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June, 2006: 2 5 8 14 22 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.

Part of the potential difficulty with following the portfolios is because I had changed my mind along the way, especially about Leapin' Lizards (LL). Originally, at the first adjustment (around 10/05), the intention was to keep Classic Value (CV), add Yummy Yielders (YY), and have a 50/50 blend of these latter two portfolios, which I called Mama's Mix (MM), from that point on, to replace the earlier 50/50 blend of Leapin' Lizards (which was to be dropped in favor of Yummy Yielders) with Classic Value.

The reason for this change (dropping LL and adding YY instead) was that during the Leapin' Lizards' first year, this momentum-plus-value strategy had proven more volatile but less rewarding than Classic Value. Is that all clear as mud!?

To further muddle the situation, since I was continuing to track the Leapin' Lizards that had not yet been held a year (even though I was now not adding new ones), I discovered that, in the several months after introducing YY instead, there were times when LL would actually do better than CV or YY. So, not to be too hasty in eliminating a possibly still good approach, I went back to not just tracking but also adding to the LL selections, though its portfolio now had fewer assets (and a different average hold period) than CV due to the months when no new LL picks were made.

However, by then the YYs were showing promising results too, so I was reluctant to drop them that soon after the portfolio had been started. The only reasonable thing, it seemed, was to keep track of all 5 potential portfolios: LL; CV; a 50/50 blend of those two; YY; and Mama's Mix (MM - a 50/50 blend of CV and YY). This is what I have done.

That was the new policy for awhile, up till about two months ago, when I made things just a bit more complicated by also adding Momentum Value (MV), a momentum plus value strategy just like that of LL, except that, instead of requiring that assets bought under this approach be doing at least 50% better than the S&P 500 Index over the previous 52 weeks, its relative strength requirement would be for a minimum of just 25% better in the prior year than the S&P 500.

I introduced MV because I had noticed there were really very few assets that qualified under LL and hoped that MV would have more screened stocks from which to choose (which has turned out to be the case so far) and, since the best of several would likely be better than the best of a few and there was possibly more potential in a beaten down asset that was starting back up than in one that had already had a good performance run of at least 50% over what the S&P had done in the last year.

There has been way too little time to know if my reasoning here will be borne out, but at least in its first couple months (including through the recent correction), to date MV is up about 6%. I doubt very much that on an annualized basis it will do anything like as well as that might suggest, but at least for now MV still seems to have potential.

Thus, besides the blends, at present there are 4 portfolios being tracked and receiving new asset selections: LL; CV; YY; and MV. In addition, the portfolios being tracked are rounded out to a total of 6 with the two blended portfolios: a 50/50 mix (which has no other name - and which has been around since 10/04) of LL and CV; and a 50/50 mix (just since the YY portfolio began in 10/05) of CV and YY, which I have called Mama's Mix (MM).

The important things from my perspective, and hopefully also for readers, are that there a number of assets being chosen and recommended from a variety of value or value plus momentum approaches and that the results of each strategy are being tracked, reported on at least annually (though I'll likely still be trying to do so quarterly unless it becomes too cumbersome). Knock on wood, to date all of the strategies and blends, once their proper hold periods are taken into account, appear to be doing well, some of them with apparently less volatility than for the major market indexes. I expect the next performance update will be at (or just after) the end of this month.

At some point, to simplify things, I'll probably combine some of the portfolios. For instance, if MV continues to do well, I'll just incorporate it into LL, only changing the latter's relative strength criterion from 50% to 25% better than the S&P 500 Index's one-year performance.

And CV, which currently includes low P/E and/or low P/Bk stocks, might incorporate relatively high yielding assets (YY), so that we're back to just LL vs. CV (or a blend of the two). For the time being, though, it is interesting to see how the more specialized portfolios may do.

Since the prior entry, our Leapin' Lizard (LL) pick, CELL, has been held a year, and so it will be sold at the market price Monday morning, removed from the LL open positions portfolio, and its closed position info recorded based on the 6/2/05 to early 6/5/06 per share performance. Through 1:40 PM (Central Time) today, after subtracting a commission but not counting any dividends, CELL has been up 94.60% in the past 12 months. (Note that there was a 6 for 5 stock split for CELL effective yesterday.)

My top-ten equities for mention today are: BL; BRK/A (or BRK/B); CINF; CTCI; DODGX; EMCI; MOD; UTR; WIND; and ZNT.

The focus for the current entry is a new Yummy Yielder (YY) pick, CT Communications, Inc. (CTCI) (recent price $16.54). CTCI's trailing price to earnings ratio is just 4.55. The market-cap is about $318 million. CT Communications has a 2.50% dividend, not as high as my usual selections for this strategy but above the market average. Its dividend payout ratio is 0.11. The price to sales ratio is 1.80. Its price to book value is below average at 1.23. There is positive free cash flow. Return on equity is 31.07%. Debt to equity is 0.17. The current ratio is 2.39. The asset's shareholder equity to total assets ratio is 0.64. CTCI has been up about 38% over the past 12 months, while the S&P 500 Index has been up about 7% in that period. The stock presently has low P/E, low debt, and an above average yield going for it. CTCI meets Benjamin Graham value and safety criteria. While there is no guarantee this particular stock will do well in the months ahead, considered as a whole a large portfolio of such low price to value assets traditionally has done well, better than the S&P 500 Index, with less overall potential for substantial loss.

CT Communications, Inc., will be added to the YY and MM tracking portfolios at its market price early Monday morning, 6/5/06.

6/5/06-Fittingly, this marks the first day of trading in National Headache Awareness Week. If the rest of the week pans out similarly, a number of us might have rather significant headaches by Friday evening. The S&P 500 Index has fallen 5.5% since I mentioned here a month ago that folks might best assure they are well allocated, as we appeared close to a short-term market top. 1.8% of that loss came just today. Meanwhile, the Nasdaq has fallen still further.

Some have pointed out that mid-cap and small-capitalization assets, unlike the case at the beginning of the big bear that began in early 2000, seem more overvalued on average than large-caps, thanks to many mutual funds and individuals overweighting the low end of the capitalization spectrum, following past performance up. In some ways, recently the market has thus become more universally pricey than was the situation about six years ago.

So should a person throw in the towel, sell all equities, and get into strictly safe assets like money market funds or short-term bonds? Each of us must make up his or her own mind on the matter, given a realistic appraisal of risk tolerance and goals, but my answer would generally be "NO!" Now real bargains are just beginning to appear again after being hard to find for quite awhile. Another month or so of returns such as we've seen in the last 4-5 weeks should present the value investor with adequate numbers of excellent buy candidates.

But what about one's current holdings? Won't they just keep falling? Well, not necessarily. As one gradually keeps investing through a market downturn, a portfolio's average price to value should get more and more favorable, providing some lift against further retreat. And once the market starts a new up-trend, as inevitably will occur sooner or later unless our world literally in coming to an end (in which event one will have a lot more to worry about than stocks), it will provide extra bouyancy for a faster rise.

Despite the recent small correction we have been experiencing, for instance, on average our open position tracking portfolio assets are down less than the market as a whole (1.6% today, for example, instead of 1.8% or more) and are still positive for every portfolio tracked. Taken together, considering both the newer and older portfolios and with average holding periods of about 5-6 months (since we add to holdings at a rate of about one per week and sell them after they are held about a year, so that in 12 months' time the average asset would have been retained around 6 months), they are still up over 7%, which works out to an annualized performance of about 16%.

It may be reasonably argued that the open positions do not really count, that what matters is the performance after commissions and spreads and once the assets have been sold, merged, etc. In other words, the closed positions tell the real tale. Our oldest portfolios, Leapin' LIzards (LL) and Classic Value (CV) were begun in 10/04 and take into account actual spreads and commissions, though dividends have not been included. In that period, there have been 19 LL assets whose positions closed, 20 for CV. Through today, when CELL was sold early this morning with a one year, three days' net gain of over 90%, the average LL closed positon showed a gain of 26.2%, while the average closed position for CV's holdings has been up 26.5%. Their annualized performances would be slightly higher, since in a few instances the period an asset was held had been less than a year (due to mergers or cash buyouts).

Our portfolios are not immune to large drops in paper value. Nor will the closed position returns always be exceptional. On the contrary, I am certain the performance stats will succumb to a more normalizing influence over time. The 5-10 year record of average annual compound gains, therefore, is likely to be significantly lower, though once dividends are included perhaps not precipitously so.

But the point is that it appears value or value plus momentum strategies presented here may continue to give a better accounting of themselves than the major market averages, with generally lower volatility, and it is simply this which I have been suggesting as the goal from the beginning.

Whether the markets are temporarily up or down, a strategy of buying roughly each week the best available value or value plus momentum asset one can find and holding it for a day more than one year is likely to be profitable. So, as the President likes to say in a rather different context, even more true here I believe, it is best to just "stay the course."

Our next analysis and recommended asset selection is due toward the end of the week. Given the latest trend in the markets, I'm confident we can find a good choice for purchase at that time.

6/8/06-Loi Tran wanted to know my favorite investment books. With his permission, I'll show Loi Tran's top selections in the next entry. These are my top 10:

• B. Graham's The Intelligent Investor;
• William R. Neikirk's Volcker: Portrait of the Money Man;
• Kenneth L. Fisher's Super Stocks;
• Janet Lowe's Value Investing Made Easy;
• John Train's The Midas Touch and The Money Masters;
• James P. O'Shaughnessy's What Works on Wall Street;
• Jeremy Siegel's Stocks for the Long Run;
• Roger Lowenstein's Buffett: The Making of an American Capitalist;
• and Bruce C. N. Greenwald (et al)'s Value Investing: From Graham to Buffett and Beyond.

Since the prior entry, our Classic Value (CV) pick, PROG, has been held a year, and so it will be sold at the market price Friday morning, removed from the CV open positions portfolio, and its closed position info recorded based on the 6/8/05 to early 6/9/06 per share performance. Through 1:00 PM (Central Time) today and despite the recent correction, after subtracting a commission but not counting any dividends, PROG has been up 33.37% in the past 12 months.

My top-ten equities for mention today are: ASH; ACAP; AE; AMCP; BRK/A (or BRK/B); EMCI; ESCL; IPCC; MPAC; and STC.

The focus for the current entry is a new Classic Value (CV) pick, Stewart Information Services Corp. (STC) (recent price $36.86). STC's trailing price to earnings ratio is just 8.34. The market-cap is about $672 million (micro-cap). STC has a 2.00% dividend, with a dividend payout ratio of .17. The price to sales ratio is only 0.28. Its price to book value is a mere 0.87. There is positive free cash flow. Return on equity is 10.98%. Debt to equity is only 0.12. The current ratio is 3.87. The asset's shareholder equity to total assets ratio is 0.58. The stock presently has low P/E, low debt, low P/S, low P/Bk, and a reasonable yield going for it.

STC meets Benjamin Graham value and safety criteria. While there is no guarantee this particular stock will do well in the months ahead, considered as a whole a large portfolio of such low price to value assets traditionally has done favorably, better than the S&P 500 Index, with less overall potential for substantial loss.

STC will be added to the CV and MM tracking portfolios at its market price early tomorrow morning, 6/9/06.

6/14/06-An interesting new site I've come across is The Mechanical Investor.

Since the prior entry, our Leapin' Lizards (LL) pick, SGR, has been held over a year, and so it will be sold at the market price tomorrow morning, removed from the LL open positions portfolio, and its closed position info recorded based on the 6/13/05 to early 6/15/06 per share performance. Through mid-morning today, in spite of the recent market downturn and after subtracting a commission (while not counting any dividends), SGR has been up 12.46% in the past 12(+) months.

My top-ten equities for mention today are: BRK/A (or BRK/B); CTGX; HOLX; INMD; JCTCF; MTLM; PCR; URGI; VLO; and ZEUS.

The focus for the current entry is, first, on a Leapin' Lizards (LL) repeat pick, United Retail Group, Inc. (URGI) (recent price $15.28). URGI's trailing price to earnings ratio is just 7.16. It is a micro-cap company with a market capitalization of $206.16 million. United Retail Group has no dividend. The price to sales ratio is only 0.46. Its price to book value is 1.93. There is positive free cash flow. Return on equity is 32.93%. Debt to equity is 0.04. The current ratio is 1.83. The asset's shareholder equity to total assets ratio is 0.55. URGI is up 116.71% in the past 52 weeks (compared with 1.64% for the S&P 500 Index). The stock presently has low P/E, low P/S, low debt, and good 12-month momentum going for it. Besides meeting our LL criteria (low debt, low P/S, and high relative performance), URGI meets Benjamin Graham value and safety criteria.

United Retail Group will be added to the LL tracking portfolio at its market price as of the beginning of trading in the morning.

Our second focus this time is on a new Momentum Value (MV) pick, Computer Task Group, Inc. (CTGX) (recent price $4.91). CTGX's trailing price to earnings ratio is 30.50. It is a nano-cap stock with a market capitalization of merely $100.21 million. CTGX has no dividend. The price to sales ratio is only 0.31. Its price to book value is 1.66. There is positive free cash flow. Return on equity is 4.75%. Debt to equity is negligible at 0.02. The current ratio is 1.45. The asset's shareholder equity to total assets ratio is 0.53. CTGX has been up 44.38% in the past 52 weeks (compared with 1.64% for the S&P 500 Index). The stock presently has low P/S, low debt, good momentum, and nano-cap size going for it.

Computer Task Group, Inc., will be added to the MV tracking portfolio at its market price early tomorrow morning.

Loi Tran, whose investing site, Investing Guide, was mentioned here previously, has provided the names of several of his favorite investment or economics books. The reader might benefit as well from familiarity with a number of his selections. In the investment category, they are:

• Common Stocks Uncommon Profits by Philip A. Fisher;
• Value Investing With the Masters by Kirk Kazanjian;
• Random Walk Down Wall Street by Burton G Makiel;
• One Up on Wall Street by Peter Lynch;
• The Five Rules for Successful Stock Investing (Morningstar's guide to building wealth and winning in the market) by Pat Dorsey;
• Security Analysis, 5th Edition, by Benjamin Graham.

And here are two of his economics choices:

• Economics In One Lesson by Henry Hazlitt;
• Freakanomics by Steven D. Levitt and Stephen J. Dubner.

6/22/06-Since the prior entry, our Classic Value (CV) pick, OUTL, has been held over a year, and so it will be sold at the market price tomorrow morning, removed from the CV open positions portfolio, and its closed position info recorded based on the 6/20/05 to early 6/23/06 per share performance. Through the close of trading today, in spite of the recent market downturn and after subtracting a commission (while not counting any dividends), OUTL has been up 69.80% in the past 12(+) months.

My top-ten equities for mention today are: BF; BRK/A (or BRK/B); CINF; CVX; EMCI; FRD; SIG; STC; TCHC; and ZNT.

The focus for the current entry is on a Yummy Yielder (YY), Cincinnati Financial Corp. (CINF) (recent price $45.72). CINF's trailing price to earnings ratio is just 8.00. It is a large-cap company with a market capitalization of $7.92 billion. Cincinnati Financial has an above average 2.90% dividend, with a dividend payout ratio of 0.40. The price to sales ratio is 1.79. Its price to book value is below the mean at 1.29. There is positive free cash flow. Return on equity is 16.54%. Debt to equity is 0.18. The current ratio is 1.32. CINF is up 16.22% in the past 52 weeks (compared with 3.74% for the S&P 500 Index). The stock presently has low P/E, low debt, a healthy dividend, and mild momentum going for it. CINF also meets Benjamin Graham value and safety criteria.

Cincinnati Financial Corp. will be added to the YY and Mama's Mix (MM) tracking portfolios at its market price as of the beginning of trading in the morning.

6/29/06-Since the prior entry, our Leapin' Lizards (LL) pick, AFAM, has been held over a year, and so it will be sold at the market price tomorrow morning, removed from the LL open positions portfolio, and its closed position info recorded based on the 6/27/05 to early 6/30/06 per share performance. Through close of trading today, in spite of the recent market downturn and after subtracting a commission (while not counting any dividends), AFAM has been up 72.86% in the past 12(+) months.

My top-ten equities for mention today are: BRK/A (or BRK/B); CINF; EMCI; HDL; KCLI; OCAS; SIG; STC; UTR; and ZNT.

The focus for the current entry is on a Classic Value (CV), Kansas City Life Insurance Company (KCLI) (recent price $43.19). KCLI's trailing price to earnings ratio is 14.54. It is a micro-cap company with a market capitalization of $516.60 million. Kansas City Life Insurance Company has an above average 2.50% dividend, with a dividend payout ratio of 0.36. The price to sales ratio is 1.13. Its price to book value is quite low at 0.77. There is positive free cash flow. Return on equity is 5.33%. Debt to equity is 0.04. The current ratio is 3.72. The stock presently has low price to book value, low debt, micro-cap size, and a healthy dividend going for it. KCLI meets Benjamin Graham value and safety criteria.

Kansas City Life Insurance Company will be added to the CV and Mama's Mix (MM) tracking portfolios at its market price as of the beginning of trading in the morning.

In the next entry, there will be a quarterly review, looking at both open and closed positions, of the individual tracked portfolio performances.

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