fran has from part-time performing gigs. So, assuming no major economic or health crises, we should be comfortably well off (though far from rich) starting in 10/06, with income equivalent to $1 million in U. S. Treasury bonds at 6% interest, even if we only take $18,500 a year out of tax-deferred accounts and leave the rest of our real estate, bond, reserves, and equity assets invested. The trick, then, will just be getting through the next few years with our principal relatively intact, despite little surprises like we got from Fran's dentist yesterday. (See today's entry for Dove Feathers and Dog Hair.)

4/8/02-Completed a new analysis of our portfolio yesterday. Because of exchanges into value fund holdings, IRA contributions, and low price to book assets like Qwest and Adelphia Communications, our book value has already surpassed the year-end target, up over 10% since the end of 2001.

Today I mailed off a letter to U.S. Global Investors, asking to redeem all my shares of their Gold Shares Fund. I had put $2000 into this asset fourteen years ago, back in the days, right after the October, 1987 market crash, when the "professionals" were advising a significant investment of one's portfolio in gold and silver assets, as a hedge against rainy day losses in stocks and bonds. Well, that strategy did not work very well. Precious metals are just commodities, their prices controlled by a complex system of supply and demand. Unfortunately, the fund was managed badly and the demand for (and price of) gold was much higher when we bought its shares. We'll be "lucky" to get a little over $100 for those redeemed shares now. In general, I don't think any layperson should be induced to put money into sector funds. More often than not such assets just turn into tax write-offs.

4/12/02-There have been interesting changes for two of our portfolio assets recently. "Value Line" has downgraded the timeliness of Thornburg Mortgage (TMA). Nonetheless, it retains a low price to earnings ratio and a high dividend of about 10½%. Its fundamentals generally look significantly better that average. So, the intention is to keep it until either there is a significantly higher P/E, and the asset has increased in price 60%, or there is evidence of a significant decrease in its valuation advantages.

On the other hand, Adelphia Communications (ADLAC) was purchased about three months ago on the recommendation of two venerable value managers, as being at a price significantly below its intrinsic worth. Since then, however, it has suffered from several instances of bad news that have frightened many investors; and its price has plummeted. In fact, its price to book is now only .39. Some of its fundamentals look OK. Others look terrible. But, per Wallace Weitz, who at the last seen quarterly report still had it in his Weitz Partners Value Fund holdings, it was then still seen as an excellent investment. Schwab also indicates that 9 of 11 analysts recommend buying or accumulating it. So, although its deterioration in the market is scary, I'll stick with my policy of holding such assets unless or until a value investment professional indicates it is no longer a good equity for the portfolio, or till it is up 100%, whichever first.

4/19/02-After my physical this morning, I had blood drawn. The technician saw my book, John Neff on Investing, and commented that she needed to do something with her 401K. She is leaving this current employment and wants to roll her 401K assets over. I suggested she put them into a new Charles Schwab self-directed 401K, that they have lots of no-load mutual funds; and one can also select and buy stocks for the account through them. She liked this idea and said she would check it out and probably wind up doing that.

Have decided on the following guidelines for investing:

We may invest as much as we want and in any way we want - So long as:

  1. The book value of the equity portfolio increases by 12.5% (±20%) per year;

  2. Debt (except for mortgage[s]) does not exceed the greater of:
    1. 5% of total current gross assets;
    2. A level of non-mortgage debt based on $400/Mo. in net debt retirement payments, beginning in 5/02, from debt level as of 4/15/02;

  3. We have sufficient other assets/reserves, etc., to maintain an adequate but frugal lifestyle until the increase in book value eventually translates into a comfortable level of financial independence;

  4. The first $1,000,000 of our assets (including retirement annuity + medical and dental benefits treated as the principal [$416,667] needed to generate the annuity + benefits) is treated as a modified automatic investment management "machine;"

  5. We keep my $250,000 life insurance policy active for 10 years (thru 2/12).

4/24/02-Have decided to assure by monthly payments investment-related debt is kept at 5% (or below) of current assets.

Am in a nervous limbo over a large, lost check, mailed to Schwab nine days ago. Except that the date it was dropped in the box, 4/15, was tax day, it should not have taken more than a couple days to be delivered. Meanwhile, am wondering whether to put a costly hold on the check and start over, probably the safer course, or to keep waiting and hoping it will turn up, that it has just been temporarily misplaced in the postal shuffle but has not been stolen. At least the bank so far has no record of it having been cashed.

Have researched a number of mutual funds, besides the already recommended Weitz Partners Value Fund, (WPVLX) (1.13 expense ratio) and came up with the following three other excellent no load value funds. Each has a ten-year record about 4% per annum above that of the Standard and Poors 500 Index. They are as follows:

  • Legg Mason Value Trust (LMVTX) (1.69 expense ratio)

  • Clipper Fund (CFIMX) (1.04 expense ratio)

  • Longleaf Partners Fund (LLPFX) (.94 expense ratio)

Another no load value fund, Oakmark Select Fund (OAKLX) (1.08 expense ratio), though it has a shorter history, is also well worth consideration, with a 25.85% average compound annual return over the last five years, about 15% per year better than the S. & P. 500.

All five funds seem like terrific long-term investments, though it may be wise to wait, before making purchases, till the market has gone down. While there are occasional exceptions, in general, either buying on dips or with a dollar-cost-average approach seems worthwhile.

4/25/02-Have good and bad news. Good first: Schwab received my large check and credited it to our margin debt balance. Also, we received a new appraisal on our residence property, up about $21,000 in the last year!

The bad news: 1. our real estate taxes will likely be going up 10-15% again; and, 2. our investment in Adelphia Communications continues to take a severe beating in the market, as more and more negative stuff is being revealed about it in the press, etc. Amazingly, sources of investment info. on the stock indicate that eight out of ten analysts are still recommending either buy or accumulate. The debt load looks terrific; but I understand that is par for the course for cable/telecomm. companies, that they generally avoid taxes by always looking like they are about to sink from the debt of constant improvements, such as laying more cable, etc.

It's a real bummer to see the price going down and down. Reminds me of what happened with Fruit of the Loom. Of course, even Enron had multiple analysts giving out favorable recommendations up to and even after they'd filed for bankruptcy protection!

So, I've a choice. Sell now and take a hefty tax write-off vs. hang on for dear life and hope it eventually will come back up from the depths. Price to book is now only about 0.23. But is the book value current and valid? It is hard to imagine this sixth largest cable company going completely belly up or that so many analysts, several of the value persuasion, could be as wrong as the press and the price would have us believe. Yet, it seems sometimes these things take on a life of their own and the stock can sink out of sight despite many things seemingly going for them.

I could always sell now, then buy more a little over a month later if I get further firm confirmation from the likes of Wallace Weitz, in his next quarterly report, that it remains a good value play. As far down as it's gone, it's unlikely to have surged much in the next five weeks or so. Hmm.

Meanwhile, our assets as a whole are up 2% for the year. Well, that's something.

4/28/02-Have decided to hold onto our Adelphia Communications shares at least for the time being, and to review the Weitz Partners Value Fund's next quarterly reports. If Wallace Weitz has sold Adelphia, so shall I, but not otherwise.

This past week I sold two more of the gold assets we had purchased many years ago, both at a loss, though they had about doubled in the last several months. Neither represents anything close to good value. They were the last of such holdings I'd purchased in the belief gold stocks would be an effective hedge in a major market meltdown. The intention now, instead, is to assure each purchase is itself defensive, with an excellent price to value and thus the famous "margin of safety" of which Benjamin Graham and Warren Buffett had often written and spoken.

One of our key assets now, Berkshire Hathaway (BRK/A; BRK/B), has just been favorably mentioned in a feature article in "Barron's," 4/29/02, entitled "Warren-ted Success," on pp. 17-18. The author, Andrew Bary, suggests that BRK stock could easily be about 27-41% higher by next year, thanks to improved press and earnings.

Have settled on a personal finance strategy for dealing with the rest of the retirement period until I'm 62, after which my Social Security benefits should assure we have a comfortably large increase in annual income. Our approach will depend on three main measures:

  1. We'll sell off holdings (about 3-4% of current assets per annum) held at least a year that no longer have attractive price to value ratios, using about half the proceeds for reinvestment in excellent price to value shares and the rest for ongoing expenses and/or to reduce investment-related debts;

  2. We'll take annual distribution of tax-deferred account holdings (at a rate of about 2.5-3% of current assets per annum), beginning in 5/03. The net sale of assets between #1 and #2 will be about 5% per year of current holdings.

  3. At the same time, balancing and offsetting the above actions, we'll gradually exchange reserves and tax-deferred bond assets for low price to value equities, the main engines for eventual portfolio growth, such that the stock and equity mutual fund side of our portfolio is not simply maintained but gradually increased.

If we don't experience personal tragedies and the market cooperates much at all in the next three and a half years, at the end of that time we should have on equity portfolio worth a half million dollars (apart from remaining reserves, debt instruments, real estate, and personal property) and sufficient annual income overall ($60,000), equivalent to the yield of a million dollars in intermediate- to long-term bonds.

In the above planning, as well as the manner in which we shall arrive at buy and sell decisions till I'm sixty-two, I'm significantly influenced by two useful investor references, the first by far the more important, but the second also containing some good ideas (though the title is misleading; and, other than by starting the investing habit very early, there is little automatic or easy about safely becoming a millionaire):

  • The Intelligent Investor, by Benjamin Graham;
  • How to Make $1,000,000 in the Stock Market Automatically! (Third Revised Edition), by Robert Lichello.

Disclaimer and Disclosure Statement
Much as I'd love it to be otherwise, I receive no payment of any kind for disseminating investment information unless, by some fluke, millions of folks, on the strength of these entries, start buying shares of stock I own, a possibility only slightly less likely than our being destroyed by a large meteorite. Do not follow any suggestions made in Investor's Journal as if I were a professional.

Neither I nor Investor's Journal will be responsible for losses by anyone who obtained ideas from this site.

This diary is intended for personal interest and general information only. You are advised to do your own research (as well as to consult highly compensated professionals) before spending money on anything.

I know of no reason anyone should take my financial musings seriously. At best I am a dedicated amateur providing a bit of investment-related insight and entertainment, at worst an amusing diversion.

My wife, Fran, and I may at times own shares of some of the assets mentioned here. But neither of us receive any benefit from reference to them, unless you count the mutual misery when we get it wrong, or the opportunity to gloat when we get it right.

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