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October, 2005: 4 11 14 15 21 27
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.


10/04/05-The average holding period of the competition portfolio assets has been about 182.5 days vs. twice that for a hypothetical S&P 500 Index holding since the 10/4/04 inception. Classic Value (CV) is once again ahead, with a gain of 16.63%, while the Leapin' Lizards (LL) assets are up 11.28%. The S&P 500 Index is up 7.24% since the contest's beginning (all statistics as of close of trading today). (The figures are based strictly on price appreciation, which excludes dividends. Commissions have been subtracted from the portfolio results and not from the S&P 500 Index record.)

Recall that the Classic Value assets meet basic, straightforward Ben Graham criteria for bargain stocks, with both safety and value qualities, generally at least having relatively low P/E, P/Bk, or price to net current assets and low total debt to equity or high dividends with low total debt to equity. The assets selected for CV meet these standards as a minimum.

Our Leapin' Lizards, at a minimum, have low P/S (0.5 or below) plus low debt to equity and have performed at least 50% better than the S&P 500 Index over the past 52 weeks.

The next contest stock will be added to the LL tracking portfolio (replacing the LL purchased 10/4/04, BAMME [its symbol originally, a year ago: BAMM], which is up in the interim 3.61%) at its market price early tomorrow, 10/5/05. The top candidates this week are: HNT; MHS; NYER; PSAI; and PSS.

My choice among them is Pediatric Services of America, Inc. (PSAI) (recent price $13.86). PSAI has a market capitalization of $100.50 million, a P/E of 26.60, no dividend, a price to sales ratio of 0.40, a return on equity of 5.69%, a price to book value of 1.41, a current ratio of 3.35, debt to equity of 0.28, and positive free cash flow. PSAI is up 9.56% for 2005 to date, 57.24% relative to the S&P 500 Index over the previous 52 weeks, and 65.84% in relation to its own price 12 months ago.

This is the one-year anniversary of our LL vs. CV competition. (Please see the 10/1/04 entry for how this contest began.) With average per asset holding periods of about 182.5 days, the LL assets are up at an annualized rate of +23.83% while the CV assets have an annualized increase of 36.03%. Not only do the CV securities beat LL on an absolute basis. They also do so on risk-adjusted measures. Including both open and closed positions and after subtracting for commissions, only 54% of the LL holdings are up vs. 77% for the CV stocks. Only 8 of the LL securities performed at a 10% or greater rate, so that less than a third of the total LL portfolio accounted for most of its overall gains. By contrast, 14 of the CV securities rose at least 10%, more than half of the portfolio holdings. Further, more of the CV assets than the LL stocks had dividends, providing for still higher total returns and greater portfolio stability.

Although both tracked portfolios would have easily beaten a buy-and-hold investment on 10/4/04 in the S&P 500 Index (as indicated, up 7.24%), the clear superiority to date of the CV approach is sufficient that, from now on, I shall be using a substantial amount of our investment funds for purchase of the Classic Value assets, but shall be buying Leapin' Lizard stocks only when a quite compelling candidate becomes available, i.e. one that, besides meeting the LL criteria, also meets CV requirements.

However, since readers may wish to benefit from the tendency of value vs. momentum stocks to fluctuate in performance (1998 results were relatively dismal for value assets vs. momentum, for instance), and since both approaches are to date a big improvement over the major market averages, a useful strategy might be to simply put equal dollar amounts into each type asset, alternating purchases of first one and then the other portfolio pick. This would give a combined portfolio (apart from mergers, etc.) of roughly 50 holdings, seemingly plenty for diversification. Had this been the technique over the past year, and if roughly the same amount were invested in each asset, the gain to date (not counting dividends, but with commissions subtracted) would be about 13.96%, an annualized return of roughly 29.87%. Of course, as always, past performance does not assure future returns, and annualized projections are often inaccurate, mainly useful for comparison purposes rather than as any assurance of similar actual performance.

There are various schools of thought on when to sell such assets. Some say to sell as soon as the stock is up 50% or more, others to hold for two years, etc. Since one-year average returns of the LL vs. CV portfolios are likely (at least based on our own and others' studies so far) to be adequate, for simplicity in tracking the returns of each of our portfolios we'll be trying to place either hypothetical or actual (if I had bought the asset for our own nest egg) sell orders on or soon after the one-year anniversary of the asset's purchase. Thus, if I bought on 10/4/04, I'll be aiming to put in a sell order at the close of business on 10/4/05 or not much later. If the sale goes through the following trading day, I believe this would also fulfill the one-year-and-a-day tax criterion for long-term holdings.

Meanwhile, in our own net assets so far in 2005 we have seen an overall gain of 3.67%, or rather we would have but for an excess of expenses (over our retirement income) of $22,685. Once that amount has been subtracted from our dividends or portfolio principal, our actual nest egg gains were reduced to only 0.28%. Considering what a meager performance the major averages have shown so far this year, though, it is pleasing that we have had any advance at all beyond our budgetary needs. (As mentioned previously, we should find it easier to remain financially in positive territory once monthly Social Security benefits begin to be received, in late December of this year.)


10/11/05-The average holding period of the competition portfolio assets has been about 186 days vs. twice that for a hypothetical S&P 500 Index holding since the 10/4/04 inception. Our portfolios have taken a significant hit in the down markets over most of the past week. However, in our contest, Classic Value (CV) remains ahead, with a gain of 12.49%, while the Leapin' Lizards (LL) assets are up 6.56%. The S&P 500 Index is up just 4.68% since the contest's beginning (all statistics as of close of trading today). (The figures are based strictly on price appreciation, which excludes dividends. Commissions have been subtracted from the portfolio results and not from the S&P 500 Index record.)

The LL assets are up at an annualized rate of +13.28%, while the CV assets have an annualized increase of 25.98%. The S&P 500 Index's compound annualized increase, based on a holding period from 10/4/04 to present, would be 4.59%.

The next contest stock will be added to the CV tracking portfolio (replacing the CV purchased 10/11/04, FAF [which is up in the interim 36.57%] at its market price early tomorrow, 10/12/05. The top candidates this week are: DEVC; MHJ; REMC; TWMC; and VOXX.

My choice among them is Devcon International Corp. (DEVC) (recent price $9.75). DEVC has a market capitalization of $56.80 million, a P/E of only 7.61, no dividend, a price to sales ratio of 0.65, a return on equity of 12.93%, a price to book value of 0.77, a current ratio of 2.24, debt to equity of 0.32, and positive free cash flow. Based on its low trailing P/E and its low P/Bk ratio as well as its relatively low total D/E, this asset meets Benjamin Graham classic value criteria. Historically, a portfolio of assets meeting such standards has performed at a compound annual rate of from 15-20% when sold per B. Graham guidelines.

Following the past week's overall decline, our net holdings' total return since 12/31/04, after our expenses, has been a 2% loss. If we had not needed to use roughly $23,300 of our assets and dividends for extra expenses, beyond our retirement income, our year-to-date return would have been 1.8%, a bit better than that of the S&P500 Index.

Meanwhile, though, our total equity book value targets are being more than met and are on track to stand at $342,000 (or more) by 12/31/05, which represents a 12.5% increase (over and above all expenses) beyond the book value of the portfolio at the end of 2004.


10/14/05-The average holding period of the competition portfolio assets has been about 187.5 days vs. twice that for a hypothetical S&P 500 Index buy and hold since the 10/4/04 inception. Our portfolios have continued to suffer greatly as the major market averages have been off in the last several days. In our contest, though, Classic Value (CV) remains ahead, with a gain of 9.75%, while the Leapin' Lizards (LL) assets are up only 4.23%. The S&P 500 Index is again up 4.68% since the contest's beginning (all statistics as of around 11:15 AM today). (The figures are based strictly on price appreciation, which excludes dividends. Commissions have been subtracted from the portfolio results and not from the S&P 500 Index record.)

The LL assets are up at an annualized rate of +8.40%, while the CV assets have an annualized increase of 19.85%. The S&P 500 Index's compound annual increase, based on a holding period from 10/4/04 to present, would be 4.55%.

The next contest stock will be added to the LL tracking portfolio (replacing the LL purchased 10/14/04, PCR [which is up in the interim 21.88%] at its market price early on Monday, 10/17/05. The top candidates this time are: GRIL; HGGR; HNT; INMD; and PSS.

My choice among them is Payless ShoeSource, Inc. (PSS) (recent price $16.38). PSS has a market capitalization of $1.12 billion, a P/E of 36.75, no dividend, a price to sales ratio of 0.41, a return on equity of 7.96%, a price to book value of 1.64, a current ratio of 2.51, debt to equity of 0.32, and positive free cash flow.

PSS is up 29.59% year-to-date, 63.45% relative to the S&P 500 Index over the past 52 weeks, and 70.12% in relation to its own price 12 months ago.

Our nest egg's total return since 12/31/04, after our expenses, has now been a 3% loss. If we had not needed to use roughly $23,600 of our assets and dividends for extra expenses beyond our retirement income, our year-to-date return would have been 0.8%, not much but still barely up!


10/15/05-I'm fairly "bummed" that, once again, the Leapin' Lizards have let us down with returns not even half those of the Classic Value holdings and with greater volatility. Am fed up with them this time and determined to find a more satisfactory substitute. I'm looking into the possibility of replacing them, as each completes its year in the tracking portfolio, with a mid-cap or large-cap high dividend stock. I would then limit the Classic Value holdings to stocks primarily meeting the Ben Graham low P/E or P/Bk value criteria, regardless of market-cap and of whether or not they also had a decent dividend.

One difficulty is with not having a way of easily tracking the dividend part of a stock's total return. Still, maybe the appreciation alone for certain quality dividend stocks would be sufficient to show them in a favorable light relative at least to the S&P 500 Index, if not also to the low price to earnings (or low P/Bk) classic value type stocks. Anyway, I'll be looking into this over the next several days. Will keep readers posted.


10/21/05-Beginning with this entry, I'm introducing a couple new portfolios, Yummy Yielders and the Mama's Mix Stock Portfolio. It is hoped and expected that these sets of stock picks will prove superior in performance, and with lower volatility or risk, than the Leapin' Lizards and hypothetical combined (50/50 Classic Value and Leapin' Lizards) portfolios, respectively.

Yummy Yielders(YY) will simply be the best high dividend stocks I can currently find. This portfolio will start with the next entry after this, and selections for the YY portfolio will replace those maturing (held at least a year) in the Leapin' Lizards tracking portfolio.

The Mama's Mix Stock Portfolio(MM) will be a 50/50 blend of the best low P/E or low price to book value stocks I can find (which I'll continue to suggest for the Classic Value portfolio*) and of the Yummy Yielders selections. It is intended to be a combined portfolio so likely to provide a good return, and yet also so safe, I'd be happy to recommend it to my mom and to have her use it for her nest egg investments. (*The Classic Value stocks will not necessarily exclude high dividend stocks, but the primary criterion for their selection will be low price to earnings or low price to book value.)

The MM portfolio will start with today's selection, at the early market price on Monday, 10/24/05. The Yummy Yielders' first selection, next time, will be its second holding, and so on.

Meanwhile, I'll continue to track the performance of the exclusively Classic Value portfolio, begun in October, 2004. I'll also still report the results for the Leapin' Lizards, but, since they are being replaced by the Yummy Yielders, only until the LL assets presently in the tracked portfolio have all been sold, after each has been held a year.

Back to the original competition, the average holding period of the competition portfolio assets has been about 191 days vs. twice that for a hypothetical S&P 500 Index buy-and-hold since the 10/4/04 inception. Classic Value (CV) remains ahead, with a gain of 11.23%, while the Leapin' Lizards (LL) assets are up only 4.99%. The S&P 500 Index is up just 4.24% since the contest's beginning (all statistics as of the close of major US market trading today). (The figures are based strictly on price appreciation, which excludes dividends. Commissions have been subtracted from the portfolio results and not from the S&P 500 Index record.)

The LL assets are up at an annualized rate of 9.75%, while the CV assets have an annualized increase of 22.55%. The S&P 500 Index's compound annual increase, based on a holding period from 10/4/04 to present, would be a mere 4.05%.

The next contest stock will be added to the CV tracking portfolio (replacing the CV purchased 10/20/04, DUCK [which is currently up 43.81% since then], at its market price early on Monday, 10/24/05. The top candidates this time are: IBA; IPCR; PHG; PLFE; and VNT.

My choice among them is IPC Holdings, Ltd. (IPCR) (recent price $26.55). IPCR has a market capitalization of $1.28 billion, a trailing P/E of 12.60 (with a forward P/E estimate of 6.02), a 3.70% dividend (with a dividend payout ratio of 0.35), a price to sales ratio of 2.95, a return on equity of 5.79%, a price to book value of only 0.71, a current ratio of 1.17, debt to equity of 0.00, and positive free cash flow.

IPCR is a classic Ben Graham bargain, based on its low price to book value, its high dividend, and its low debt.


10/27/05-Please see the last entry (10/21/05) for info on the new portfolios: Yummy Yielders (YY) and Mama's Mix Stock Portfolio (MM), as well as the curtailment of new purchases in the Leapin' Lizards (LL) portfolio. Classic Value (CV) will be continued as is, except that new purchases will be focused on assets meeting, as a minimum, either low price to book value or low price to earnings criteria.

Back to the original competition, the average holding period of the competition portfolio assets has been about 194 days vs. twice that for a hypothetical S&P 500 Index buy-and-hold investment since the 10/4/04 inception. Classic Value (CV) remains ahead, with a gain of 10.90%, while the Leapin' Lizards (LL) assets are up only 5.02%. The S&P 500 Index is up just 4.15% since the contest's beginning (all statistics as of the close of major US market trading today). (The figures are based strictly on price appreciation, which excludes dividends. Commissions have been subtracted from the portfolio results and not from the S&P 500 Index record.)

With thus far only one asset (IPCR), and it held for only four days (purchased 10/24/05), in the Mama's Mix Stock Portfolio (MM), it is currently down 2.62%.

The annualized performance of the Classic Value tracked holdings to date is about +21%. That of a buy-and-hold investment in the S&P 500 Index since 10/4/04, at the original contest's inception, is about 4%.

The new asset this time would at this point be replacing the latest sold LL held for at least one year. However, about a year ago, on 10/24/04, the LL recommendation was OMVKY, for which we turned out to have inaccurate statistics when it was selected for purchase. So, although its price went up over 80% in the interim, ultimately it was deleted from the LL tracking portfolio and not counted in the LL stats.

In addition, since we are no longer buying new LL assets, the recommendation this week instead will be our first Yummy Yielder (YY). The selection will be taken from these large dividend candidates: FBN; FULT; HWG; SRT; and UGP. (The top pick among them will be purchased at the early market price on 10/28/05.)

My choice among them is Furniture Brands International, Inc. (FBN) (recent price $17.02). FBN has a market capitalization of $961.32 million, a trailing P/E of 11.97, a 3.59% dividend (with a dividend payout ratio of 0.41), a price to sales ratio of 0.39, a return on equity of 7.89%, a price to book value of 0.91, a current ratio of 4.76, debt to equity of 0.32, and positive free cash flow.

FBN, in addition to being the first YY pick, will be added tomorrow to the MM portfolio, a 50/50 mix of the Classic Value and Yummy Yielders selections, intended to be so safe and profitable over the long-term that I would be glad to have my mom buying its recommendations.


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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