August, 2011: 3 6 10 16 18
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.

8/3/11-Since the last entry, our Low Price to Book Value asset, AETI, purchased on 11/13/09, was up close to 50%. Since I was then seeking more funds to put into our money market accounts, and the stats on AETI no longer looked compelling (negative earnings and P/Bk above 1.2), I went ahead and sold our position in this asset, on 7/26/11. After the commission, its net gain was 48.81%. Info on both its cost basis and its performance from 11/13/09 through 7/26/11 has been added to the Low P/Bk closed positions spreadsheet, and AETI was also deleted from the record of Low P/Bk open position holdings.

Since the last entry as well, our Low Price to Book Value asset, AHCI, purchased on 8/31/10, was sold on 7/29/11 for a net gain of 89.18%. Info on both its cost basis and its performance from 8/31/10 through 7/29/11 has been added to the Low P/Bk closed positions spreadsheet, and AHCI has also been deleted from the record of Low P/Bk open position holdings.

In addition, since the last entry, our Low Price to Book Value asset, FLXS, purchased on 7/27/10, is now up over 50%, and so will be sold tomorrow at the early market price. It will be deleted from the Low P/Bk assets' open positions spreadsheet, and its statistics for 7/27/10 through 8/4/11 will be added to the Low P/Bk closed position record.

Overall, despite the recent string of negative market days, our remaining Low P/Bk open positions are down only slightly, while our closed positions, even after the debacle with HQS (finally sold for $0.30 cents a share, a 94.43% net loss, on 7/8/11), have gained at an average annual rate of 38.22%. The record of low price to book investing is relatively poor generally, per the "Mechanical Investing" Discussion Board at The Motley Fool, averaging only about 5% or so a year over a long period. However, our approach is still turning in market beating results. We must be doing something right.

We are these days keeping more of our powder dry and so for now will hold off on a new Ben Graham Dividends with Value Portfolio recommendation.

My current top-five low price to book value stocks are: BDR; BSET; HAST; REX; and SYA.

My new favorite from among them is Bassett Furniture Industries, Inc. (BSET) (recent price $8.25). It meets Benjamin Graham's bargain stock safety and value criteria.

Bassett Furniture Industries, Inc. will be added to our nest egg at its market price in early trading tomorrow, 8/4/11.

Since I have on occasion in the past several weeks or months commented on the larger political, economic, and/or national picture and have even based part on my recent strategy (for a change) on a market timing decision, that, with our government basically dysfunctional on key fiscal matters, the repercussions for equities could not be good and so I had better sell off assets and raise cash, I want to add a bit about my current views on such matters. First, I believe as a rule in bottom-up investing, seeking good value for one's investment dollar, rather than in making major shifts in one's investment allocations based on macroeconomic assessments. I have twice now, however, focused on the latter approach, in the early fall of 2008 and then in the months leading up to the recent deadline for raising the nation's debt ceiling. In each case, I raised a substantial amount of cash when it had become apparent that the markets were under threat from unprecedented and severe conditions which potentially could undermine our entire monetary system.

If governments had not acted swiftly and surely in 2008 and early 2009, we almost certainly would have found ourselves, within a matter of just days or weeks, in such a loss of confidence in the markets, or indeed in the entire economic system, that the results could have been even worse than in the Great Depression.

In the latest episode, for the first time in our country's history, a small but, as it turned out, powerful faction of our representatives were intend on destroying the full faith and credit of the United States if this set of members did not get its way on a set of rather unsound policies. After great "sound and fury," the matter has been but temporarily settled and in a way that leaves most of the long-term fiscal and employment problems unresolved. In the process, the stature of our nation in the global community has been badly damaged. It will not be easily or quickly restored. One can hardly have confidence in how things may be handled in future, given the record of this "gang of monkeys." Further, if real long-term U.S. growth is curtailed and our image is also tarnished, this will have major implications beyond our borders. Many depend on this country's powerful engine for their own security and movement forward. As our capacity to fulfill that role is weakened, others will seek to fill the vacuum. A world dominated by The People's Republic of China as its foremost superpower may not be one we would find hospitable.

We must be optimistic and have faith that, as Warren Buffett says, the best days are ahead of us in America. There have, after all, been prior epochs in our history when fools have held sway, and yet we have come through them the strongest and best nation on Earth.

For now, however, I am glad to have a substantial portion of our assets in cash reserves and anticipate that, in the months and year or so ahead, I shall have further opportunities to obtain equities at excellent price to value levels, intending on the whole to be a buyer on market dips. Nonetheless, I shall not be "backing up the truck" anytime soon. Many rough patches are likely to persist in the road ahead for equities.

8/6/11-Yesterday, on 8/5/11, our previous Low Price to Book Value asset, IPSU, bought on 4/29/10, fell over 59% after a negative earnings surprise. While doing the recent weeding of assets to raise extra reserves, I sold all our shares of IPSU, on 7/5/11, once I had noticed it was selling above book value. We had then a net gain on the investment of only about 18%. Naturally, we were disappointed not to have seen a 50% or greater return. As things have turned out, we are taking this disappointment philosophically. And IPSU's stats for 4/29/10 through 7/5/11 were included in the overall Low P/Bk portfolio closed positions' annualized gain (mentioned on 8/3/11) of over 38%.

About the only thing I see positive as I look out over financial concerns' macroscopic landscape is that it appears so unrelentingly negative.

Standard & Poor's, evidently seeking to redeem itself after having rated sub-prime mortgage junk as AAA in the years before the 2008 bursting of multiple bubbles, has just announced that, for the first time, it has lowered our long-term U.S. credit rating to AA-plus.

When the Treasury Department pointed out that the figures S & P were using to support this action were unduly negative, flawed by two trillion dollars, the rating agency admitted their mistake but said this made no difference, that they were lowering the rating anyway. The economic talking heads tell us this will mean higher interest rates, which will cost us all enough extra to off-set any fiscal benefits of the hard fought debt ceiling deal, finally worked out a few days ago between Democrats and Republicans, and will make climbing out of our stubbornly high unemployment hole harder as well. And if U.S. markets are headed deeply south, the speculation goes, can global markets be far behind?

Meanwhile, there are ongoing worries about an ever more unstable and long-in-the-tooth "Arab Spring," about Greece, Ireland, Portugal, Spain, Iceland, and/or Italy defaulting on their debt, our involvements in three wars, inflation in China, the threats of cyber warfare (which supposedly could shut us down at any moment), droughts, global warming, the Three Horsemen of the Apocalypse, etc.

There seems to be every reason for caution (or even depression, as in a second great one). Yet, for a contrarian investor, the latest daunting headlines might be just what the doctor ordered. Are the pessimists or optimists correct? Time will tell, of course, but even the Second World War did not destroy our equity markets which, for small caps, despite much bad news and many dips along the way, have provided average returns since 1926 of better than 12% a year. So, until the real "end of days" make their appearance, we shall continue to look for and point out apparent bargains in stocks.

My current top-five low price to book value stocks are: ABL; BDR; HAST; HWG; and SYA.

My new favorite asset among them is American Biltrite, Inc. (ABL) (recent price $7.73). It meets Benjamin Graham's bargain stock safety and value criteria.

American Biltrite, Inc. will be added to our nest egg at its market price in early trading on Monday, 8/8/11.

8/10/11-Since the last entry, there have been no assets followed here for which there were sell signals.

As most of us know, there has recently been a sharp correction in both global and U.S. equities. While this is an uncomfortable situation if we focus on a portfolio's market value, it is good news for those of us looking to gradually increase our total book value and so lower our total nest egg's price to value.

While I know this intellectually, like many others I do suffer some disquiet as prices plummet and so have sought another way to feel better about things. What I have come up with is to buy some small amount of an excellent price to value stock when our overall securities are down $5000 or more. This takes care of my compulsion to DO SOMETHING as the bottom line keeps falling, but does not cost me much and is indeed a constructive step.

Say I buy just $2500 in a new, low price to book value asset each day my portfolio falls significantly. I am thus buying low in order to later sell high, and the cumulative effect of many such small purchases adds up. If the market is rather bearish and is down significantly 30 times a year, then my cumulative annual $2500 purchases add up to $75,000. This represents at least $93,750, probably more, in extra book value. On average these assets return around 15% or better on an annualized basis. In short, this small down-day step can ultimately represent about $11,250 or more in annual profits to my portfolio, enough to at least offset a nice chunk of the apparent or "paper value" losses (a loss only really being relevant if one of our assets goes to zero - which rarely occurs - or we sell while the stock is down) that may have looked so dismal when they occurred, like they have more than once just in the past week.

Meanwhile, when my portfolio is up which on average is the case, believe it or not, about twice as frequently as when stocks head south, I tend to sell assets that have high price to value, thus assuring that my reserves are restored to at least their earlier levels.

In service to my compulsive need to take some positive action, then, today's research reveals another low price to value nugget, Unitrin (UTR), recent price $23.97. It meets Benjamin Graham's bargain stock safety and value criteria, with a price to book value of 0.68 (23.97 divided by 35.33), a dividend of at least 3.5%, a dividend payout ratio of 37%, debt to equity of about 29%, positive free cash flow, a price to sales ratio of about 0.59, and a P/E below 10. It is also a holding of some value mutual funds whose managers I respect.

Unitrin will be added to our nest egg at its market price in early trading on Thursday, 8/11/11.

8/16/11-What if what we are in is really a depression? The website Wikipedia defines an economic depression as "a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle." Whereas the period from 1982 to 2000 was characterized by great expansion, and indeed by some measures this was predominantly the case from 1982 to 2008, with bubbles during that extended period in both the equity and housing markets, since 2008 not merely the U.S. economy but the worldwide financial system (and on a sustained basis at least the U.S. and Europe) has been rocked by a series of shocks and bubble collapses, with large numbers of bank failures, unusually high and persistent unemployment, significant depreciation in home prices, loss of consumer confidence, record foreclosures and bankruptcies for the post-World War II period, currency fluctuations, volatile markets, reduced trade and commercial activity, uncertainty in the business community, and, overall, a great contraction of economic engagement. We certainly are not in a merely normal business cycle. To me, it now appears likely we actually are in a depression. It is, of course, not one as severe as the last century's Great Depression, or not yet. However, it is, on the other hand, also not a mild one from which we can expect full recovery in the short- or even the medium-term.

So, if we were to recognize that this is in fact a depression, how might that affect the way we allocate and invest our financial resources? Ought we convert all our assets into cash and put it under a mattress, buy a lot of gold, reduce our equity exposure to virtually zero, insist on only the safest investments, such as U.S. Treasuries, insured muni bonds, or the stocks of companies with the highest safety ratings, secure dividends, etc.?

I do not yet have a complete answer myself to these questions, but believe they are apt and need to be addressed in the current environment. My leaning, though, is to still follow as yet relevant advice from Ben Graham who, after all, developed much of his guidance on stock investing, and began teaching and applying it, during the Great Depression, and so apparently knows whereof he speaks. He suggested in The Intelligent Investor that one ought not have less than about 25-50% invested in equities, but recommended that the portfolio of stocks be well diversified and be comprised of securities with little debt (generally with less debt than equity) selling at well below their true value.

He suggested as well that one have the balance of one's liquid assets in either high grade bonds or, for the more sophisticated and active investor, in bonds offered under special and bargain conditions, with opportunities to make large profits.

In his day, though, high quality bonds typically yielded around 5% or more, while today one may be fortunate to receive half that for a bond of equivalent grade and duration.

What is more, low price to book value stocks were then much more abundant as a percentage of the securities available on stock exchanges. The stocks that currently are selling at below book value often are also under a serious cloud, and it is difficult for the ordinary investor to know which are genuine bargains and which "value traps."

I do not pretend to know how to best respond to such concerns generally. My own solutions may not be ideal for others. For what it is worth, though, in my view one can in the current environment substitute high quality, dividend paying stocks for a substantial portion of what, 50 or so years ago, one might have put into high grade bonds. This is the theory behind my Ben Graham Dividends with Value Portfolio. My suggestion today for that category is Eaton Corp. (ETN), recent price $42.43. ETN has a 3.3% dividend, a reasonable debt level (debt to equity below 0.5), a good business model, and a dividend payout ratio of 0.37.

I also continue to like low price to book value assets, but want them to pass a few other criteria as well, including low debt, low price to cash flow, positive return on equity, and reasonably low price to sales.

My current top 5 low price to book value stocks are BSET; FRS; NWLI, STC; and URS.

My favorite among them is URS Corporation (URS) (recent price $33.58). It meets Benjamin Graham's bargain stock safety and value criteria.

URS Corporation will be added to our nest egg at its market price in early afternoon trading today, Tuesday, 8/16/11.

8/18/11-The turbulence persists. Another couple days of trading, and we see another terrific buying opportunity. The contrarian in me, taking advantage again and again of good bargains, is buoyed by this 2011 oft repeated situation, even as I am also not without anxiety over the rapid losses in market value, wondering where it may all end and if I might be better off to wait till all this selling is over, as if I would then be prescient enough to pick just that moment to suddenly take the plunge I had put off making before.

No, I had better just continue my strategy of buying a little on dips and selling on rallies (meanwhile holding in reserve plenty of money market funds, just in case there is a whole slew of "capitulation selling" yet in our not so distant future).

Shortly before this latest equity bloodletting, I had sold all our shares in our Low P/Bk asset, TRH, because I had noticed that Transatlantic Holdings had received three takeover offers, averaging $51.21 a share, only 76% of book value, and, to top it off, were now also being sued by one of the bidders, hoping thereby to get its offer taken more seriously. Too frequently when a company is sued its price drops, so I chose to retreat. My exit price was $50.25, which, after commissions, meant I have had a gain of 8.84% since my purchase on 5/21/10. As with my sale not long before of IPSU, I wish the profit could have been greater, but am glad I was at least able to sell at a profit.

My currently favorite 5 low price to value assets are BRK/B; NWLI; PCCC; RVT; and URS.

Choosing between them is difficult, for they all look good. BRK/B, for instance, while slightly above its book value, is trading at only 68% of its estimated intrinsic value of $102 a share, this for probably the best run large company in the country. RVT is a diversified, closed-end value fund with a good record and is trading now at just 71% of its net asset value.

If the market continues its recent weakness, I shall probably get shares (or more shares, in the case of BRK/B) of both those equities, but, since I am limiting myself while conditions are so frothy to just $2500 a day of new investment after a significant drop in our portfolio's net, this time I shall purchase shares of my current preference among them, PC Connection (PCCC) (recent price $7.57). It meets Benjamin Graham's bargain stock safety and value criteria, with a price to book value of 75% ($7.57 divided by book value per share of $10.13) and a debt to equity ratio of less than 1%. PCCC is also a major holding of several value mutual funds.

PC Connection will be added to our nest egg at its market price in early trading tomorrow, Friday, 8/19/11.

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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