10/1/04-In his book, How to Retire Rich, James O'Shaughnessy writes that excellent returns have been available from investing in portfolios of "Reasonable Runaways," which combined aspects of low price to value with superior 52-week price change (positive momentum). His back-testing had shown that these portfolios, over a 45-year period ('51-'96) had averaged compound annual returns of 18.4% (the 50-stock portfolios) to 22.6% (the 25-stock portfolios). While I understand that subsequent mutual funds based on this overall approach have not turned out to have nearly this good performances, the intriguing possibility remains that by using a simple, mechanical timeliness-plus-value screening device the ordinary investor might produce extraordinary returns.
But are such hopes at all realistic? On the face of it, I would think not. Thousands of professional investors have been working for decades to find and use winning investment methods. Few if any have come up with better techniques for the average person than those value investing approaches of Benjamin Graham and his students. Graham, according to John Train in The Money Masters, said that "one should never buy a stock because it has gone up or sell it because it has declined." Clearly, this advice is inconsistent with the O'Shaughnessy approach. Yet the latter author, especially for the 25-stock portfolios, has claimed even higher returns than those of Graham for his methods. Who is right?
I propose a small "Investor's Journal" competition between my variation of the two basic styles. When I'm in town (at home), on alternate weeks I'll recommend what seem to be good classic value Benjamin Graham type assets, particularly my top choice for one such equity in each two-week period, up to 25 a year, and will keep track of the results of the portfolio, assuming one invests close to an equal amount in each pick.
Roughly every other week I'm in town I'll recommend a stock that meets criteria similar to those for "Reasonable Runaways" assets, though with a few personal refinements (assets of any market capitalization with a price to sales ratio of .5 or better, a debt to equity ratio of .33 or lower, and a positive price change, relative to the S & P 500 Index, of 50% or better in the last 52 weeks), up to 25 a year. I'll call these my Leapin' Lizards and will keep track of this portfolio's total return as well. We'll see just which approach wins.
For the sell disciplines, I'll redeem the classic value Graham style portfolio shares when an asset's price to value is now 1 or above or they are taken in a cash buy-out or merger (if such that the price to value is now 1 or above) or the company's assets or profits have reversed (so the new price to value is already 1 or above). Otherwise, I'll simply continue to hold the asset indefinitely.
For simplicity, if the asset had initial value both because of its assets (net working capital or book value) and either high earnings or a high dividend in relation to price, I'll just sell based on its price having risen to 1 or more times presently calculated assets, rather than continuing to hold until the price in relation to earnings or dividend is also 1 or higher.
The Leapin' Lizards will just be sold after one year and a day, or, if I'm out of town then, as soon as practicable thereafter.
When our portfolio has fallen below its target threshold, I'll be using real funds to add these picks to our holdings. So I'll do my utmost to have each selection, of whichever approach, be the very best I can find.
To begin the competition, my first choice is a Leapin' Lizard: Books-A-Million, Inc. (BAMM) (recent price $8.16). BAMM has a P/E of 15, a price to free cash flow of 2.48, a price to sales ratio of .29, debt to equity 0.14, a 1.5% dividend, a return on equity of 7%, market capitalization of $136 million, and a price to book value ratio of 1.01. Relative to the S & P 500 Index, BAMM has risen in price 81% in the past 52 weeks. (At this time, our actual portfolio is slightly above its target, so BAMM will be added to a portfolio tracker based on a $2500 hypothetical market order purchase and the prevailing asked price on Monday morning, 10/4. The commission will be assumed to be $15, our usual per trade rate.)
10/8/04-Our nest egg's equity book value stands at a little over $335,000, well ahead of this year's end-of-December book value target, $304,000. (Our book value goal for the end of 2005 is $342,000.) Given that the equity assets we hold have a current value of $450,000 (total portfolio value $640,000), the equity price to book value is 1.34. Since assets tend to return to the mean, and average price to book is around 2, while that of the S & P 500 Index is about 3, both our risk and return potentials should be superior to those of this major market average.
The current Classic Value top candidates for purchase are: DSTR, DUCK, FAF, MFW, and TALK.
I've chosen First American Financial Group (FAF) (recent price $30.85) as the Classic Value selection this time. FAF is a mid-cap stock (market-capitalization $3 billion) and has a P/E of just 6.82, a P/S ratio of 0.44, a price to book value ratio of 1.2, a price to free cash flow of 4.5, debt to equity of 0.24, a 1.9% dividend (with a 12% payout ratio), and a return on equity of 21%.
Though my value-based sell price for FAF will vary with the company's subsequent earnings levels and the overall Aaa corporate bond yield (presently about 5.5%), a preliminary share price sale target would be $63.50.
Monday morning (our equity holdings being now below their intended level), I'll begin our Classic Value portfolio with a market order for FAF of approximately $2500 and record the exact transaction in the portfolio tracker.
As of the close of markets today, the Leapin' Lizards addition (BAMM), from last week, is down 1¢ since the purchase price, or .7%, including the $15 commission.
The S&P 500 Index stood at 1132 last week when we began this informal competition. It is down .9%, to 1122, at the close of business today.
If in our total portfolio (up 29.4% since my retirement on 12/31/01*) we are fortunate enough over the long-term to best the record of such major averages as the S&P 500 (down 2.3% since Dec., 2001*), it will be due not only to specialized investments like those for the Classic Value and Leapin' Lizards portfolios but to a wider variety of approaches, taken together. Beginning below and through the next few weeks, I'll detail several of these other strategies.
First, I invest up to 20% of our equity holdings in Berkshire Hathaway (BRK/A or BRK/B). The latest (Nov., 2004) issue of Smart Money magazine, "Power 30 Investors," p. 88, features Warren Buffett, CEO of BRK. Keith Trauner, portfolio manager for Fairholme Capital, is quoted there as indicating Berkshire Hathaway shares are currently available at a bargain price compared to his estimate of the company's value, about $110,000 per class A share, which translates to $3367 per class B share. The market has recently priced BRK/A at just $85,600, and BRK/B at $2853, a 22% or greater discount to Trauner's assessment of BRK's worth.
(*After all intervening retirement expenses, our total assets' net value is still up 11.0%, an annualized advantage over the S & P 500 return in the same period of 4.7%.)
10/13/04-Our Classic Value vs. Leapin' Lizards portfolio competition continues this week with another Leapin' Lizards asset purchase. The five finalists were: AGYS, ASGR, BRK, HOC, and PCR.
The top choice today is Perini Corp. (PCR) (recent price $15.35). This security will be recorded in the Leapin' Lizards tracked portfolio at tomorrow's early market trading price (along with a $15 commission).
PCR is up 69% this year and also up 81%, relative to the S&P 500 Index, over the past 52 weeks. It has a market cap. of $380 million, a price to earnings ratio of 7, a price to free cash flow of just 1.9, a price to book value ratio of 2.46, a price to sales ratio of only 0.21, a return on equity of 43%, no dividend, but a debt to equity ratio of only 0.08.
Prior to the PCR purchase, with so far one asset (BAMM vs. FAF) in the Leapin' Lizards vs. Classic Value portfolio, respectively, the Classic Value portfolio is ahead with a return of 2.01% (vs. -4.14% for the Leapin' Lizards portfolio). (The S&P 500 Index is down 1.9% since 10/4/04.)
Since our total assets are not now significantly below target, the PCR asset purchase tomorrow morning will remain hypothetical.
As indicated in the prior entry, our overall retirement holdings have been aided by other approaches. One that is successful is to buy stocks with A++ (highest) "Value Line" financial strength ratings, above average dividend growth and 3-5 year total return projections, low payout ratios, and low debt to equity ratios. Such assets are to be held for the long-term. Home Depot (HD) and PepsiCo, Inc. (PEP) currently meet these criteria.
As always, I recommend investors do their own checking on assets before the purchase of securities they find are of true value at current prices.
10/19/04-Our Leapin' Lizards vs. Classic Value portfolios are now neck and neck, each down about 1%, most of which is due to the commissions. (The S&P 500 Index stood at 1135 on 10/4/04 and is now 1103, a loss of about 3%.)
Our retirement portfolio has also been down some relative to its targets. Accordingly, we purchased shares of last week's Leapin' Lizards portfolio recommendation (PCR) for our actual holdings and will do so for today's Classic Value portfolio suggestion.
The current Classic Value final five are: ACGL, DUCK, HGGR, STG, and TOM.
Duckwall-Alco Stores, Inc. (DUCK) (recent price $15.85) is the new Classic Value recommendation. DUCK has a price to net working capital (the original Ben Graham strict value criterion) of less than one (0.86), based on the company's 8/1/04 figures. It has a low price to free cash flow of 5.25. It's market-cap. is $69 million. The P/E is reasonable at 11. Its price to sales ratio is only 0.16. The price to book value is just 0.62. There is no dividend. Return on equity is 5.82%. Its current ratio is nicely high, at 3.2, and DUCK's debt to equity is impressively low, at 0.13. We'll be adding DUCK shares to both our Classic Value and actual retirement portfolios at tomorrow morning's price.
Concerning other investment approaches I use, when Ben Graham type value stocks are not abundant (as they are not now), I also purchase contrarian bargains which appear favorable in terms of their financial strength, return on equity, recent price level compared with historical market quotes, and/or low price to earnings ratios, among other criteria. Current contrarian candidates include: SAFM and TXN.
10/24/04-The Dow reached a new low for the year on Friday, 10/22. The S&P 500 Index is down 1.4% in 2004. Our nest egg is up 4.6% year-to-date (YTD), but down .9% after we have taken $34,345 from the portfolio for retirement expenses thus far this year.
Prior to redemptions necessitated by expenses, for the entire period since my 12/31/01 retirement, our nest egg is up 27.8% (or 9.1% compounded annually), vs. the S&P 500 Index, which is down 5.0% (or -1.6% compounded annually) since the end of 2001. If S&P 500 dividends were included, that index is up annually (compound average) in this period about .4%.
Since 12/31/01, however, we have taken $104,345 out of our portfolio for retirement expenses. The nest egg remains up 9.2% since 12/31/01 (or +3.2% compounded annually) following these withdrawals.
Currently, our equity total is $452,800, and the portfolio's equity book value stands at $347,329, for an overall equity price to book value of 1.3 (vs. approx. 3 for domestic securities generally). The 2004 end-of-year book value target was $304,000 (and that for 2005, $342,000).
Besides the Classic Value or Leapin' Lizards stock strategies, one method we use for healthy returns is to own shares of value stock mutual funds with excellent long-term performances and no greater than average risk. Five fund holdings I particularly like currently are:
In the competition we began on 10/4 between the Leapin' Lizards and Classic Value strategies and portfolios, Leapin' Lizards is very slightly ahead (down 1.9%) vs. Classic Value (down 2.0%). (The S&P 500 Index stood at 1135 on 10/4 and is now 1096, a loss of 3.4%.)
At present I find the following Leapin' Lizards assets attractive (each with price to sales .5 or below, debt to equity .33 or below, and substantial price rise relative to the S&P 500 over the past 52 weeks): AGYS, AIT, BKR, HOC, and OMVKY.
My favorite among them is OMV Aktiengesellschaft, ADR (OMVKY) (recent price $51.15). OMVKY is a micro-cap (market capitalization $276 million). It has a long-term debt to equity ratio of 0.00. The current ratio, however, is only 0.69. OMVKY has a 1.4% dividend and a sustainable 27% payout ratio. Per Reuters*, if we can believe its figures, this company has $670 per share of book value (giving it a price to book value ratio of .08), plus a P/E of 0.54, a price to sales ratio of .02, and a price to free cash flow of just 1.36. [*Editor's note (11/4/04): per new data discovered today, the above information on OMVKY is incorrect. Please see Yahoo Finance's OMVKY figures which show that this stock actually has a P/E of about 14. It's price to sales ratio is really about 0.75. I would assume the book value is also much less favorable than in the earlier Reuters summary. If not already bought, I would not recommend OMV AG as a Leapin' Lizards asset. For our own portfolio, it is not considered a hold.]
Per Charles Schwab, OMVKY has had an increase from its low YTD price of over 50% and a 52-week performance, relative to the S&P 500 Index, of +71.7%.
At its early trading price on 10/25, I'll be adding it to the Leapin' Lizards tracking portfolio.
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