7/5/03-Knock on wood, but, by some good fortune, our net liquid assets are now up $92,000 (25%) since mid-March of this year, despite the recent pull-back in the equity markets and the fact that Fran and I are both retired (on just a modest retirement annuity of about $22,000 a year), our income from part-time or temporary earnings during these months being only about $3000. What is more, this was accomplished while about one-fourth of our assets were in relatively safe money market accounts, short-term bonds, or similar reserves. I am, as a result, more than ever convinced that a value or contrarian approach to investing is best.
One of the systems with which we've had success in this period is a quite simple strategy touted by Robert Sheard (of The Motley Fool) in The Unemotional Investor.
He calls this technique "Unemotional Value 2."
The web site "Backtest Hall of Fame" helpfully provides the easy steps needed to select stocks using this method:
As of the close of trading on 7/3/03, the two stocks to be purchased using this method are:
By this technique one may, in an hour or less a year, obtain relatively high-yielding assets in an approach that, over the long-term, has good prospects of beating the major market averages. It is also a strategy that takes most of the guesswork and stress of indecision out of stock investing. One knows precisely when and what to buy and sell.
A big disadvantage is its volatility. With just two selections, if something goes seriously wrong with even one of them, much can be lost. Say you begin with $25,000. After five years the portfolio might be up to $65,000. Then, in the sixth year, one of your selection companies declares bankruptcy (as rarely but sometimes occurs) and you lose 100% of your investment in that security, perhaps reducing the portfolio by about $32,500. So it is not an approach for the fainthearted.
Offsetting this, though, is the prospect of performance that over the long haul averages much better than, say, the S. & P. 500 index. (Per R. Sheard, the annualized return of this method from 1961 through 1997, just before The Unemotional Investor was published, was 21.67%. Even considering that the compound annual returns since then have undoubtedly been lower, the strategy seems likely in the long run to be superior to investing in any of the major market averages.)
For Fran and me, this technique is not one we'll use exclusively or even with most of our liquid holdings. But for 5 -10% of our nest egg it seems ideal.
We invested $25,000 on 12/30/02, half in Honeywell and half in J.P. Morgan Chase. As of 7/3/03, including dividends, they are up on average just over 30%.
7/11/03-Have rediscovered Benchmark Investing (BI). We had bad luck with it a number of years ago, buying a lot of BI selection, Fruit of the Loom, stock just before its price plummeted almost to zero and then the company declared bankruptcy, so that all remaining common shares did in fact eventually become worthless. Even though the system had earlier helped us pick Intel, with which we had a much better experience, I have thus for some time been leery of this mechanical and complicated approach to value investing. Now, however, I have researched it further with help from the Trouncing the Dow web site, a new reading of the book of the same title, by Kenneth Lee, and a check into the record of this technique, at least as back tested, which turns out to have averaged over 26.5% compounded over the last 29½ years! At their reported rate of total return in that period, a mere $1000 investment in 1973 would be worth over $1,000,000 today (assuming one followed the approach throughout that period and that the tax consequences of trades were limited by a tax-deferred brokerage account).
Armed with my new interest and information, I labored this past week through the complicated calculations for all thirty of the Dow Jones Industrial Average stocks, preferring to do them myself rather than paying the $200 a year charged by the web site, which I'd want to double-check anyway. It happened that only one of the Dow 30 currently meets the criteria, if I did the math right: Home Depot (HD), with a recent price of $33½. It's current low and high price targets are $42 and $82, respectively. So, I'm buying a few thousand dollars worth of HD shares.
Given that I now know how to select the current BI winners, can determine when it is best to sell them, and the system's record is so terrific, I anticipate limiting my purchases of large-cap equities other than REITs to only those which, as a minimum, meet the BI criteria. I'll also, except for mid-cap, small-cap, and micro-cap stock purchases, suspend my usual restrictive personal selection criteria, such as that debt to equity must be no higher than .33 or price to book value no greater than 2.
Incidentally, the two stocks cited in the above entry as meeting the present Unemotional Investor 2 criteria, AT&T and SBC Communications, do not make the cut as current BI bargains.
7/31/03-Purchased 1200 shares of Parlux Fragrances (PARL) this morning. PARL has a price of $3.12, a market-cap of $26.7 million, a P/E ratio of 6.1, zero dividend, a price to book value of 0.54, and a debt to equity ratio of 0.10. It meets two Benjamin Graham value criteria (P/E and P/BK) and two safety criteria (D/E and current ratio [3.83]). Per AAII, its price to sales ratio is 0.43. The company's price to cash flow is 4.56. Return on shareholder equity is 10.83%.
This year our micro-cap value stocks, such as this, have generally done quite well. We have high hopes for PARL as well.
Disclaimer and Disclosure Statement
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.