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December, 2012: 4 8

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.

1. Select stock shares which are, as best can be determined, the finest risk-adjusted assets available with:

a. dividend % divided by P/E = 0.3 or higher;

b. dividend payout ratio 0.5 or below;

c. debt to equity 0.5 or below;

d. a reliable investment service's estimate of their average annual 3-5 year total return equal to or greater than 19% (i.e. 3-5 year total return est. 100% or better);

e. dividend 3% or above.

2. Once have ten such assets in the portfolio and have a new qualifying asset to substitute for each equity to be sold, replace assets that have been held a year and a day and have gone up in price 50% or more or that have been held for at least two years since purchase and which no longer meet all of the buy characteristics, adding for each redeemed security a new asset which currently meets the above minimum criteria. (Assets may also be sold earlier if there is a price advance associated with a buyout offer or there has been a relevant actual buy-out or merger.)

My Love 'Em & Leave 'Em (LE&LE) portfolio was begun on 3/26/12 and so far has involved five assets, ALV, AZN, CXS, PSEC, and SHS (the other four having been added gradually after AZN was bought in March). I anticipate that the long-term total return will likely be about 15% a year, pre-tax.

However, thus far the LE&LE portfolio has done better than this, gaining 11.3% with an average hold period thus far of just 0.38 years, for an annualized performance of 32.3%. With the average dividend at purchase (6.9%) added in, the mean annualized total return has been 39.2%.

Of course, it is very early days as yet. The small sample and duration suggest we should not draw conclusions from this other than that the potential rewards of the strategy appear to be interesting.

Happily, this is another bargain investing approach, for the dividend and/or P/E will generally meet Ben Graham criteria for value, while the relatively low debt to equity ratio will generally match his acceptable stock purchase safety criteria.

On 12/3/12, our Low Price to Book Value asset, CSC, purchased on 9/26/11, was sold for a net gain of 50.33% (not counting any dividends). Info on CSC's cost basis and performance from 9/26/11 through 12/3/12 has been added to the Low P/Bk closed positions spreadsheet, and CSC has been deleted from the record of Low P/Bk open positions. (To date, not counting dividends, our net closed position Low Price to Book Value portfolio transactions have averaged annual gains of over 28%.)

Alphabetically, though in no particular order of merit, my current top-five low price to book value stocks are: AXS; LM; NDAQ; PLAB; and RCKY.

My new featured equity from among them is Legg Mason, Inc. (LM) (recent price $25.51). It meets Benjamin Graham's bargain stock safety and value criteria.

Legg Mason, Inc. will be added to our nest egg at its market price in early trading today, Tuesday, 12/4/12.

12/8/12-Our Love 'Em & Leave 'Em (LE&LE) asset SHS received a buy-out offer and spiked up. It has been sold with a 33.17% net profit (not counting any dividends). I have chosen CA Technologies (CA) (recent price $22.03) as the portfolio replacement. CA appears to have good prospects as well as a reasonable debt level (D/E 27.35%), a below market P/E, a 4.5% dividend, and a dividend payout ratio of 0.40. Based on its high dividend and low debt, it meets Ben Graham bargain stock criteria. It will be added to our nest egg at the market price in early trading on Monday, 12/10/12.

As most investors are likely aware, one result of either the current "fiscal cliff" negotiations or their failure could be a large increase in taxation on equity dividends. Thus, if one conveniently has the option, it may be wise to keep most higher dividend assets in tax-deferred accounts.

Since the last entry, I have become aware of a cash and stock buyout of our Low Price to Book Value asset, Flagstone Reinsurance (FSR). FSR had been bought for our Low P/Bk portfolio on 12/17/10. The buyout, effective 11/30/12, involved then FSR stock holders receiving $2 a share plus 0.1935 shares of the purchasing company's stock from Validus (VR). Once the cash has been subtracted and VR shares' latest market price has been factored in, this deal represents about a 35% loss from our FSR cost basis.

On the other hand, FSR had been down significantly more than that prior to the buyout. Also, VR itself is a low price to book value asset. I have decided to hold the new shares in the portfolio in the hope that they may eventually show us a profit.

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