July, 2011: 2 4 10 12 14
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.

7/2/11-The following is my regular quarterly summary (statistics through 6/30/11) of the asset approaches followed here:

Portfolio or Market IndexDate Began
Average Asset
Hold Period
Low Price to Book Value5/14/090.86 year14.67%17.18%
Low Price to Earnings1/14/100.62 year0.24%0.39%
Jim's & Phil's 10 for 10 (combined)5/14/101.13 year16.20%14.23%
Earn. Estimate Increase 5%(+)1/20/110.10 year3.50%40.04%
Net Nets2/24/110.24 year<11.87%><41.27%>
Small-Cap Momentum with Div.3/28/110.10 year<1.08%><10.61%>
B. Graham Dividends w/Value Port.5/20/110.08 year0.00%0.00%
S&P 500 Index (SPX)5/14/092.13 years47.93%20.19%

A few observations about the above results:

  • As I approach my final years as an investor, at most my final decades, I am more concerned with stability and risk-adjusted returns in both our nest egg as a whole and in the specific portfolios which comprise it. While it is true that the long-term potential is good for the Net Nets approach, I have not had a good experience with this technique. Its prices move counter-intuitively, and I am never very sure I have made good picks among the few remaining assets with per share "net net current assets" greater than their share prices. I do not know if the difficulty is with the wide bid-ask spreads, underlying weakness in the companies, manipulation of the prices by folks seeking to profit from shorting them, etc. This is the second or third time I have attempted to master the method, but, as before, I am too bothered by the prices falling significantly even when the market is rising to keep adding new money to the strategy. Instead, wanting to raise reserves in view of the partisan "brinksmanship" occurring in Washington (which in my view has a good chance of badly spooking the markets in the next few weeks), I have sold all my Net Nets positions. Having done so, I do not intend to try this type strategy again.

  • I have also, as mentioned in the last quarter's summary, been quite disappointed with the Low Price to Earnings results. Despite researching for and investing in what appeared to be good securities with excellent value and safety criteria being met, and though a handful have done well, overall they have shown about as close to a zero result as if I had put the same amount of our money into money market funds. The outcome being significantly better for low price to book value equities, I shall concentrate on them in future with the funds I would otherwise have invested in selections which sport low P/Es but do not necessarily have equally attractive P/Bk ratios. In addition, I shall when our portfolio is generally up over the next few weeks or months be continuing a policy of selling into rallies what remains of our low P/E portfolio, both in order to increase the proportion of the nest egg safely on the sidelines and to make extra funds available for new low P/Bk or high dividend, low risk picks.

  • While the return on the newest portfolio, B. Graham Dividends w/Value Port., at absolute zero (to the dollar exactly the same as the total cost basis), this represents only a little over a month's experience with the strategy, one I have applied already in our own nest egg and so am confident shall be profitable given time. Meanwhile, though the price has shown no change, the assets selected for this approach so far, JNJ, NVS, and T, have an average dividend of 4.1% a year. What is more, that average is likely to rise as the profitable, safe stocks picked in this method have increasing earnings. This is as well a technique which helps balance out some of the more turbulent ones I use.

  • The combined Jim and Phil 10 for 10 approach has performed relatively well despite two of the picks, HQS and AOB, having unfortunately ceased being traded and/or having had major losses after concerns arose over similar assets having highly suspect financial data. I remain optimistic that the majority of these holdings will prove lucrative going forward.

  • The Low Price to Book Value technique also suffered from HQS now being shown on our monitoring site as having zero value since it is no longer trading. Despite that, Low P/Bk has a record which is clearly superior to that of the major market averages long-term.

  • Re the S & P 500 Index results, they are undoubtedly good over the last year or two, yet (in contrast to most of the low P/Bk picks cited by Investor's Journal in the last ten years) they are hardly commendable for the past decade, showing average annual gains of just 0.66%.

  • The five portfolio approaches left, after Net Nets and Low Price to Earnings are eliminated, are the ones I shall concentrate on in future. I have enjoyed experimenting with a wide variety of techniques, many of which I have discussed here, but feel that, rather than engaging in further trials, now and for the foreseeable future it is time to focus efforts and funds on those methods which have the best chance of providing satisfactory risk-adjusted profits: 1. Low Price to Book Value, which represent the largest chunk of our holdings and shall continue to have the lion's share of my new investments; 2. Jim's and Phil's 10 for 10, a strategy for long-term growth; 3. Earn. Estimate Increase 5%(+), an approach which combines value and earnings surprise characteristics; 4. Small-Cap Momentum with Div., as yet not a fully proven strategy and down slightly in the last few weeks (though this is moderated by its significant average dividend), yet one with great potential; and 5. B. Graham Dividends w/Value Port., a method that combines relatively high dividend yields with reasonably low risk.

  • The average result of following these five strategies to date, taking into account the larger portion of investments in Low Price to Book Value, would be better than 16% a year before dividends. This may in fact be a conservative estimate of their long-term total return outcome.

I have routinely provided info on the Low Price to Book Value investments and have mentioned as well those currently held in the B. Graham Dividends w/Value Port. In addition, the assets in the Jim's and Phil's combined 10 for 10 portfolios are fixed, not subject to any change for awhile. Here are the current positions in the other two portfolios being retained:

  • Earn. Estimate Increase 5%(+): AIRM; BEXP; CRDN; MIND; and NX. I expect to be rebalancing this portfolio in the next several days, selling those that no longer qualify and adding ones that do.

  • Small-Cap Momentum with Div.: AEA; CV; LAD; SMP; and SPTN. The portfolio was rebalanced on 6/28/11. SMP still qualifies after being bought on 4/11/11. The others were just purchased 4 days ago.

Concerning our personal nest egg, the vast majority of our holdings are in the strategies mentioned above. I do have holdings from several years ago that it is too much trouble to sell, for instance shares in companies that have had stock splits, mergers with other companies, etc., so that the trail is now hard to follow and it will be easiest just to let my wife or other heirs update the cost bases for tax purposes once I kick off (when cost basis is bumped up to assets' market value upon my being deceased).

There is also a small portion of our holdings invested in recommendations from a nephew who is keen to try his hand at investing but, alas, as yet has not mastered a value-plus-safety orientation. In bull markets the suggestions of his I have followed tend to do a bit better than my other holdings, though in bear markets they fall harder.

Further, I have an interesting little allocation in each of two strategies featured in the "Mechanical Investing" Motley Fool discussion board, Canslim 26 and YearEarningsYield (YEY). The total of all these extra holdings is currently only about 10% of our net assets and is not being followed here because they are somewhat aberrant and do not fit well into the value investing philosophy I most appreciate. While the YEY approach does emphasize stocks that have low P/Es and/or high dividends, for instance, it does not necessarily screen out equities with relatively high dividend payout ratios or debt.

An ongoing fundamental of portfolio management for me is to raise the level of total equity book value each year. Over the past six years, through 12/31/10, for example, total book value has been increased at an average annual rate of over 10%. (See the 4/2/11 entry for a longer discussion of this topic.) The annual minimum book value increase target for the next several years, however, is 13.5%, which makes this year's goal a bit over $680,000. Currently our total equity book value stands at $606,500, so I have a ways to go to achieve the intended 2011 book value amount. The challenge is greater since I feel the need to reduce risk in the nest egg because of incompetence in the nation's capital and an anticipation that before year's end there may well be better opportunities for picking up bargains. Thus I am selling into such rallies as we have enjoyed this past few days.

Meanwhile, our equities as of the close of trading on 6/30/11, the end of the second quarter, stand at $695,730 (and are a few thousand higher effective the following day, 7/1). It is hoped but by no means assured that if I can get our total book value up to $680,000 or above by 12/31/11, the total market value of our equities may grow substantially from here as well. Unfortunately, our overall nest egg has not as yet seen much rise this year, up only 1.5% through the end of June.

As always, I wish everyone good personal finance statistics over the next three months!

7/4/11-Since the last entry, our Low Price to Book Value asset, SYMS, purchased on 11/1/10, is up 55.71% (through the close of trading on 7/1/11) and so is eligible for sale. I have placed an order to redeem its shares early on Tuesday, 7/5/11. Info on both its cost basis and its performance from 11/1/10 to 7/5/11 will be added to the Low P/Bk closed positions spreadsheet, and SYMS will be deleted from the record of open position holdings.

My latest selection for the Ben Graham Dividends with Value Portfolio is RTN. It meets Graham's criteria for value and safety, based on its high dividend and low debt. We shall be adding RTN to our nest egg early tomorrow, at its then market price, and recording it among our Ben Graham Dividends with Value Portfolio open positions.

My current top-five low price to book value stocks are: BBOX; KTCC; SKX; STC; and SYA.

My new favorite among the current top five low price to book value stocks is Black Box Corp. (BBOX) (recent price $31.76). It also meets Benjamin Graham's bargain stock safety and value criteria.

Black Box Corp. will be added to our nest egg at its market price in early trading tomorrow, 7/5/11.

While I like BBOX a bit better on a risk-adjusted basis, I am also rather partial toward STC, which has a dividend as well as a low P/Bk (0.45). I am tempted to buy shares of both these equities, though it will mean having to sell more of other shares in our nest egg (that currently have less appeal and a higher price to book value).

We hope everyone has had a super 4th of July Weekend.

7/10/11-Since the last entry, our Small-Cap Momentum with Dividends Portfolio has been rebalanced again twice. When generating profits, this strategy turns out to involve fairly frequent trades. With the latest buys and sells, the method's stocks as of early Monday, 7/11/11, will be comprised of: CV; INTX; SPTN; SMP; and VPFG. Its open positions are now up almost 9%. Including both open and closed positions, after subtracting commissions, while not counting the dividend income, this portfolio is so far up over 2% since its March, 2011, inception, for an annualized gain of over 7%, about 8-9% if dividends were included.

My latest selection for the Ben Graham Dividends with Value Portfolio is INTC. Based on its high dividend (currently 3%) and low debt, INTC meets Graham's criteria for value and safety. We shall be adding this asset to our nest egg early tomorrow at its then market price and recording it among our Ben Graham Dividends with Value Portfolio open positions. Effective 7/11/11, this technique's equities will include: INTC; JNJ; NVS; RTN; and T.

My current top-five low price to book value stocks are: BBOX; LAKE; MLNK; STC; and SYA.

My new favorite among them is ModusLink Global Solutions, Inc. (MLNK) (recent price $4.64). It also meets Benjamin Graham's bargain stock safety and value criteria.

ModusLink Global Solutions, Inc. will be added to our nest egg at its market price in early trading Monday, 7/11/11.

7/12/11-Considering the potentially high and long-term costs of our elected officials' continued irresponsible behavior, and in view of the ongoing partisan brinkmanship games inside the Beltway, over the normally routine raising of the country's debt ceiling to cover expenses Congress has previously approved, I do not think it wise to expend additional reserves on new investments until the nation's politicians finally resume acting like statesmen serving the citizens' genuine interests (rather than as several hundred squabbling egos), and so come to a meaningful agreement that overcomes the current impasse. Such reserves will almost certainly be required for bargain purchases to restore our gutted portfolios if the debt limit is not raised by the looming deadline.

Accordingly, I shall not be making further purchase recommendations over the coming few weeks, unless the S & P 500 has already fallen at least 10% from its current level (1314) and/or a debt ceiling compromise is at last enacted.

Meanwhile, if not for the fact that the very people who deserve indictment would have to pass such an action, I would be calling for the impeachment of members of Congress on grounds of treason, their inaction on this crucial issue being a greater threat to United States' economic strength and America's standing in the global arena than any possible selling of its secrets to a hypothetical enemy.

7/14/11-Have been alarmed, on further reflection about the state of the nation's finances, that my Small-Cap Momentum with Dividends Portfolio is too vulnerable to a substantial downturn in the market. Certainly it has good upside potential during bull markets. However, it also drops like the proverbial stone when the average investor is throwing in the towel on equities. After multiple trades and over three months now of watching these big ups and downs, I have in fact decided to throw in the towel on this volatile portfolio. As of today, its performance is up, overall, including closed as well as open positions, but only about 1%. With dividends, the total return has been about 1.5% since inception, yet with way too much drama along the way. Accordingly, I am selling the current portfolio (INTX, LAD, SMP, SPTN, and VPFG) and using these assets as a way to further bolster our nest egg's reserves, in case the actions - and inactions - in Washington continue to be dangerous for investors' wealth.

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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