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October, 2015: 1 5 9 15 29

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:

With dividends included, the average total return of our Dividend Value portfolio would have been about 7.0% a year (and for closed positions alone, around 20.0%). That of our Low Price to Book Value portfolio would have been about 6.8% (and for closed positions alone, around 17.0%) .

As is typical in the latter stages of a bull market, value investing approaches, especially when not combined with momentum strategies, tend to underperform the major market averages. This is disappointingly reflected in our results here. In fact, the extent to which the S&P 500 Index has on average consistently beaten my low price to book and dividend value picks suggests it is time to review the methodologies I am using. The performance of assets suggested here has for some time been well below that indicated by impressive arrays of research compiled by Tweedy Brown and Company and the American Association of Individual Investors (AAII) on what (historically, at least) one may obtain from value investing techniques. Frankly, I am at a loss to understand the primary causes for this discrepancy.

In light of continued poorer results, it seems time to at least reexamine my take on investing. I began this journal as an extended experiment to see if as an average guy, having no special expertise, I might recapitulate the findings of such value investing gurus as Benjamin Graham. Despite early promise, to date the cumulative answer to that question must be "no."

Given doubts about my approach to picking good value assets, it will not be surprising that in coming weeks or months I shall be looking into more reliably lucrative methods. If superior criteria are found, I may suspend existing portfolios followed here and sell off their remaining stocks.

From my own nest egg, which has had a better overall outcome than an average of the portfolios noted above, there are a few lessons that I believe are still applicable:

1. In general, the smallest stocks by market-capitalization tend to be riskiest, to be bought and sold the least, and to do less well for extended periods in the market cycle than ones that still meet low price to value criteria but for which there is more trading.

2. Stocks tend to do better, even in the absence of low price to book value, that are financially stronger, have a higher than average dividend supported by good earnings, and for which there is at least a bit of forward momentum.

3. A glide path approach to when to buy stronger assets vs. to sell weaker ones, as described in my last quarterly report (7/4/2015), can be beneficial.

4. In spite of reservations expressed here otherwise, as a way of keeping one's whole portfolio moving forward with less risk than is likely to be there for the market, a targeted technique for increasing total equity book value in the nest egg can be helpful. My guideline here is to increase total book value by 13.5% a year. (We are on track for achieving this annual increase goal again for the current year.) Others may prefer a more conservative annual target.

   I hasten to add that probably not just any low price to book value asset will do. One can get assistance from a reliable investment service such as "Value Line" and limit one's investments to those with at least average financial strength and prospects, ones that also have better price in relation to value and have shown some upward price movement.

5. Finally, I continue to find it helpful to augment the portfolio's increasing total book value targets with a requirement that there be sufficient equity yield to provide a minimum of 2% a year dividend income on that advancing total book value level.

I do also from time to time keep my eyes open for other techniques that may prove beneficial. Small, short-term investments (no more than 5% of our total portfolio, held no more than three weeks at a time) in certain exchange traded funds (TWM and VXX, for instance, when they are relatively lower in price) can provide useful hedges against rapid, steep losses in a stock market that appears to be overbought.

With the recent market correction, our total nest egg is however still down 6.52% so far this year.

These are the present Low Price to Book Value portfolio open positions: AEG; AEL; AEY; AGII; AGO; AHL; AIG; ANAT; AOSL; ATW; BAMM; CDE; CLF; CSH; CUO; ELP; EZPW; FVE; GBLI; GENC; GGB; GLPW; GTE; GURE; HDNG; HP; IAG; IOT; ISH; KELYA; LQDT; MANT; MT; NE; PBR; PERI; PGH; PKX; PNTR; PRE; QCCO; REGI; SCX; SSRI; STLY; STRL; TATT; TCK; TDS; TX; UMC; VOXX; VOYA; and WILC. I may add to some of these positions from time to time.

Here are our current Dividend Value portfolio holdings: AP; AVX; BGCP; BRKS; CCUR; COP; CSPI; DEST; EC; ESV; GME; IQNT; MLR; MN; NOV; PETS; PSEC; RDS-A; RGR; SSL; STO; SUP; T; TEO; TGA; TICC; TNH; TX, UVV, VIV; and WSTG. I may also add to some of these positions from time to time.

Hope we all have a rewarding final quarter of 2015.

10/5/15-Since the prior entry, the following assets have been sold from the Low Price to Book Value portfolio: AOSL; QCCO; TDS; and UMC.

More info will be provided on these sales a little later.

Consistent with comments on 10/1, I have been developing new investment guidelines. The criteria are more stringent for what constitutes an acceptable investment, so there will be fewer candidates from which to choose. The new strategies replace the approaches used before. They begin immediately. The assets purchased based on newer value characteristics will be added to the existing records for low price to book value and dividend value stocks.

To help offset the reduced number of low price to value stocks being suggested, a fresh portfolio is being added: Low Price to Trailing Earnings.

From now, the revised methods call, in most instances, for sales not to occur until the price to value ratio reflects significant profits or a downward change in per share value or two years after purchase, whichever occurs first (except that, if at the two year point I am on vacation or otherwise out of pocket, those sales will simply occur as soon as convenient after the two-year hold period criterion has been met).

Berkshire Hathaway shares, unlike the others, will only be bought when BRK/B price to book value is below 1.2. The intention with them alone is also that they then be held "forever."

The following assets meet the new guidelines at this time: Everest Re Group, Ltd. (RE) (recent price $173.66) meets the Low Price to Trailing Earnings criteria.

And Friedman Industries, Ltd. (FRD) (recent price $5.91) plus L B Foster, Co. (FSTR) ($12.30) meet the Low Price to Book Value portfolio criteria.

I shall be adding shares of all three to our nest egg in early morning trading later today, 10/5/15.

At this time, I do not have any Dividend Value stocks to suggest under the new approach.

10/9/15-To bring the record of closed positions up to date, since our final September entry the following assets (all of which had been held over two years) have been sold from the Low Price to Book Value portfolio:

AOSL, bought on 4/13/13, was sold on 10/1/15 for a net loss of 12.27%.

QCCO, bought on 10/29/12, was sold on 10/1/15 for a net loss of 53.08%.

TDS, bought on 9/12/13, was sold on 10/1/15 too for a net loss of 12.79%.

UMC, bought on 7/25/13, was sold on 10/1/15 for a net loss of 25.32%.

MT, bought on 12/8/11, was sold on 10/6/15 for a net loss of 69.75%.

PBR, bought on 3/11/11, was sold on 10/6/15 for a net loss of 71.47%.

AEG, bought on 9/16/13, was sold on 10/6/15 for a net loss of 23.20%.

STRL, bought on 4/30/12, was sold on 10/6/15 for a net loss of 59.32%.

CDE, bought on 6/9/13, was sold on 10/6/15 for a net loss of 76.58%.

STLY, bought on 4/29/13, was sold on 10/6/15 for a net loss of 30.21%.

In each case, the returns shown are after commissions but do not include any dividends. The buy and sell dates plus results for these sets of round-trip trades have been added to our spreadsheet for Low Price to Book Value closed positions and will be incorporated into the stats for our quarterly performance reports.

I do not have new buy suggestions at this time.

The higher than usual number of sales noted above is indicative of a shift in both my buying and selling guidelines. As indicated recently, I will be more restrictive in what is bought for our portfolios. In addition, price to value assets will be sold more readily. Among low P/Bk assets, sales will occur when the price to book value is 1.2 or above or when the asset has been held for two years (and no longer meets buy criteria), whichever first.

Low P/E assets will be sold when the trailing P/E has risen to 10.5 or above or when the asset has been held for two years (and no longer meets buy criteria), whichever first.

Dividend value stocks will be sold once the dividend has fallen significantly or once the asset has been held for two years (and no longer meets buy criteria), whichever first.

In the next few months, as more stocks reach their two-year hold point or it is noted some of them already have exceeded our value guidelines, higher than usual redemptions will persist, then level off.

Selling our stocks at a sometimes substantial loss will of course for awhile have an adverse effect on the record of closed positions performance. Hopefully this will be balanced out in time by better overall future returns due to both greater initial care in selection and the removal of losers sooner, giving them less chance to decline further.

10/15/15-No further sales of assets followed here have occurred since the last entry.

At present I do not have additional new stocks to mention as either Low Price to Book Value or Low P/E portfolio candidates. (I do wish to revise one of the earlier mentioned selling criteria for our Low P/E portfolio securities. Instead of selling if they reach a trailing P/E of 10 or above, the max trailing P/E level will be 11.25 or higher.)

At this time, I find Eaton Corp., plc (ETN) (recent price $52.10) to be a good candidate for our Dividend Value portfolio and accordingly shall be purchasing shares of it at the market price in early trading tomorrow.

10/29/15-Since our last entry, the following couple assets (each held over two years) were sold from the Low Price to Book Value portfolio:

EZPW, bought on 9/8/13, was sold on 10/20/15 for a net loss of 63.17%.

CUO, bought on 7/14/13, was sold on 10/20/15 for a net loss of 20.22%.

Their indicated returns are after commissions but do not include any dividends. The buy/sell dates, amounts, and results have been added to our spreadsheet for Low Price to Book Value closed positions and will be included in the stats of our quarterly performance reports.

In addition to FRD, FSTR, and RE, mentioned earlier this month, the following assets meet the new guidelines at this time: The Washington Post Co., also known as Graham Holdings Company (GHC) (recent price $564.71), meets the Low Price to Trailing Earnings criteria.

Rocky Brands, Inc. (RCKY) (recent price $12.52) meets Low Price to Book Value portfolio as well as Dividend Value portfolio criteria.

I shall be adding shares of both GHC and RCKY to our nest egg in early morning trading tomorrow, 10/30/15.

Day after tomorrow, we celebrate Halloween. Hope this year we wind up enjoying more treats than tricks. Though there are exceptions, historically the six-month period immediately following this holiday has been more rewarding for investors than the half-year that begins on May Day. In addition, third years in the four-year U.S. presidential term tend for some odd reason to be up ones for our markets. This is especially the case when the year ends in 5. All things considered, with such trends plus a bit of luck and good stock selection in our favor, maybe we shall mostly be smiling by the time the next tax season is winding down.

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