4/7/03-We have "good," "bad," and yet more "good" financial news today. In the micro-budget, covering our monthly or annual income and expenses, we gained about $100 of disposable cash today by: 1. turning over our collected loose change to the bank, for tallying and deposit in my account; and 2. emptying our rented safety deposit box and closing its account at the bank. We'll use a locked fire-resistant box kept at home, a gift from Mom, instead.
But in the macro-budget, covering our total portfolio of current assets, we lost everything, roughly $2500, on an investment mentioned here a few months ago in a Piotroski value "bargain," Telesoft (TSFT), which went the way of several earlier "value" investments, in Fruit of the Loom, Qwest, and Adelphia Communications, into virtual worthlessness for the investor.
The latter three companies saw their share prices fall after scandals arose about management or accounting practices, unknowable to the average investor until too late. In Telesoft's case, word came Friday, 4/4/03, that management had decided voluntarily to deregister the security, deleting it from any of the trading exchanges, and relegating it to the stockholder "no man's land" of the pink sheets. As my Schwab representative succinctly said, "It's going away."
By Friday evening, 4000 shares of TSFT were worth forty cents! I asked how it was legal for a company's management to take an action, without consulting its shareholders, that at once nullifies the stock's worth. He said there were a couple loop-holes for companies, left in the law back in the 1930s when the Securities and Exchange Commission was established. He added that they might have notified their largest shareholders, presumably thus obtaining majority support for the action, and come to a private arrangement with them. (It may be recalled that, ironically enough, at one point Motley Fool was showing the worth of this single holding in our nest egg as $10,000,000. "Easy come, easy go" has never seemed so applicable.
I'm reminded of comedian Gilda Radner's autobiographical book, It's Always Something.
I remember now that so-called "penny stocks," relatively illiquid shares trading for $2.00 or less (TSFT at $.61 when purchased) are often tied up in schemes for profitable price manipulation, frequently by the Mafia. It would not be unreasonable to imagine that short-sellers, standing to make a mint if the price should suddenly plummet, might have influenced management under the table to make its deregistration decision and announcement. If the Mob were involved, it would be hard for authorities to prove such corruption, hidden as it could be beneath many layers of money laundering. Besides, they are stretched thin and have bigger fish to fry.
So, I decided - what option did I really have? - to take my losses, for tax purposes, treating it as a business expense. (I think of the half-million dollar or so portfolio we own as an enterprise, one I manage for overall profits after regular expenses, taxes, and debt payments, and aim for an average annual cumulative business return and book value increase, above all costs, of 10% or more.) Schwab will do a courtesy trade for us, charging only the forty cent current balance as our commission.
Meanwhile, though, there is more good news. Also on the macro-budgetary front, our total assets are now up a little over 5 percent in recent weeks, more than $25,000, despite the complete TSFT loss. This says something about the importance of diversification, at least for average investors like me.
Telesoft and the other so-called "value" investments that went bust for us have taught me a couple more lessons. First, we should avoid purchasing illiquid securities. Thus, from now on, we'll only buy assets selling at $5 or more per share. Second, there must be a greater margin of safety for our equities than provided by meeting any single Benjamin Graham value criterion. Just one value factor advantage might have been sufficient in his day, but no more, certainly not for most small investors. From now on, assets purchased should have the equivalent of double the original value investing level of safety. For instance, besides relatively low debt and price to book value, the asset candidate should also have a solid dividend and a reasonable payout ratio and/or a high earnings yield.
4/15/03-Altria Group (MO) and R.J. Reynolds Tobacco (RJR), albeit with great yields, have been under price pressure recently as law suits (and outrageous judgments) continue, brought by smokers and the U.S. government, notwithstanding that those using cigarettes should have been aware of risks to their health and the Feds have been supplementing tobacco farmers and benefiting for decades from heavy taxation of the tobacco industry, clearly caring much more about their share of the profits than public health.
I've now reluctantly sold both of these holdings. The companies no longer have sufficient financial strength to assure they'll weather the litigation storms. At least, considering the hefty dividends received from them since purchase, our losses in these equities have not been major.
Huge, plaintiff-biased judgments weaken otherwise good companies just when the economy needs a large boost rather than fresh sledge-hammer blows. The states, already desperate for additional funding to stem floods of red ink, also must scramble to back up potential lost revenues, in case the massive tobacco settlement of just a few years ago is scrapped due to tobacco company bankruptcies. When politics enter the capitalist equation, often the only winners are politicians and lawyers. Unfortunately, their good fortune is not a favorable harbinger either for the citizen or the shareholder.
There has been no contact from the company, Harcourt, to which I'd applied for temporary (spring and summer) work as an exam papers grader. I thus assume I was not among those selected, and so will continue looking for an appropriate position.
Meanwhile, at some point perhaps I can assist Fran in getting a small web design business going.
Warren Buffett has said that the secret of investment success is not great luck or high IQ but "low expectations." Consistent with this, in the current economic and market environments, whether or not Fran or I have further employment, we'll seek simply to assure that on average, after expenses, our nest egg does not go down and that we gradually reduce debt toward zero while getting a 3% or better overall yield on our liquid assets. Anything better than this is gravy. (We'll take no significant risks for a little gravy.)
4/23/03-Our portfolio, like the major market averages, being up further lately, the holdings we own have now achieved a sell signal. Starting in March, I had set targets based on $2500 plus 5% above (sell) or below (buy) the level of our equity investments. Our assets of all kinds are now up 8.7% in the last few weeks.
We are hoping for an additional increase of about 6.3% between now and March of next year, which would represent the amount needed for our budgeted expenses plus a 10% per year overall portfolio increase. This is simply a goal, however. Our personal finance planning will be successful if we merely hold to our budget, avoid any net dipping into our nest egg, and see the portfolio go up at least as much as inflation.
Based on this week's sell signal actions, plus the tobacco industry security sales earlier this month, we have so far maintained equities at 1.05% of target while redeeming over $12,000 of our stocks and reducing debt.
Early this afternoon we drove over to our main insurer and completed the paperwork and payment for $1,000,000 in umbrella liability insurance. Believing in a margin of safety, our intention is to keep such coverage at a rate roughly twice our net worth (not counting the value of fixed income).
4/30/03-I just completed the initial employee forms for Harcourt and was officially hired by them for three sessions of full-time (but temporary) work scoring test papers. With training, the job starts the week of 5/11, ending about two months later. It pays $10/hr. and involves only day shift desk work. It requires just casual attire. The main objective here is not the income or convenience, welcome as they are, but the opportunity to secure a good employment reference, offsetting a negative one from "Mr. Turnover," my last supervisor. If this goes well, I would also be in line, without further competitive screening, for repeat test scoring projects in succeeding years.
I think now that a good compromise between, on the one hand, my interest in our having adequate income while doing something interesting and productive outside the home and, on the other, still having the leisure and relative freedom from stress associated with retirement, is to work at this position plus other seasonal jobs, perhaps in tax preparation, so that, in all, I work a total of about half-time. Don't know, of course, if this can work out, but it may be a constructive solution.
In such a scenario, instead of via a career, I would express more ambitious or competitive drives through careful but moderately aggressive management of our nest egg. (As of tonight, our net assets are up 9.2% since about a month ago.)
Meanwhile, I've been called for an interview tomorrow, to fill a position as a loan processor for a mortgage lender located fifteen to twenty miles away, a full-time job paying $25,000/year (about $12/hour), setting up the paperwork for the loan officers who work strictly on commission, receive more as they can manipulate the customers out of lower rates (or get extra money from them for points and other fees), and who make $100,000 to 200,000 a year in this fashion.
Yes, an extra $25,000 a year would be nice to have, but a permanent, full-time position involving daily having to wear business attire and fight heavy rush-hour traffic, morning and evening, while doing work that supports folks I consider predatory, hardly seems like a higher quality of life option.
I think Fran would probably prefer it if I worked at higher-paying employment. It would of course help our budget. But my efforts for over twenty years are already providing our sole retirement annuity. Understandably, Fran does not care enough about our having added income to want to give up her own mainly non-working status, unless it involves a coveted orchestra position. Who can blame her? We'll probably get by financially in the years ahead, then, but without many luxuries.
The lender's selection process probably cannot be completed within a week, so if hired there I'd likely not be able to notify Harcourt in time for them to scramble to replace me before their training begins. I'll therefore call the lender and cancel the interview if their position will not be filled almost immediately.
Have learned more about eighty-year-old Mom's portfolio and estate, which have decreased very substantially over the last few years. My brother, Horace, who is her financial consultant, has borrowed the most from her (no conflict of interest there!), takes a yearly 1% fee, and keeps advising her to give large annual gifts of money to him (and her other children), with the assurance that, at an 8% annual return, she'll never outlive her assets. In my opinion, he's conveniently ignoring certain facts with such self-serving counsel: 1. It's highly unlikely she'll ever see an average annual return of 8%; 2. Even if, otherwise, a moderate risk portfolio might eventually achieve a 6.5-7% return, that is automatically reduced to 5.5-6% by his fee; 3. Out of that (optimistic) 5.5-6% total return, she must still pay most of her expenses and make any gifts (combined, these have actually been running about 8-10% a year of her net liquid assets, by my "guesstimate"); 4. Her actual portfolio performance plus dividends, in the years since Dad's death, has averaged a negative number; 5. A portfolio as conservatively allocated as she would prefer would be unlikely to return more than 2-3% a year (after Horace's fee), and this bright forecast assumes she never has a severe and expensive medical problem (for which she is neither prepared with a long-term health care policy nor catastrophic illness insurance).
Unfortunately, it looks to me as though her financial planning has been just short of a disaster. Any major new stress on that nest egg could leave her with virtually nothing, though she had $1.5 million shortly after Dad died.
My other brothers and my sister, each anticipating an eventual estate settlement at one-eighth of the earlier ($1.5 million) amount (or more), could be in for a surprise. We might all be lucky not to be called on to assist with her later medical and personal care bills, after the money runs out.
Mom continues to be in denial, convinced, though he lives only a mile from but has few contacts with her, and in other ways freely shows her little respect, that Horace has her best interests at heart. Currently he provides Mother no monetary benefit as her financial consultant. For this he gets over $7000 a year! She would do better to pay him 25% of any actual increase in the portfolio from one year to the next, offering nothing if, after her expenses, the assets do not go up at all. Of course, she could do still far better using a discount broker like Schwab, but that's never going to happen either.
To give Horace his due, he has tried over the years to earn his keep. However, Mom, like Dad before her, stubbornly insists on managing the portfolio almost exclusively her way, regardless. So, due to the loan, gift, and fee ideas Horace came up with to feather his nest with Mother's money, he has benefited in a big way. But, besides that, she has overseen the nest egg in a very inconsistent and often emotional manner. Typically, out of greed or fear, she has done the opposite of the basic rule of investing, to buy low and sell high.
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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.