April, 2009: 1 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.

4/1/09-I wish it were an April Fool's joke, but in fact this worst economic downturn, and likely also most impressive bear market, in my lifetime is taking quite a toll on our Classic Value (CV) hypothetical portfolio (not to mention our actual nest egg!). Here is the CV & S&P 500 Index performance summary, and the rather ugly reality, through the first quarter of 2009:

Portfolio or BlendAverage Asset
Hold Period
Classic Value*0.87 year<3.05%><3.52%>
SPX* **4.49 years<26.69%><7.55%>

(The statistics combine portfolio open and closed position results and are effective as of the end of trading yesterday, 3/31/09. Dividend income has not been included in the table's performance figures. Commissions, though, have been subtracted from the portfolio asset results, but not from the SPX "gains.")

( *since inception, 10/4/04)
(**SPX is used as a proxy for the S&P 500 Index.)

Observations about the portfolio results:

  • As usual, I feel the closed position figures are more indicative of the actual performance of a portfolio than the more volatile and short-term open positions. For the CV assets this time, the closed position figures at least still are barely in positive territory. Since early 10/2004, they have averaged +1.84%, compounded annually, for a total return of about 3.5% a year (after commissions), once a quite conservatively estimated CV mean dividend of 1.7% has been included.

  • Lately, of course, the losers have far exceeded the winners among our CV assets. It remains a good and open question whether there would have been significantly fewer losing positions among CV stocks if the hold period had been longer. Intuitively, I think that must be the case, but I do not know.

  • In our own portfolio, we have been selling assets that no longer have as good a price to value as the many other excellent candidate equities now available with which we might replace them. However, so long as their value still persists among the best out there, we are holding them indefinitely, trusting that, on average, eventually these will be among our winners, buoyantly lifting the overall portfolio once this huge bear is transformed into an impressive bull.

  • As a reminder, Ben Graham wrote that over any given five-year period he and his firm's experience with value assets had been that they had average annual performances of 15%. So, considering that the last bull market ended in 10/2007 and that our CV performance since then has been dismal compared with the period from 10/2004 until that date (indeed, our closed position Classic Value performance [not counting dividends] through 9/30/07 had averaged 19.62% a year), it seems we are due for a major upturn in value assets' returns before long, if only to get us back up to that average 15% a year return level.

  • Of course, things are not quite that simple. Even Benjamin Graham struggled during the Great Depression. While this is not anything so severe as that, it is arguably worse than most of the bear markets with which he had to deal during his firm's value asset record keeping. In fact, the recent combined credit/housing/commodities/equities bubbles (that have together burst in roughly the past year and a half) may represent an unprecedented level of market risk, surpassing even that prevailing in late 1929. And we cannot properly compare our CV portfolio's results to date with that 15% annual record Graham discussed, since he had in mind asset holds of generally more than the year-and-a-day we use as a stock's minimum duration in the portfolio (unless there is a buyout or merger). So it is to an extent an apples and oranges thing.

  • Notwithstanding those objections, however, I think I am on safe ground in suggesting we may well be overdue for a significant rally and in pointing to Graham as having been an optimistic yet reliable prophet on whom to base such a forecast. Who knows when it may occur? We have just witnessed a favorable March. There might be more of the same in store over the next few months. On the other hand, a true turnaround of market performance could still be a year or more away.

  • In my view, though, it is unquestionably a good time to be buying, either on a dollar-cost-average basis, as through our IRAs or 401ks, for instance, and/or, if one has the cash (I still would avoid margin!), loading up the truck with the terrific bargains there for the taking whenever we have new dips.

  • My wife and I continue to have as an annual target to increase our portfolio's book value by 12.5% or more, and, though it is still early innings, are on target to achieve that goal again this year.

  • Our portfolio of "Value Line" assets (with positive momentum, excellent safety, and probable 3-5 year returns of 125% or better) has been doing better than our CV holdings of late, off just 2% since we began to acquire such holdings last November. We shall keep adding these to our nest egg so long as the bear market provides. We are also still favorable toward Berkshire Hathaway and periodically adding its BRK/B shares. We have seen more than one conservative valuation of these shares' intrinsic value as still above $4200. At today's closing quote of $2819, BRK/B looks to me to be at just 0.67 or less of its I.V. In time, I think Berkshire Hathaway will once more surpass most assets (though perhaps, due to its size, not most value bargains), as the market anew and belatedly recognizes how well that company is still being run.

4/28/09-Since the last entry, our Classic Value (CV) pick, PRE, purchased on 4/7/08, has been held over a year. It will be sold early this morning, Tuesday, 4/28/09, at the prevailing market price at that time. It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 4/7/08 to 4/28/09 per share performance. Through the close of trading on 4/27/09, after subtracting a commission (while not counting any dividends), PRE had been down 17.39% in the past 12(+) months.

Also since the last entry, our Classic Value (CV) pick, NSEC, purchased on 4/28/08, has been held a year. It will be sold early tomorrow morning, Wednesday, 4/29/09, at the prevailing market price at that time. It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 4/28/08 to 4/29/09 per share performance. Through the close of trading on 4/27/09, after subtracting a commission (while not counting any dividends), NSEC had been down 47.99% in the past 12(+) months.

My top-ten equities for mention today are: AMPH; BRK/A (BRK/B); EGY; ENDP; ESV; GHM; KBR; LECO; MUR; and SPAR.

The focus this time is on a new Classic Value (CV) selection, Spartan Motors, Inc. (SPAR) (recent price $6.78). SPAR's trailing price to earnings ratio is just 5.15. The asset's market-capitalization size is nano-cap: $220.94 million. Spartan Motors, Inc. has a 1.40% dividend, with a dividend payout ratio of 0.04. The price to sales ratio is but 0.27. SPAR's price to book value is 1.31. The shareholders equity to total assets ratio is 0.65. There is positive free cash flow, with a price to cash flow of only 4.60. Return on equity is 28.49%. Debt to equity is 0.16. The current ratio is 2.63. This stock has low P/E, P/CF, P/S, and D/E ratios in its favor. It meets Benjamin Graham's bargain stock safety and value criteria.

Spartan Motors, Inc. will be added to our CV tracking portfolio, as well as our own nest egg, at its early market price this morning (that is, on Tuesday, 4/28/09).

On a personal note, I am quite pleased to report the latest news on my young nephew (who just turned ten on 4/23), whom I had mentioned earlier as having been diagnosed in September with bone cancer. This week he is being fitted with a partial left prosthetic leg and is expected to be able to walk without crutches using it within the next several weeks. Following both surgery and extensive chemotherapy, he is cancer free, per his latest CT scans, x-rays, and blood tests. Of course, there is no certainly he is fully out of the woods, so new scans will be done periodically for awhile, but his prognosis is now excellent, the odds of a recurrence considered less than 10%. Needless to say, my wife and I, his parents, and the tons of other people who have been closely following his progress are happy with this best possible outcome. Other kids who had the same type surgery he has had for the condition have gone on to lead amazingly normal lives, adjusting quickly to the prosthesis, so that they can eventually do almost everything a person with two normal legs can do. I appreciate very much the responses from readers who have sent their best wishes and prayers for his recovery.

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.

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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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