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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. |
12/2/02-Continuing the exchange out of our bond assets, which are now quite vulnerable to coming interest rate or inflation increases, I placed an order today to reduce our Vanguard Total Bond Index Fund holdings by another $2600, raising our money market account holdings by that amount.
The Dow has risen about 17% just in the past couple months. Other averages are up significantly as well. Our assets have been no exception to this happy trend.
On the one hand this has meant we've exceeded our short-term targets substantially. On the other, of course, it has decreased greatly the number of fantastic value bargains available, and it is harder to get a limit price (to assure one is not creamed by the bid-asked spread) value stock order executed.
Yet, on a per share basis, there are still many excellent companies for sale at 60% or less of their true worth, based on any of several traditional value criteria. So, we should have no real difficulty gradually loading up on Benjamin Graham type investments in the coming months, leading to the target of a safe half-million dollar equity portfolio by the end of 2003.
12/3/02-Have found another good value bargain, MGP Ingredients, Inc. (MGPI) (recent price $7.25 per share). The stock's price to earnings ratio is 5.7. Price to book value is 0.53. The company pays a decent dividend (over 2%), with a payout ratio of 11.4%. The debt to equity ratio is 0.17. Market capitalization is $58.4 M.
Overall, the asset meets statistical criteria for equities in the lowest price to value decile. Such holdings tend to be among the best performing, if sold once they have achieved fair value.
12/5/02-Have located an attractive company with excellent value characteristics, Flanigan's Enterprises, Inc. (BDL) (recent price $5.70). It has a dividend of about 4.4% and a price to earnings ratio of about 7. Price to book is 1.15. Dividend payout ratio is 29.55%. Debt to equity is 0.18. Price to sales is 0.4. But be cautious. With a market capitalization of just $10.76 M, it is a micro-cap and likely to enjoy both the benefits and deficits of such stocks' extreme volatility.
Interestingly, effective 7/31/02, Fidelity Low Priced Stock Fund owned 195,000 shares (over $1,100,000 worth, or about 10%) of BDL. The fund was also reported, as of 12/4/02 by Morningstar, to hold over 1% (one of its top 5 holdings) of PMI Group, Inc. (PMI), previously mentioned here as a good value selection.
12/9/02-The markets' downturn last week and again today have moved our top five core assets and misc. value equities modestly below their current targets. (The second tier core holdings are actually about $20,000 above our intended level.) Accordingly, I am doing a little purchasing to eliminate the deficits below current goals.
For our core assets, I placed an order to purchase one share of Berkshire Hathaway, Series B (BRK/B), which has a recent price of $2350 per share. This is an extremely well run company that seems likely to at least match the performance of the S & P 500 over the next several years but with less risk.
As an addition to our misc. value holdings, I placed an order today for 3200 shares of BCT International (BCTI). At its recent price of $.78, this micro-cap stock (market capitalization just $4.55 M) is trading at levels consistent with traditional Benjamin Graham valuation and safety criteria. Price to book value is just .26. The trailing price to earnings ratio is 6.34. Price to sales is .22. It has no current yield. Total debt to total equity is only .04. The current ratio is 4.69.
There is, of course, no guarantee either BRK/B or BCTI will go up, but our average individual holding has above the market dividend yield, a price to earnings ratio below seven (among the lowest available), a price to book value less than one, and little debt. As a group, such companies should in time be recognized by the market for the superior value they represent.
12/17/02-Online stock screens can be very useful as a starting point for selecting companies in which to invest. But it is best not to depend exclusively on any one stock screener. In the last few weeks I've found serious problems with the results from two major online stock screening companies. As a result I'm now verifying interesting information obtained from any single stock screener with at least two others. MultexInvestor, Hoover's Online, AAII, and Value Line have all been helpful at times, but none are infallible.
Today shares of Circuit City (CC) (recent price $7.31) fell to a bargain level. Price to book value is .59. Price to sales is .17. PEG is 0.6. There is a .96% dividend. The payout ratio is just 7.19%. Debt to equity is only 0.1. Trailing price to earnings is 8.44. At its $1.53 billion market capitalization, this is a mid-cap. stock with good value.
12/24/02-An intriguing bargain stock to consider is Metris Companies, Inc. (MXT) (recent price $2.39). This asset has a price to book value of just 0.2, a trailing P/E of 5.2, a price to sales ratio of 0.13, a PEG of 0.4, a 1.7% yield (with a payout ratio of 5.32%), and a total debt to total equity ratio of 0.32 (per AAII) or 0.6 (per Charles Schwab). This equity was among five mentioned in the latest (1/6/03) "Forbes" issue as having (for the group) good likelihood of appreciation. MXT is a micro-cap., with a market capitalization of only $137.72 M. The company meets strict Benjamin Graham value and safety criteria.
12/30/02-Completed some final, end-of-year adjustments to the portfolio this afternoon.
My recent value investing had been limited to mid-cap., small-cap., or micro-cap. equities. I've not found large-cap. stocks that meet our strict bargain criteria.
But this situation may represent an allocation deficiency. Decided to invest about 5% of the nest egg in bargain DOW stocks, selected using a high dividend and low price approach, a variation of the "Dogs of the Dow" method.
I start with the ten top-yielding D.J.I.A. stocks. Then I pick the five of these with the lowest price. Next I look for the two with the lowest prices among these which, however, do not have both the very lowest price and the very highest dividend (among the ten high dividend assets). This step is to reject stocks that are too risky, seen by the market, at least, as having too much liability.
The above screening process today culled out Honeywell (HON) and J.P. Morgan (JPM). I then checked for relatively low price to book. I want a price to book value of 2 of below. Both HON and JPM are well within the acceptable range.
If these last two criteria were to result in the lowest priced DOW high-yielder(s) being rejected, I would look at the next lowest priced high-dividend DJIA assets. If none met all the above criteria, I'd simply delay the purchase until I could find stocks that were OK.
I'll hold the assets thus chosen for a year and do the screening again. If they do not pass the screens at that time, they get sold. Otherwise, they are held. To cut down on taxes, these DOW high dividend stocks are generally to be kept in tax-deferred accounts. I plan to simply see where the initial investment takes me, never adding additional funds, except to compensate for dividends that are used for something else. But I'll not sell these assets for expenses either. So, one way or another, the once a year checking, holding, selling, and/or buying is to continue indefinitely, unless these equities must be redeemed due to an emergency.
Since today Honeywell and J.P. Morgan are fully consistent with the screens, I placed market orders and bought 563 shares of HON at $22.44 and 519 shares of JPM at $23.81, adding about $25,000 to our large-cap. holdings. (If the assets perform well, say at an average 15% compounded annual rate, not out of line in view of past performance, that $25,000 will be $101,000 in ten years or $409,100 in twenty, assuming reinvestment of the dividends. We'll see. At the least, they should outperform the market, on average.)
Next, in our taxable accounts I did some debt-reduction and tax-loss market order selling, deleting about $5000 worth of investments that have shown significant price drops since purchase and that also no longer meet our strict buy criteria, thus eliminating ALA, KEP, Q, and RJR from our holdings and helping (for tax return purposes) to offset a few gains.
The resulting total portfolio, as we wind up the year, stands at $310,899 (regular equities) plus $202,987 (REITs and non-equities) = $513,886 total, with investment debt at 4%. Assets net of this debt stand at $494,000.
This is a substantial drop (approx. 12%) from year-end 2001, due to unforeseen expenses (like having to replace an auto) plus significant stock price drops. However, our record is far superior to those of the market averages (Dow down in the past year about 17%, the S.&P. 500 down about 22%, and the Nasdaq down about 29%).
In addition, we have used the market dips for purchase of excellent bargains, lowering our average price/earnings and price to book value ratios while increasing our average dividend level, suggesting the potential for excellent future total returns.
In the last twelve months the absolute level of our individual assets' book value has increased 57.9%, to $171,313.
While the future is surely uncertain, the portfolio's long-term financial prospects would thus appear promising.
Disclaimer and Disclosure Statement
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.