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October, 2011: 1 2 4 7 10 12 24 29 31

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.

Observations:

• The market as a whole is off about 14% for the three-month period from 6/1/11 through yesterday. Our monitored portfolios reflect much of the red ink. Taking both the closed and open positions into account, it is noteworthy that there is a bit of positive news here: the Low Price to Book Value and a new portfolio, Selective Six Percent Plus, are slightly up. Were dividends added in, they would be a notch higher still. As noted three months ago, for the recent past a buy and hold investment in the S & P 500 Index (invested on 5/14/09) would have beaten all our other approaches. Nonetheless, the index's record over the previous decade, at an annualized 0.85%, is significantly worse than that of a virtually risk-free money market fund since ten years ago.

• The latest approach being tested here, Selective Six Percent Plus, is designed for the conservative investor who wants some growth, some income, and not a lot of trading. Begun in the latter half of August, it takes advantage of the fact that dips in equities periodically make available assets with high yield and not a whole lot of risk. To qualify, an equity need only have at the time of purchase a dividend of 5.6% or above (that is, a rounded off 6% or better yield) and be among the lowest risk such high yield equities then available.

• The current Selective Six Percent Plus portfolio includes RVT, SSL, STM, UMC, and VOD. Its average yield is 6.8%. (STM had a higher dividend when I bought it for this portfolio a few weeks ago, but now yields just 5.1%, having in the meantime gone up in price about 12%.) One can simply keep adding such stocks to a gradually increasing portfolio or rebalance after a year (or a year and a day, for long-term tax treatment), to weed out ones that at the time of rebalancing no longer qualify, having then a lower dividend or a higher level of risk than desired.

• Market dips also provide good low price to book value opportunities. I have in the past several weeks been able to pick up several stocks with a price to book value of 0.5 or below, the proverbial dollar available for 50 cents or less.

• Are markets headed higher from here? The just ended quarter certainly seems to have set things up for a nice, seasonality favored year-end rally. However, my crystal ball remains dark. We might have merely more of the same. If markets remain depressed or even go farther down, one can then snatch up additional bargains, some of which may be good enough that one would like to hold them essentially forever.

• In the latter category for me currently is Berkshire Hathaway (BRK/B) which, at about $71 a share, is selling at a considerable discount from a conservative estimate of its intrinsic value. What is more, Warren Buffett's company has recently begun buying back Berkshire Hathaway shares. This will naturally tend to increase the profitability of its remaining shares. BRK/B is another of our nest egg holdings that is up since purchase.

• The Jim's and Phil's 10 for 10 stocks have taken a beating like most everything else, but I believe they will do well over the balance of the decade that the best of them are to be held.

• As usual, I think the closed position results are a more reliable indicator of the success or failure of an investment approach, partly since the fluctuations in a group of open positions can be wide in either direction and partly because in many cases one need not accept negative returns but can instead wait for the price one wants before selling.

  Through 9/30/11, the Low Price to Book Value closed positions have averaged 34.16%, 31.29% on an annualized basis. With dividends included, these results would likely be about one percent higher in each case.

As noted a few months ago, I routinely provide the investments I make and recommend for the portfolios followed here. Although I had not referred to the Selective Six Percent Plus (SSPP) portfolio previously, I think it too is a keeper and expect to refer to suggested new SSPP assets from time to time. Here are a few of interest for it at present: FRD; RVT; SMS; SSL; and UMC.

Wide price swings can be daunting for individual investors. I believe that for people willing to hold assets till the right time to redeem them, the asset approaches cited here have ascending risk levels. The first of these may have the best return for their volatility and the last ones the lowest return for the risk assumed, but for me all are quite valid and recommended methods of investing for the long-term:

• Selective Six Percent Plus

• Berkshire Hathaway (BRK/B)

• B. Graham Dividends w/Value Port.

• Low Price to Book Value

• Earn. Estimate Increase 5%(+)

An ongoing goal is each year to raise the level of total equity book value. From 1/1/05 through 12/31/10, for example, our nest egg's total book value has been increased at an average annual rate of over 10%. (See the 4/2/11 entry for a longer discussion of this topic.) The annual minimum book value increase target for the next several years, however, is 13.5%, which made this year's milestone a bit over $680,000. Thanks to the stock market's downturn this past summer, we have been able to raise our total book value faster than earlier anticipated. It now stands at $689,400, a bit more than $9000 above the target level for the end of this year.

Our equities as of the close of trading on 9/30/11, the end of the third quarter, stood at $592,000. When calculated with our nest egg's total stock plus stock mutual fund book value, this indicates a P/Bk of 0.86, suggesting the assets are probably oversold and thus likely sooner or later to see a satisfactory rebound.

Meanwhile, though, our nest egg's overall net asset value has dropped 9.5% for the year.

I wish everyone investment success during the next quarter.

10/2/11-Since the last entry there have been no stocks followed here which were sold or have had sell signals.

With equities as yet down for the year, today I again used a screen for very low price to book value stocks. Here in my opinion are the most interesting results:

My currently favorite 5 low price to book value assets are ADUS; AMED; BBOX; LNC; and SYA.

My favorite among them is Addus HomeCare Corp. (ADUS) (recent price $4.05). It meets Benjamin Graham's bargain stock safety and value criteria.

Addus HomeCare Corp. will be added to our nest egg at its market price in early trading on Monday, 10/3/11.

10/4/11-Since the last entry, there have been no stocks followed here which were sold or have had sell signals.

My favorite low price to book value asset this morning is Sims Metal Management Limited (SMS) (recent price $10.70). It meets Benjamin Graham's bargain stock safety and value criteria. SMS has a price to book value of 0.79, a 6.60% projected dividend, with a dividend payout ratio of 0.33, a debt to equity of about 10%, a current ratio of 2.15, a forward P/E of 9.3, and a P/S ratio of about 0.30. While there are no guarantees, a portfolio of stocks with stats. like these has in the past tended to do significantly better than the market.

Sims Metal Management Limited has been added to our nest egg at its market price in early trading today, 10/4/11.

10/7/11-Since the last entry, there have been no stocks followed here which I have sold or which have had sell signals. However, due to a stock and cash merger effective 10/5/11, our 704 ContinuCare Corp. (CNU) shares in the Phil's Ten Stocks for a Decade portfolio have been transformed into 29 shares of Metropolitan Health Networks (MDF), which at the close today ($5.06 a share) represented a market value of $147, plus $4401 in cash.

The cost basis when the shares of CNU were purchased for the portfolio, on 5/14/10, was $2473. So at today's MDF price the total gain so far on this investment has been 83.91%. As MDF is a small-cap with apparently good prospects, a P/E of less than 8, and a return on equity of 38.86%, I shall on 10/11/11 use the cash proceeds of the merger to purchase more shares of MDF and add the total share holdings to the Phil's Ten Stocks for a Decade portfolio, as a replacement there for the CNU shares.

My currently favorite Ben Graham Dividend with Value asset is Illinois Tool Works (ITW) (recent price $43.15). Based on its dividend and debt to equity level, ITW meets Benjamin Graham's bargain stock safety and value standards.

As a refresher, recall that the criteria for my Ben Graham Dividend with Value assets include simply that: 1. the dividend must be 0.66 or more the average AAA corporate bond yield (as that yield is reported in the most recently received "Value Line Investment Survey" or in the Moody's investment service); 2. the asset must be rated 1 (best) for safety by "Value Line;" 3. the dividend payout ratio must be 0.5 or below; 4. the debt to equity must be 0.99 or below; 5. the asset at time of purchase must have a 3-5 year projected total return, per "Value Line," of 100% or greater.

Before this purchase, my Ben Graham Dividend with Value holdings are: ETN; INTC; JNJ; NVS; RDS/A; and T.

Illinois Tool Works will be added to our nest egg at its market price in early trading Tuesday, 10/11/11.

10/10/11-Correction: On 10/7, I indicated that the proposed trades cited in that entry for shares of MDF and ITW were to be made on 10/11/11. I had been assuming the markets would be closed today in observance of Columbus Day. However, it turns out of course that this is just a federal holiday, and most of the markets will be open. Accordingly, I shall instead be placing those buy orders a few minutes from now, at the opening today (10/10/11), for shares of both MDF and ITW.

10/12/11-As of this morning, I am adding to our nest egg shares of low price to book value asset, RCL, which meets Ben Graham value and safety criteria. Its price in early trading today was $24.30.

10/24/11-As of this morning, I have added to our nest egg shares of a low price to book value asset, ADPI. It met Ben Graham value and safety criteria. Its price in early trading today was $10.35.

10/29/11-Since the last entry, there have been no stocks followed here which I have sold or which have had sell signals.

My currently favorite Ben Graham Dividend with Value asset is 3M Company (MMM) (recent price $81.00). Based on its dividend and debt to equity level, MMM meets Benjamin Graham's bargain stock safety and value standards.

The criteria for my Ben Graham Dividend with Value assets include simply that: 1. the dividend must be 0.66 or more the average AAA corporate bond yield (as that yield is reported in the most recently received "Value Line Investment Survey" or in the Moody's investment service); 2. the asset must be rated 1 (best) for safety by "Value Line;" 3. the dividend payout ratio must be 0.5 or below; 4. the debt to equity must be 0.99 or below; and 5. the asset at time of purchase must have a "Value Line" 3-5 year projected total return of 100% or greater.

Before this purchase, my Ben Graham Dividend with Value holdings are: ETN; INTC; ITW; JNJ; NVS; RTN; and T.

3M Company will be added to our nest egg at its market price in early trading on Monday, 10/31/11.

I am also interested in PAAS (recent price $29.56). Though this silver producing company does not match my usual guidelines for low price to value, it is relatively low priced as precious metals companies go and seems likely to do well over the next few years, both as an inflation hedge and due to profitable earnings in its own right.

While October is not quite over and may yet give us a Halloween surprise, its dramatic market recovery from the summer swoon has so far lifted our overall equity portfolio enough to give us a 6% return on these investments, after commissions and not counting dividends. Needless to say, I am hopeful the trend for the balance of the year is also mostly upward. This might give us an opportunity to sell assets while higher and so increase our cash reserves again before the next major drop.

10/31/11-The latest addition to my Selected Six Percent Portfolio is Universal Insurance Holdings, Inc. (UVE) (recent price $4.28). Based on its dividend, price to earnings, and debt to equity level, UVE also meets Benjamin Graham's bargain stock safety and value standards.

UVE has a 4.10% dividend with a dividend payout ratio of 20.00% and an estimated forward dividend of 7.50%. The P/E is 4.24. D/E is 28.46%. It has positive free cash flow. Return on equity is 28.90%.

Before this purchase, my Selected Six Percent Portfolio holdings are: RVT; SSL; STM; UMC, and VOD.

Universal Insurance Holdings, Inc. will be added to our nest egg at its market price in early trading this morning.

I hope everyone has a rewarding Halloween, All Saints' Day, and Day of the Dead.

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