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August, 2003: 2 6 26

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.

Our current "pause," for instance, has given us Home Depot, a definite bargain last month, at close to $34, and an even better one now, at $30.85, about 10% lower.

And there are new or better micro-cap deals as well. Consider McRae Industries 'A' (MRI/A) at a recent price of $6.50. MRI/A has a P/E of 7.4, a market-cap of $18 million, a dividend of 3.6%, and a price to book value ratio of 0.59. Its return on equity is 7.8%. Price to cash flow is 7.9. Price to sales is 0.24. Total debt to total equity is 0.13. The dividend payout ratio is just 24.9%. This asset meets three classic Benjamin Graham value criteria (P/E, P/BK, and dividend yield) and two safety criteria (D/E and current ratio).

Or take a look at MGP Ingredients, Inc. (MGPI). At its recent price of $7.90, MGPI has a market-cap of $67 million, a P/E of 7.8, price to book value of 0.57, and a dividend yield of 1.9%. It's dividend payout ratio is only 17.2%. Price to cash flow is 3.6. Price to sales is 0.37. Return on equity is 6.63%. Debt to equity is 0.18, and the current ratio is 2.32. It meets two of the Benjamin Graham value criteria (P/E and P/BK) and two of his safety guidelines (D/E and current ratio).

We are adding to our holdings of all three assets.

8/6/03-MSN has an article in their online investing page today saying it takes $1,000,000 to make people feel happy. I guess we can now forget about all that stuff in the New Testament or Buddhist philosophy. By this measure, though, Fran and I should now be fairly content. While we don't have that much in liquid assets, and won't for awhile, if our retirement benefits were seen as income from an assumed principal needed to generate that amount (invested conservatively, as in an intermediate bond index fund), our total would easily exceed the million dollar target.

And while we're far from rich, at least work is an option rather than a necessity, and we're still young enough to appreciate our leisure.

The market and our portfolio being down yesterday, this morning I placed orders for more of Berkshire Hathaway (BRK/B) ($2400), a perennial value favorite, and Home Depot (HD) ($31.20), which remains at a bargain level.

8/26/03-The business press, in print, online, and televised, is rife with speculation and opinion about the direction of the stock market. One analyst suggests we're about to have another 1987 crash, only worse. Another says that the contrarian market view now would be for it to go substantially higher, since most everyone is expecting only small gains or a modest to major pullback, after the dramatic run-up in the first half of the year. A cautious observer suggests another 5-10% increase in domestic stock prices by year-end, unless the geopolitical situation seriously deteriorates, i.e., we have another 9/11 or a tragedy even more devastating.

Some recommend gold stocks, funds, or bullion investments as a hedge against higher interest rates, inflation, and precipitous market drops. Indeed, we find ourselves in this camp, and our holdings in no-load American Century Global Gold Fund [BGEIX] are up about 14% in the last several weeks.

But overall, though I may be fooling myself, I think it best just to keep a large proportion of the total portfolio in equities chosen for quite low purchase price in relation to value.

One such stock that we already own and I can recommend is Parlux Fragrances (PARL) (recent price $3.46). Its price to book value ratio is 0.60. It has a P/E of 6.7, a P/S of 0.48, and debt to equity of 0.10. The stock has no dividend, but it meets strict Benjamin Graham value criteria, based on the low P/BK and P/E. I'd sell it once the P/BK is 1 or above.

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