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August, 2004: 2 6 17 23 26 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.

I have found an excellent asset screening alternative at T. Rowe Price.

Based on tools available there, ACGL, CURE, and DUCK currently look like interesting low price to book value purchase prospects. They also appear to each have a quite low market capitalization, debt level, and price to sales ratio.

I'm optimistic too about several large-cap assets presently selling at a discount to their true value: BRK/A (or BRK/B); L; and PFE.

Meanwhile, I'm giving CBS MarketWatch a try for its portfolio management function. It's too early to say how it will measure up. I'm utilizing it solely to track four mid-cap assets purchased (in early Jan.) based on value criteria: CYTC, MACR, TSN, and BER. As a group, including dividends and after commissions, they are up 36.3% (in not quite seven months). I'm not recommending the assets at this time, but do think their performance, despite a lack of significant movement by the major averages recently, speaks well for the potential of mid-cap bargains generally.

8/6/04-With the sharp decline in our major market averages over the last two to three weeks, our portfolio has not been left unscathed. Indeed, we are currently down for the year, based on our holdings after excess (above retirement income) expenses. (Our portfolio, net of the budget, is down 3.3% as of the close of business today. The S&P 500 is down 4.3% since 12/31/03.)

Our nest egg's asset value since my 12/01 retirement has been up 24.1%, for an annualized total return to date of 8.7%. However, after the $98,033 in extra expenses during that period, our net asset value has had a cumulative increase of just 6.7%, or 2.5% on an annualized basis.

These results compare favorably, though, to the post 12/01 S&P 500 Index. It has been down 7.3% after December, 2001, for an annualized return of -2.9%.

Thus, even when our living expense reductions are taken into account, Fran's and my net portfolio has bested the S&P 500 by an average of 5.4% a year.

I continue to find a few attractive stocks at recent prices, including: BRK/A (or BRK/B), PFE, GVA, CURE, DUCK, IBA, and TWMC.

As I've added assets to compensate for the stock price declines, our equity book value has been increasing. It now stands at $343,622, slightly above next year's end of December book value target.

Once prices eventually go up again, there is accordingly plenty of cushion for the selling of some stocks, to reduce risk and margin debt (currently at $16,400, or 2.7% of total current assets).

8/17/04-Through the close of business yesterday our portfolio is up a little since the prior couple entries although we've reduced debt a bit by selling off two assets (NWL and TTES) that no longer look as enticing as when they were purchased.

A few words about our equities, how the nest egg as a whole is allocated, and the return so far:

1. The stocks or stock mutual funds we hold now comprise 74% of our current total assets;
2. The balance of our holdings, such as money market funds, personal property, non-liquid real estate, and bond mutual funds, add minimally to overall performance;
3. Thus, the nest egg's total return record depends mainly on our equity holdings;
4. Yet it is the total portfolio's fully allocated record with which we have been comparing that of the S&P 500 Index;
5. If equities alone were considered, the cumulative total return since 12/01 (when I retired) has been about 36%.

While, in this unusual period, that included both a bear market and the aftermath of the 9/11/01 terrorism, our record is above average, at less than three years, its duration has been too short to say much about my overall investment ability. Further, several mutual funds have done significantly better.

As I indicated at the outset of this journal, in early 2002, I am still learning. Perhaps in time I shall further refine my skills as a value investor. For the time being, I'm content to continue experimenting and, hopefully, to have a long-term total return superior to that of the S&P 500 Index.

About ¼ of our equities are in favorite mutual funds, including especially the Weitz Partners Value and Vanguard Health Care funds.

Roughly another ¼ of them are in large cap stocks, most acquired prior to my beginning a previously mentioned safety restriction on how much debt a candidate asset may have before purchase (i.e. debt to equity must not exceed .33), including primarily T, L, SBC, MRK, BRK/B, JNJ, HD, PFE, GE, and WMT. (The D/E limitation was added to my criteria after several investments in undervalued assets with higher indebtedness resulted in big losses. It is now as close to an absolute as I have in this hobby. Fortunately, there are still many stocks from which to choose that have debt to equity ratios at or below the acceptable level.)

The bulk of our remaining equity holdings were chosen for a combination of relatively low market capitalization, price to value, and indebtedness.

Generally, I prefer to purchase assets having some combination (ideally five or more) of the following:

• low P/E
• low P/BK
• low P/S
• low P/CF
• high, dependable dividend (with low payout ratio)
• a ROE (return on equity) that is at least modest (preferably equal to or greater than the typical yield on a long-term corporate bond)
• low D/E (mandatory)
• high current ratio
• low market capitalization

At this time, the following assets look quite interesting to me and so are being considered for purchase: BAMM; CVCO; FAF; KOMG; MAXF; RSC; and STC.

The hope is that, in time, they'll fetch higher prices in relation to their underlying values.

As is evident from the guidelines above, there's no magic to this kind of investing, but it's interesting and can be rather fun.

8/23/04-The market being up further since recent entries, I've been able to sell off a few securities for which there were losses, to help both with the retirement of margin debt and with lowering taxes.

Meanwhile, I'm interested in these assets at current levels: RE, BKS (both contrarian plays), BRK/B or BRK/A (a perennial favorite), BL, HGGR, BAMM, TBAC, VLGEA, STC, FAF, and MAXF (the last three, at least, mentioned a few days ago).

Of these, the following seem most intriguing:

• Berkshire Hathaway (BRK/B) (recent price $2879)
• Village Super Market, Inc. (VLGEA) (recent price $33.37)
• First American Financial Corp. (FAF) (recent price $28.46)
• Stewart Information Svc. (STC) (recent price $35.41)
• Maxcor Financial Group, Inc. (MAXF) (recent price $9.40).

In fact, I have now (as of 8/20) purchased shares of FAF, MAXF, and STC.

8/26/04-Fran and I completed applications for long-term health care (LTHC) last night. LTHC is recommended for people who can afford it and have assets they wish to protect, which could otherwise be substantially depleted by a major medical event and/or mental deterioration requiring long-term care.

The importance of both LTHC insurance and of not outliving one's assets has been brought home by the situation of my Uncle Randolph. He'll be 90 in October. He and Aunt Kim, who died last month, were married 70 years. Eventually, through good investments and some luck, they became multi-millionaires. Yet awhile ago Randolph told me when managing their money they had not expected to live as long as they had, implying they were needing to reduce their circumstances to accommodate a lowered net worth. Much of this reduction may have been due to their needs for long-term care. Following strokes, surgeries, severe falls, and so on, they had each several times been in and out of nursing homes and assisted living centers.

Our acceptance for LTHC is not guaranteed. I think they'll promptly agree to insure Frances, whose only reason to see a doctor (other than for an infected thumb a few years ago) has been to get birth control pills and, in general, seems healthier (or is it stronger?) than the proverbial ox (perhaps I should say than a sea turtle for, at least before humans, such creatures apparently would often live 100-200 years, while an ox's longevity is probably a small fraction of that span).

In my case, acceptance seems likely if I'm not knocked out by asthma or elevated cholesterol levels. It would probably be wise to be especially conscientious about diet and exercise over the next 3-4 weeks till my annual physical. Since during much of that time I plan to be on the road or in Yellowstone National Park, this will be difficult, but I must make special efforts anyway.

As for the asthma, mild attacks are controlled by coffee, and I'd rather use that home remedy than see a doctor for breathing difficulties in the next few months, till the LTHC decision is made.

I doubt the insurance company will balk at the other conditions, BPH, basal cell skin cancer (only a mild, non-aggressive neoplasm), plantar tendon problems (lessened by appropriate footwear), thyroid insufficiency (controlled by medication), or mild eye difficulties (with glasses still correcting to 20/20).

Yesterday I went to the Fidelity retirement site and used a handy tool for assisting pre- and post-retirement people check out their probabilities of success under various scenarios. A financial magazine had recommended this software, which assesses if one likely will not outlive his or her retirement resources. It also makes reasonable suggestions. (I think one may need to have an account with Fidelity to use their retirement planning section.)

In Fran's and my case, the projections are implacable. They give us quite small odds of success in retaining assets through a few years beyond our reasonable life expectancies unless we:

1. Reduce our budgeted annual spending by 1/3; or
2. Increase our yearly income by $20,000; or
3. Attain an annual total return on our nest egg of 12% or better, though the average for a well allocated, growth oriented portfolio is only about 9% a year.

Of course, I'd like to think I'm an above norm investor and that a 12% (or better) average return is well within my capacity. But is this realistic? I note that most other folks think they are above average investors and drivers (and maybe lovers too). Yet, clearly such self-assessments are somewhat delusional. We cannot all be above average.

Further review of the Fidelity planner results, though, shows that a $20,000 a year advantage over the common investor herd's historical return is all that is required to assure we have an excellent chance to not outlive our assets. This represents 3.1% of our assets' current value, but will be an ever smaller percentage of the future portfolio, assuming at least modest growth of the holdings. For example, once our portfolio's current value reaches $1,000,000, the requisite $20,000/year advantage will be just 2% of the total.

Another way of looking at it is that I need to work at least part-time, either outside or inside the house, to bring in an extra $20,000 a year. If I'm careful, this might be accomplished by beating the S&P 500 Index well enough for the needed level of extra yearly "earnings." We'll see if I can manage it.

8/30/04-Besides assets mentioned as attractive in the most recent entries, at current prices HGGR, TBAC, and WSC seem appealing today.

Of these, Wesco Financial Corp. (WSC) ($346) would be my emotional favorite. I see it as an interesting special situation.

While the earnings at Wesco vary greatly, and recently appear way too low (P/E 63), on the positive side, the price to book value is relatively low (1.16), and debt to equity (0.01) is also quite low.

But the primary reason for interest in WSC is that its CEO is Charles Munger who, next to Warren Buffett, with whom he manages Berkshire Hathaway (which owns about 80% of Wesco), is perhaps our greatest living investor. Under his leadership, WSC is only looking "bad" right now because this master investor is concerned with not adding to WSC's conglomerate holdings until the new assets would be available at the right price. Accordingly, Wesco is loaded with relatively unused cash, awaiting bargains. Inevitably, qualifying values will appear again in the market, and Munger will be there to scoop them up.

While in the relatively recent past "Mr. Market" has not been kind to WSC (only a 3-4% annual total return over the past five years), Munger's really long-term record is exceptionally good.

And Buffett would not associate with a fool. Indeed, he credits Munger with broadening his concept of value investing, and hence with a good part of both his and BRK's vast wealth.

Nonetheless, I am unsure of the wisdom of acquiring WSC shares now. That high P/E puts me off. So does the age (80) of Wesco Financial's brilliant CEO. He may well keep on being a super investor for another 10-15 years, but how would the stock and the company be affected if he were to have a stroke? I suspect that in that event BRK would buy up the remaining shares of Wesco Financial it does not already own, and so completely control the horde of cash and other assets on which WSC is sitting. But would Warren Buffett pay a premium for those shares? It does not seem particularly likely.

Since I already own shares in HGGR, my actual choice among the trio for purchase now is Tandy Brands Accessories (TBAC), recently priced at $13.68. TBAC has a reasonable P/E (12), a low P/S (.42) and P/BK (.86), a reasonably low price to cash flow (8), at least a small dividend (.8%) with a low payout ratio, a low D/E (.30), an exceptional current ratio (8.2), and nano-cap size (market capitalization $86 million). Despite recent earnings disappointment, for a patient investor, the asset has a lot to like.

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