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August, 2002: 5 8 12 17 19 21 27 30

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.

One slightly positive note with respect to our finances, though, is that I at least now have an interview in response to one of the applications for part-time work I had submitted, in this case to Target. It is far from my top choice. However, if offered a job there and working at least twenty-two hours a week (at their relatively low pay rates) I should clear enough to allow us to weather the equities storm until my Social Security benefits kick in a few years from now. This would assure us a minimum budget of $60,000 a year.

In view of the continued weakness in stocks, though, which could well persist for some time, I am making some changes to tighten up our margins of safety and hopefully assure better odds for eventual gains in our equity investing. I am mindful of a quote from the latest (8/2/02) Louis Rukeyser show, which I paraphrase: "You make the most money in bear markets. You just don't realize it yet."

First, we shall buy no stock, no matter how enticing, for which the debt to equity ratio exceeds .33.

Then, our "Value Line" timeliness plus growth and value assets shall only be held for the greater of: one month or until they lose their timeliness rank of one.

Except for our Prudential 457 plan assets, all equity mutual funds held must be value funds.

Stock purchases shall at least meet already indicated criteria and must augment aims to increase the portfolio yield to 3% or higher and increase the total net book value of individual assets held by 1% (or more) per month.

I intend that we shall specialize in low price to book stocks. No company shares shall ever be purchased, for any reason, that have a price to book of more than two. Yet the average Price/Book shall be gradually reduced to less than one.

Gross total current assets shall not be allowed to fall below $500,000.

With the markets' renewed sliding, there are some good bargains available. One would seem to be International Aluminum (IAL) which, with a recent price of $17.85, sports a price to book of 0.635 but has a dividend of 6.73%. At that level it is attractive enough for us, meeting two of Ben Graham's classic value criteria. It also has no significant debt. I'm placing an order for 112 shares today.

8/8/02-The equity markets are up again, with the DJIA now about 13% higher than just last month. Fran's and my current assets are now worth $25,100 more than at their July low point.

Our liquid holdings have a combined yield of 2.5%, compared with 2.0% for the Value Line Survey's 1700 stocks. (We receive about $10,300 a year in dividends.) And our individual stocks' average price to book value is about 1.15, compared with between 2 and 3 for the markets as a whole.

Despite the recently higher share prices, I'm still finding many excellent opportunities. Yet I do not want to increase debt to purchase more assets, just the opposite! Have decided to deal with this by selling an average of $2500 a week of assets and buying assets costing about $2000 a week. Those to be sold will naturally be the ones with the lowest prospects, while those being purchased will be limited to the highest value candidates for their price. The average $500 difference will be applied to debt retirement.

In this way we should be able to keep our margin levels under control while gradually improving even further the average dividend, P/BK, and P/E of the total portfolio. Despite so much selling, it works out to less than 1/3 of the liquid assets' current value per year, about 1/4 of their value before the recent months' major drop in prices, meaning that the average holding can still be at least 3-4 years (longer as the portfolio value improves). Taxes should not be a significant problem since over half our assets are in tax-deferred accounts.

The big personal finance news in our household today is that I had an interview this morning for a part-time job at the Target discount department store closest to us (about two miles away, an easy commute), and was offered and accepted a position. It is not the most attractive or prestigious type work. I'll be busy in their food service department. (I'm reminded of the Kevin Spacey character's new employment in "American Beauty.") But it serves the purpose, providing more than enough income to raise our annual total to better than $60,000. In fact, the hourly rate is a little higher than I'd expected. We should be able to put about $200/month into their 401K plan, thus adding to our nest egg while limiting the amount going to Uncle Sam.

Fran had a neat idea this afternoon, working part-time for a local nursery, which would be very compatible with her interests. While we do not need the extra funds, given my new job, we could always reduce our debts faster with any additional earnings. Still, she does not have to feel she must work more. Frances already helps our budget out as a member of the Austin Lyric Opera orchestra.

8/12/02-AAII recommends that folks determine their preferred asset allocation after considering the present or discounted value of all income they are likely to receive, for instance retirement annuities or Social Security benefits, based on the amount of premium, cautiously invested, that would be required to generate that income. For Fran and me, the calculations, conservatively calculated, come out to a cool half-million dollars.

When combined with our current assets, the total, even after the devastation in our equities this year (from the bear market that will not quit!), comes to $1,026,000, down $89,000 from the level at the beginning of the year, but not nearly such a desperate hit when seen against that larger context.

So, we are now allocated, using this kind of analysis, in roughly the following percentages (assuming the income stream from annuity and Social Security to be as safe as from short-term bond assets): 55% liquid reserves or "short-term bond holdings"; 30% common stock shares and mutual fund equities; and 15% intermediate to long-term bond assets, collectibles, non-liquid real estate, personal property, REITs, and preferred stocks.

Today I began implementing the policy of selling an average of $2500 a week of assets with unattractive price to value while purchasing $2000 in assets of superior value for their cost. Disposed of 65 shares of Kimberly Clark (KMB) and bought 256 of Liberty Media (L). The double transaction actually produced an extra $1900 in debt reduction, since the KMB proceeds exceeded $2500. Sales and purchases will not occur every week or in exactly $2500 vs. $2000 amounts. Rather, future sales and purchases will be adjusted so that the weekly averages fit the guidelines.

Have selected five candidate companies whose shares seem worthwhile at recent prices. All have a price to book ratio no higher than two and low debt to equity. The first, Berkshire Hathaway (BRK/A; BRK/B), has probably the best management and long-term record of any holding or insurance company out there. The next two, Orthodontic Centers of America (OCA) and PMI Group (PMI), are low debt and price to book selections from a list of thirty-three stocks recommended by Standard and Poors in a recent "Business Week" article, as having strong growth and financial margin of safety characteristics similar to those of stocks Warren Buffett would find of interest. The fourth, Liberty Media (L), is selling for only 0.76 of book value, per AAII, and has a low debt to equity ratio of 0.21, yet is recommended by numerous value investment money managers as having excellent long-term potential. The last one, Washington Mutual (WM), also is a favorite of many value investors and represents about 16% of Oakmark Select mutual fund, per a recent article in "Smart Money."

Bowing to reality, have decided, instead of shooting for a 10% annual increase in our current assets portfolio, as had been the plan at retirement, to regroup and go instead for an 8% average rate of growth of current holdings. This still will require, assuming we keep roughly 60% of current assets in equities, that the stock portion of the portfolio go up 10-11% a year, over and above what we need to cover expenses. At times this too will seem quite challenging. Nonetheless, I believe it to be realistic as a goal for the long run, particularly if some of the time I or we are working part-time. The goal for increasing book value of our individual stocks plus REITs shall still remain 12% (1% a month, on average) a year. This figure, at least, is not subject to the whims of "Mr. Market."

It is official now. I have passed my drug and background checks and am to report to my local Target for orientation on 8/16, Friday, apparently to start work soon afterward. I am to join the ranks of the ELFS: Entry Level Food Service (workers).

8/17/02-Had my first day on the job at Target yesterday, an afternoon devoted to orientation, more or less what one would expect. Then they handed out our schedules for next week. Mine was frustrating. Even including the four hours for orientation, they've given me just eleven and a quarter hours for my first nine days on the calendar. They also gave a cute young thing, hired for my department at the same time, most of the day hours I'd hoped to receive, plus more hours in total. So, all in all, it is disappointing, far less than the twenty-five hours a week, mainly during the day, that I'd been led to expect.

In short, I'm willing to give Target a chance but am now interested in looking for something else instead. If not for my physical/medical situation, I would just get a pickup and go to work in the mornings mowing lawns again. At least as one's own boss there is not this kind of humiliation.

I was looking over the journal ("Steps") for August three years ago. It turns out that, despite all the investments in the intervening period, at this time in 1999 we had almost exactly the same level of assets we have now, $535,000 total, including $345,000 in equities. It puts the bear market in a distressing perspective.

So, both on the earnings front and with respect to our nest egg, these are not the best of times. Meanwhile, from the lack of response to several applications I'd turned in before, for positions that ideally match my qualifications, it seems likely my last supervisor ("Mr. Turnover") has been expressing less than charitable views about this ex-employee, notwithstanding that I had one of the best quality and production records there. I need to find a way to get around this serious obstacle to my obtaining adequate work!

On a positive note, the latest numbers for Lone Star Steakhouse (STAR) look pretty good. It has the highest "Value Line" timeliness rating, a price to book value ratio of less than one (0.91), a dividend well above the average (2.9%), debt to equity of zero, per AAII, and a total return likely to exceed that of the rest of the market over the next three to five years. We already own some of its shares. I'm debating whether to purchase more.

8/19/02-Dressed up, cleanly shaven, with a close haircut, and wearing a big smile on my face, I went for an interview at Sun Harvest Market this morning. They decided, after looking me and the application over, that I would not be happy there, that I was overqualified for a cashier position. Hey, guys, how 'bout letting me decide what will make me happy? They seemed to be looking for any excuse not to give me a chance, though I've worked for years as a cashier before: grocery store; bookstore; and health food store, except those experiences had been mainly back in my college days. I'd guess it's another case of age discrimination.

I must admit that, after this, I felt grateful to Target for giving an old guy a try! So, next I drove over there and bought the clothes to complete three sets of their uniform, a red shirt with khaki slacks. Now I can start my first hours of on-the-job training tomorrow.

Have decided to do searching for another job, than the one I already have, only under certain conditions:

1. Things just are not working out at all for me at Target;

2. The economy and our portfolio really take a nosedive so that I need full-time work, not merely a convenient part-time gig;

3. The prospective new position is obviously superior to Target's, i.e. much better pay, preferable and longer hours, or a kind of work I enjoy a lot more;

4. They do not have to have me immediately but can accept my giving Target two weeks' notice; and/or

5. The new position is a full-time, professional one that better utilizes my background, interests, and experience.

Meanwhile, reasons to eventually resign from Target would include Frances and I meeting or exceeding our long-term goals (set before retirement) for stocks and equity mutual funds, and likely being able to continue doing so, within our budget, without the extra earnings, or, of course, my getting a better job consistent with the above guidelines.

At the personal finance front, the really good news came from our investments, up about $10,000 in the past week. One stock, Telesoft (TSFT), a low price-to-book value pick, went up about 89% just today. If that kind of thing would happen each time one has a bad interview, job hunting would be a lot more tolerable!

8/21/02-In a very limited sense I am a stock trader. Day trading is not for me, but if I can purchase an asset, like Washington Mutual (WM), that appears to be at bargain prices and sell another of approximately equal value, like Intel (INTC), that no longer is cheap, even if in the very long-term it may by some measures have good prospects, I'll do so, as I did today.

I am ever alert for opportunities to sell or exchange high P/E, high P/BK, and low (or no) dividend assets when our portfolio is generally up, replacing them, when our nest egg and the markets are again depressed, with great value holdings.

Today we sold off about $4500 (net) in overvalued assets, reducing our (already low) margin debt by that amount.

Our portfolio, before these sales, had increased about $33,000 in the past couple weeks, raising equities several thousand dollars above their 60% allocation level.

There is yet another reason for disposing of Intel shares at this time. The company has made a policy decision not to show its options as an expense against company earnings. (To my mind, this is a mistake, more of the old school of self-serving accounting practices than the present realities of necessary disclosure and integrity.) Were they to do so, their current, high P/E of about 34 might almost double. Washington Mutual, with seemingly more reliable earnings, little long-term debt, a dividend of about 2.8%, a P/E about 9.5, and a higher per share book value than Intel ($16.43 vs. $5.35), looks like a much better bet for our portfolio.

The net change in portfolio book value from today's completed transactions was plus $2905. Given that debt was reduced $4500, the change in net book value was plus $7405, not a bad day's work, and much more dependable than the whimsical day to day gyrations of the market. (I believe it was Benjamin Graham who said, to paraphrase, that in the short-term stock markets are voting machines, but, in the long-term, weighing machines.)

8/27/02-Today I sold all shares of TSFT and INMRY, which no longer met the low price to book Piotroski financial strength criteria, and purchased 216 more shares of IBA, which remains at a price to book ratio of 0.58 and with low debt. This experimental, low price to book Piotroski portfolio now stands at $6219, including $3919 invested in IBA and $2300 in cash. When all costs have been factored in, there has been a 5.0% profit. Will hold the cash pending a new review, in approximately another month.

Frances and I are now talking of possibly putting our house on the market at an asking price of $150,000 (but negotiable) this coming spring, if by then there is not good reason to remain in Austin, with the intention of moving to either New York, near Syracuse or Elmira, or to somewhere in the Pacific Northwest (Oregon, Washington, Idaho, or British Columbia), if we can find sufficient housing in our destination at or below our selling price (Below is better!).

There are a lot of "ifs" involved in this tentative plan. Will our current house pass inspection vs. have a cracked foundation or other expensive problems? Will I in the intervening period get work here that I like? Or will the markets go up enough that we need not take any equity out of our house soon, or have any extra earnings, in order to feel we have adequate resources for the next few years? Will my mom's health remain relatively good? (If not, I maybe should stay in the area longer.) And so forth.

But before we would make such a move, if we do, we'll expect to make a trip or two up to scout out the potential destination area(s).

8/30/02-Actions taken in the last couple days have further improved our portfolio's net book value by several thousand dollars. We also purchased a number of shares of the REIT, Voronado Realty Trust (VNO), which is recommended by value investors and has a good dividend.

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