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April, 2011: 2 16 30

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.

• Mortgage debt now stands at about $6500 and brokerage account margin debt at $1400. We thus owe about 0.8% of our total net asset value (NAV). The NAV, in turn, is up 81.23% since I retired at the end of 2001. Our assets have at times been employed to offset budgeted costs, yet we have been fortunate, and the total portfolio has increased at a compound annualized rate of 6.64% in that 9.25 year period. There are mixed feelings about this record. While the broader market, as measured by the S & P 500 Index, has been close to flat since 2001 (up a total of 15.5%, or 1.57% annualized), I had optimistically intended a net increase of at least 12% a year after expenses during our retirement years.

• I had also had a rosier scenario in mind for our total equity book value (targeting annual increases in this measure of worth of 12.5% or above) than has actually occurred. The calculation here is more problematic, since in the first two or three years after my wife and I had retired we still had a large percentage of our overall portfolio in mutual funds, for which the book value tallies were but estimates. Thus, while total stock book value has gone from $108,500, effective 12/31/01, to $618,800, effective 3/31/11, initially that reflected both transfer of mutual funds into individual stocks and investment gains in book value.

• The transfer from mutual funds had been completed by some months into 2004, so a more accurate assessment of the book value increases should begin with the portfolio total book value as of 12/31/04, $335,000. From that figure at the end of 2004 through the first quarter of 2011, our overall portfolio's total equity book value has increased $283,800 or 84.72%, for an annualized increase in those 6.25 years of 10.32%, more than 2% a year below a target that I had thought was conservative.

• What I had not anticipated was that during the recent Great Recession the book value of a number of our holdings would go down substantially. In addition, I have in the first quarter of 2011 sold several assets in order to raise reserves, figuring we were, without that step, too exposed to a possible market crash or a new bear market. I am not forecasting either a crash or an imminent bear, only wanting to have the risk/reward ratio of our portfolio stacked a bit more in our favor, in case something might, within the foreseeable future, shake the equity markets badly.

• To get back on target, I must now increase our book value total by an annualized rate of 13.5% in much of the coming years (if I live to see this expectation realized), through 2024, and once this is achieved might then resume the lower, 12.5% rate of annual book value increases.

• In other words, assuming that the end of 2004 total book value had actually been increased by 12.5% a year through 2024, what would that $335,000 have become after twenty years (well over $3 million)? Then, taking the current figure, as of 3/31/11, $618,800, at what annual rate must that be increased between now and 12/31/24 to achieve the earlier total book value target?

• The answer, per our handy compound return software, comes out, as above, to 13.5%. Assuming mind and body hold out and our economy does not in that period face another Great Recession or worse, this seems a reasonable goal. Accordingly, starting from 4/1/11, that is our new intended minimum annual increase in book value. Hopefully, this new target will not turn out to have been just an April Fool's joke!

• Using that percentage increase, prorated through the balance of 2011, we come up with a new total portfolio book value target for 12/31/11 of $680,454.

Since the last entry as well as the one prior to that, on 3/11/11, there have been no new sales of assets in the portfolios monitored here, and no assets have achieved their sell criteria.

My current top-five low price to book value stocks are: AFG; CBEH; JGBO; KAZ; and VOXX.

My favorite among them is BMB Munai, Inc. (KAZ) (recent price $0.97). It meets Benjamin Graham's bargain stock safety and value criteria.

BMB Munai, Inc. will be added to our nest egg at its market price early on Monday, 4/4/11.

I prefer to include in our purchases a number of dividend paying assets, since, everything else being equal, dividend stocks have lower risk and higher average total returns than non-dividend paying stocks. Unfortunately, in the current market very few such assets are available at prices I regard as reasonable for Ben Graham low price to book bargains. In the above five suggested assets, only AFG has a yield. Yet its price to book, as of the close of trading on Friday, 4/1/11, was 0.82, a little higher than my cut-off.

4/16/11-Since the last entry, the experimental portfolio, Small-Cap Momentum with Dividends, begun with five stocks on 3/28/11, was up as of 4/11/11 a little over 5% overall. Accordingly, per the portfolio guidelines, a new screening for qualifying stocks meeting this strategy's criteria was completed. Three of the original assets no longer met the standards and so those stocks, DNBK, IDT, and RELL, were sold. Replacement stocks which now met the portfolio screen, ASGR, SMP, and TICC, were bought and added to both the tracking portfolio and our actual nest egg. The cost basis and redemption statistics for the three closed position assets were entered into the portfolio's spreadsheet. The rebalanced portfolio thus includes: ASGR; GLDD; RGR; SMP; and TICC.

The last of these new Small-Cap Momentum with Dividends assets to be added, TICC Capital Corp. (TICC), turns out to be particularly interesting from a value investing standpoint. It has zero debt, a P/E of 4.73, an 8.70% dividend (with a dividend payout ratio of 0.41), and a return on equity ratio of 23.76%.

My current top-five low price to book value stocks are: ENH; MRH; NWLI; PLFE; and RE.

My favorite among them is Montpelier Re Holdings, Ltd. (MRH) (recent price $17.69). It meets Benjamin Graham's bargain stock safety and value criteria.

Montpelier Re Holdings, Ltd. will be added to our nest egg at its market price early on Monday, 4/18/11.

In order to have more dividend paying stocks passing my low price to book value screen, I have had to relax a few of the previously minimum criteria I normally used, keeping them as simply preferable, everything else being equal.

Currently, the only absolute requirements I have for a low price to book value stock are that: 1. It have a P/Bk of 0.8 or below; 2. It have a debt to equity ratio of 0.33 or below; and 3. It's dividend payout ratio, if it has a dividend, must be 0.5 or below.

Now in the category of "nice to have but not necessary" is my prior requirement that a candidate for low price to book value purchase needs to have a current ratio (CR) of 1.5 or above. In fact, since I had begun using that standard, a current ratio's benefits vs. costs for the investor have become a matter of some controversy.

In her book, Value Investing Made Easy, Janet Lowe has indicated that for value investors the current ratio, or current assets divided by current liabilities, should be no lower than 2. I had already found that standard too restrictive for some types of value asset selection, which is why I had merely wanted it to be at least 1.5 or better.

Lately, however, following a lot of shenanigans by company managements, it is thought in some circles that a higher current ratio (2 or above) is an invitation for top executives of a company to skim assets off or to otherwise squander them in foolish pursuits. Thus, a higher current ratio is now actually seen as a liability. I do not know how that debate is best resolved, though I suspect loftier current ratios may be more problematic for the larger and higher market cap. companies.

The disagreement does, however, make me feel OK about setting aside this standard, thereby allowing a larger pool of candidate value equities from which to choose.

For those who still like to use a current ratio criterion, the present entry's pick, MRH, may not be a good selection. Its CR is just 0.78. On the other hand, this lower level of current assets to liabilities is unlikely to give upper management significant incentive for mischief.

4/30/11-Since the last entry, I became aware of a costly situation with one of my previously recommended low price to book value stocks, HQ Sustainable Maritime Industries, Inc. (symbol HQS), which turned out to be less sustainable than its name implied and was de-listed from its stock exchange, early in April, after failing to submit required earnings information in a timely manner. In addition, I have learned that one of its executives, a chief auditor, I believe, has resigned after allegedly getting no cooperation from top management re the release of the omitted information. Supposedly litigation on behalf of shareholders is commencing, but meanwhile the stock is no longer trading, and equity owners can expect little or nothing back for their investments.

As I get older, I am apparently more risk averse or at least more easily stressed when attempts to avoid loss of principal come to naught. So I became a little upset (translation: had a cow) soon after realizing what had occurred and that our $12,500 cost basis in the blankety-blank company is now worth zero. As one of my investment friends pointed out in the midst of my dramatic ventilating, even if worst has come to worst and I lose that entire investment (virtually certain), this actually represents a small fraction of the total nest egg. Never mind that it is more than I net from Social Security in a year, he is correct, and a more objective view helps put the circumstance into more tenable perspective.

This is hardly the first time I have lost everything on one of my investment "bets." Yet they do shake me up. The most remarkable instance was several years ago with Fruit of the Loom, which I naively kept sinking more and more into as its apparent price to value got better and better, only to have its trading also cease. I lost a chunkier portion of our then smaller net asset value as a result. I decided at that time to doubly and triply assure our value assets had great margins of safety before I would invest in them. This HQS incident has shown me once more that my protective efforts have not been sufficient and/or that I have gotten lax again in their application.

Realistically, there are no ways to absolutely guarantee any investment, and two good hits in about ten years may not be a bad record. Still, I am regretful that I suggested this stock to others, much less got burned by it myself, and so again am looking for ways to at least reduce the chances of a similar loss in future.

One lesson seems to be that if there is indication of new problems, such as when management is delaying providing necessary records, one ought to sell right away, even if, as in this case, the new bid-ask spread then guarantees a significant loss. This is of course better than losing all of one's investment.

Another may be to take one's profits (or place a stop-loss order) earlier than I might have before, perhaps after there are gains of 50% or above, yet without waiting to see if one can also get another 10-50% or so by waiting till the P/E and P/Bk are higher. If I take my profits after the price is up by half, I can then invest that cash right away in another "cigar butt" asset, so that, overall, I may do about as well but without jeopardizing the gains which have already been made.

A precaution I considered but have rejected is to sell off all the low price to value assets in a similar category, since they are now "obviously" too prone to being losers. Thus, since HQS, though headquartered in the U.S., is a China-related company (selling its specialized products largely in that country), and I then noticed that many other of our China-related stocks are down considerably, I was at first ready to sell off most of them as too likely to also follow HQS down to having no value. In the long run, this evidently is not wise, however. By some estimates, China will be the globe's largest economy, even surpassing ours, within 5-15 years. To exclude companies taking advantage of this quickly growing part of the world may well mean settling for more ho-hum returns.

So, instead, it appears reasonable to just factor in a higher level of risk in certain aspects of one's total portfolio, such as emerging markets or companies capitalizing on them, maybe keeping a somewhat larger amount of cash reserves than one would otherwise, rather than simply doing away with that important component. One may also put more emphasis on good region-specific closed-end funds and/or exchange traded funds, which will aid in diversifying the higher than average risk of investing in particular regions or consumer markets.

I personally prefer the option of sticking with dividend paying stocks, since as a rule they are less volatile and risky than non-dividend paying stocks, except that they must then also have a dividend payout ratio (dividend per share divided by earnings per share) of 0.5 or below to warrant our hard achieved dollars.

Meanwhile, I note that stocks on the whole are up tremendously since the lows in March, 2009. While I try not in general to be a market timer, at the extremes it is sometimes helpful to take into account when equities are especially vulnerable to a correction, on the one hand, or oversold, on the other. We apparently are more likely now to have a correction of 10% or greater from here than a surge of 10% or more in average stock prices. (I could very well be wrong, though, so I am not touching the bulk of our holdings.)

Further, I expect to be going on a nearly month-long vacation, starting on 5/20, and so am additionally interested in lowering risk, since I shall not be able to monitor our stocks as closely or make trades as easily while away.

Thus, for reasons mentioned above as well as concern that if things start to head south while I am not home I may not be as nimble as usual in dealing with that circumstance, I am now following a value investing sell strategy based mainly on getting out when a stock's price is merely up at least 50%. For better or worse, then, this has resulted in several securities followed here being sold on 4/25/11:

KND, a Low Price to Book Value pick purchased on 11/4/09, was sold for a gain, not counting any dividends, of 63.76%. It has been removed from the Low P/Bk open positions portfolio and its closed position info recorded, based on the 11/4/09 to 4/25/11 per share performance.

AWH, a Low Price to Book Value pick purchased on 6/10/09, was sold for a gain, not counting any dividends, of 64.57%. It has been removed from the Low P/Bk open positions portfolio and its closed position info recorded, based on the 6/10/09 to 4/25/11 per share performance.

FRD, a Low Price to Book Value pick purchased on 8/13/09, was sold for a gain, not counting any dividends, of 61.90%. It has been removed from the Low P/Bk open positions portfolio and its closed position info recorded, based on the 8/13/09 to 4/25/11 per share performance.

SATS, a Low Price to Book Value pick purchased on 4/5/10, was sold for a gain, not counting any dividends, of 83.05%. It has been removed from the Low P/Bk open positions portfolio and its closed position info recorded, based on the 4/5/10 to 4/25/11 per share performance.

TER, a Low Price to Earnings pick purchased on 11/12/10, was sold for a gain, not counting any dividends, of 50.83%. It has been removed from the Low P/E open positions portfolio and its closed position info recorded, based on the 11/12/10 to 4/25/11 per share performance.

There was other trading activity on 4/25/11. The 5-stock experimental portfolio, Earnings Estimate Up 5%+, begun between 1/20/11 and 1/24/11, was up at least 5% again (for the 3rd time since inception) as of 4/25/11 and so was rebalanced on that date with five new assets, which currently met the portfolio's criteria, replacing the five already in the portfolio that no longer met them. Sold were ATML, IRF, VSEA, VSH, and WLK. The new portfolio assets are: AIRM, BEXP, CRDN, MIND, and NX.

My current top-five low price to book value stocks are: CBEH; MRH; NWLI; RE; and SYA.

My favorite among them is National Western Life Insurance Company (NWLI) (recent price $161.07). It meets Benjamin Graham's bargain stock safety and value criteria.

National Western Life Insurance Company will be added to our nest egg at its market price early on Monday, 5/2/11.

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