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December, 2005: 1 8 15 21 29 31

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.

(The statistics are as of 9 AM [Central Time] today and reflect price appreciation only. Dividend income has not been added. Commissions have been subtracted from the tracked portfolio results but not from those of the S&P 500 Index. Please note: The holding period for the average CV asset has been corrected. It was shown as slightly too high in the previous entry.)

( *since inception, 10/4/04)

One of the new assets this time will replace the Leapin' Lizard (LL) holding, BKR, which was purchased on 11/18/04. BKR will be sold at the early market price tomorrow. It is up 30.92% since a little over a year ago.

That new selection this week is among the Yummy Yielders (YY) candidates and so will be added, also at the early price in the morning, to that tracking portfolio. The top choices are: KEY; MFCO; MTL; NHY; and UTR.

The other of the new assets this time will replace the Classic Value (CV) holding, ACGL, which was purchased on 11/24/04. ACGL will be sold at the early market price tomorrow. It is up 35.04% since a little over a year ago.

The second selection is among the Classic Value (CV) candidates and so will be added, also at the early price in the morning, to that tracking portfolio. The top choices are: AE; AMPH; BNSO; LPX; and NUE.

My pick among the YY is Microwave Filter Co., Inc. (MFCO) (recent price $1.52). MFCO has a market capitalization of $4.42 million, a trailing P/E of 16.89, a 6.50% dividend, a price to sales ratio of 0.80, a return on equity of 8.87%, a price to book value of 1.34, a current ratio of 5.18, zero debt to equity, a shareholder equity to total assets ratio of 0.84, and positive free cash flow.

My pick among the CV candidates is Louisiana-Pacific Corp. (LPX) (recent price $27.41). LPX has a market capitalization of $2.90 billion, a trailing P/E of just 7.89, a 1.76% dividend (with a dividend payout ratio of 0.13), a price to sales ratio of 1.07, a return on equity of 21.86%, a price to book value of 1.45, a current ratio of 4.48, debt to equity of 0.32, a shareholder equity to total assets ratio of 0.59, and positive free cash flow.

MFCO and LPX will also be added to the Mama's Mix Stock Portfolio (MM), a 50/50 blend of the Classic Value (CV) and Yummy Yielders (YY) selections, intended to be lucrative enough and yet also adequately safe for one's mother to use.

12/8/05-The performance through yesterday's trading of our tracked portfolios and the S&P 500 Index have been as follows:

(The statistics reflect price appreciation and special distributions only. Regular dividend income has not been added. Commissions have been subtracted from the tracked portfolio results but not from those of the S&P 500 Index.)

( *since inception, 10/4/04)

One of the new assets this time will replace the Leapin' Lizard (LL) holding, AGYS, which was purchased on 12/1/04. AGYS will be sold at the market price a little later today. It is up 10.00% since a little over a year ago.

That new selection this week is among the Yummy Yielders (YY) candidates and so will be added, also at the market price a little later today, to that tracking portfolio. The top choices are: AEG; CTCI; DECC; NFB; and UTR.

The other of the new assets this time will replace the Classic Value (CV) holding, OTL, which was purchased on 12/7/04. OTL will be sold at the market price later today. It is down 22.48% since a little over a year ago.

The second selection is among the Classic Value (CV) candidates and so will be added to that tracking portfolio. The top choices are: BNSO; MHJ; NTOL; RSC; and SRVY.

My pick among the YY is Unitrin, Inc. (UTR) (recent price $45.82). UTR has a market capitalization of $3.16 billion, a trailing P/E of 13.17, a 3.60% dividend (with a dividend payout ratio of 0.49), a price to sales ratio of 1.04, a return on equity of 11.93%, a price to book value of 1.52, a current ratio of 0.96, debt to equity of 0.24, and positive free cash flow.

My pick among the CV candidates is Bonso Electronics International, Inc. (BNSO) (recent price $4.25). BNSO has a market capitalization of $23.71 million, a trailing P/E of 9.18, a 2.20% dividend (with a dividend payout ratio of 0.18), a price to sales ratio of just 0.36, a return on equity of 8.37%, a price to book value of only 0.70, a current ratio of 1.72, and debt to equity of 0.01 (per several sources, though another shows it as 0.41).

BNSO and UTR will also be added to the Mama's Mix Stock Portfolio (MM), a 50/50 blend of the Classic Value (CV) and Yummy Yielders (YY) selections, intended to be lucrative enough, yet also adequately safe, for one's mother to use.

The Classic Value portfolio cost basis has been adjusted to reflect a special distribution, effective 12/2/05, of $5 per share for PD common shares.

Although, since the number of clearly superior stocks in the Leapin' Lizards category are quite limited, they tend to be more volatile than CV stocks, and the CV performance has generally been superior to that of LL assets in our experience, I am not adding further Leapin' Lizards to a tracked portfolio we are following (the lack of which new additions causes the mean holding period for the average LL to go up significantly compared with the CV portfolio, which is receiving newly purchased shares), I do continue to follow stocks that might have good potential as Leapin' Lizards. Two that are of particular interest of late are: KAMN and SCVL. I intend to purchase at least one of these for our own nest egg.

12/15/05-With this entry, I'm changing the format. I've been spending too much time just calculating the average holding period for assets in each tracking portfolio. That aspect of evaluating the respective performances also has led to errors. With well over 50 assets in play at once, most with different purchase dates and a sale not to occur for some time, there is plenty of room for mistakes, and these are not easily eliminated with the software currently available to us.

Short-term performance of the new Mama's Mix assets notwithstanding, the record of the illustrative portfolios has been generally better than that of a buy-and-hold initial investment in the S&P 500 Index. The main portfolios shown here, Leapin' Lizards and Classic Value, also appear to have had relatively lower volatility (and hence risk) than the major market indexes.

Bottom line, both a Ben Graham classic value approach to investing and a value plus momentum approach like that of Leapin' Lizards (assets with low debt and low price to sales but high 52-week performance relative to the S&P 500) demonstrate superior price appreciation.

Since 10/4/04 and through early today, there have been 6 closed positions in the Leapin' Lizards (LL) tracked portfolio, with an average holding period among them of 370 days, or just over a year. Their average performance has been +28.37% (after subtracting commissions and before adding in regular dividends), an annualized gain of 27.94%.

That assessment does not include the only other closed LL holding, OMVKY, which had been added in 10/04 based on initially incorrect data and so was deleted in 7/05. By then it had gained over 80%. May all our errors have such outcomes!

In the same 10/4/04 through 12/15/05 period, there have been 6 closed positions in the Classic Value (CV) portfolio. They had an average holding period of 339 days, skewed a bit by one asset (MAXF) that was bought out for cash after just over six months. Their average performance has been +27.99% (also after subtracting commissions and before adding in regular dividends). On an annualized basis, that represents a 30.44% price appreciation.

With records like that, it seems that value, with or without momentum variations, is confirmed as a better way of using one's hard earned dollars than what one can generally find in stock and mutual fund investing.

It can be argued that the aforementioned results are aberrations. This could be the case. (After all, only 12 assets, held for about a year more or less, are hardly enough for valid statistical conclusions about the broad implications of investing in value [or momentum plus value] vs. the major averages.) But the overall gains of both open and closed positions for the two long-term tracked portfolios are also good:

With a mean holding period in both portfolios of only 7-8 months, their average annualized performances are not insignificant, more than 20% for each. Once dividend income is included, the total returns of either approach would be competitive.

The record of the Yummy Yielders (at +5.72%) and of the Mama's Mix Stock Portfolio (at -.79%), both portfolios several weeks old, has not yet been long enough for conclusions.

So, to keep things simpler, in future I'll just assume the case has been adequately made for one or another value or contrarian approach, and here, from now on, merely record investment ideas, assets in which I have particular interest, and our nest egg's overall performance, but without necessarily fitting suggested stocks into one portfolio strategy or another or providing routine gains, losses, or holding periods.

I may assign new assets to appropriate portfolios and continue to sell their holdings after a year and a day, but will report on those records only occasionally.

At present, these stocks look to be at bargain levels, and I'll be happily purchasing one or several of them for our total assets in the next few days: BRK/A (or BRK/B); CONN; DDS; IAL; NBL; NFB; NOC; SCH; SKYF; and WSTL.

Among them, International Aluminum Corp. (IAL) (recent price $39.10) is receiving our current focus. IAL has a high dividend, at 3.10% (with a dividend payout ratio of 0.38), a below average P/E of 12.30, a return on equity of 11.38%, a market cap of $167.70 million, zero debt to equity, a current ratio of 3.99, a price to sales ratio of 0.64, and a price to book ratio of 1.35. Its shareholder equity to total assets ratio is 0.79.

As always I recommend that investors do their own research and/or consult investment professionals before making financial commitments.

FRD (bought 12/14/04 for the Leapin' Lizards) was sold early today. It had a 366 day performance of -28.37%.

Clearly not all the picks are winners, but interestingly FRD was up substantially in the first few weeks after addition to the LL tracking portfolio, then fell back after shareholders had received a special dividend. A useful portfolio tracking experiment or long-term backtest might be to assess whether it is more profitable to sell value plus momentum assets after they are up 50% or after a year and a day, whichever first, or simply to hold all of them for at least a year and a day. I do not know which approach is better, but note that for many accounts the sell-after-up-50% provision would result in higher taxes. Thus, when possible, assets that potentially will be sold in less than 366 days probably should be held in tax-deferred accounts.

12/21/05-As we close in on the end of December, our assets, after net expenses ($29,200), are up $22,000 to date in 2005, and our total equities' book value is on target to increase again this year by at least 12.5%, to $342,000.

My top-ten stocks this week are: AOC; AMPH; BRK/B (or BRK/A); DDS; FRD; ITIC; KEP; RESC; RSC; and VLO. I expect to be buying shares of several of them in the coming days.

The focus for the current entry is on American Physicians Service Group, Inc. (AMPH) (recent price $13.00), which meets the classic Ben Graham criteria for value. The asset has a low P/E of 7.25, a 1.90% dividend (with a dividend payout ratio of 0.14), a market cap of $35.49 million, positive free cash flow, a price to sales ratio of 1.10, a price to book value ratio of 1.42, a return on equity of 22.51%, an operating margin of 14.33%, a high current ratio of 4.22, and zero debt. The company's shareholder equity to total assets ratio is 0.86.

12/29/05-My top-ten equities this week are AEG; BRK/B (or BRK/A); CVX; DODGX; FRD; HD; JCP; OXY; RDS.B; and TSP.

The focus for the current entry is on Friedman Industries (FRD) (recent price $5.85). FRD has a dividend of 5.40% (with a payout ratio of 0.45), a price to earnings ratio of 8.44, a price to sales ratio of only 0.23, a price to book value of 1.14, a return on equity of 13.90%, zero debt, a current ratio of 3.09, positive free cash flow, and a shareholder equity to total assets ratio of 0.71. The company has its ex-dividend date on 1/25/06.

12/31/05-Year End Summary-As noted earlier, we are continuing to follow the tracked portfolios. Against my oft stated expectations, the Leapin' Lizards (LL) have once again achieved an absolute performance win over the Classic Value (CV) gains. Given that the average hold period is shorter for the CV assets, on an annualized basis CV is still the victor, but only by a statistically insignificant amount. Accordingly, as the intent here is to learn to be a good investor, not simply to push one or another conclusion despite the facts, I shall after all continue to offer LL suggestions and to include them in that strategy's portfolio. (To assure there are always stocks to pick, if the best qualifying assets for a particular strategy are already in the relevant portfolio, I'll feel free to recommend and invest in a previously held security.)

The performance, through late afternoon on 12/30/05, of all our tracked portfolios and of the S&P 500 Index (this last based on a buy-and-hold approach with the index since our contest inception) have been as follows:

(The statistics are as of the close of trading 12/30/05. Regular dividend income has not been included in the portfolios' performance. Commissions have been subtracted from the portfolio asset results but not from those of the S&P 500 Index.)

( *since inception, 10/4/04)

After this, I'll be providing a performance update at least annually (but not more frequently than once a quarter).

As of the last business day of the year, our conservatively allocated nest egg's return, taking into account all expenses (for some of which portfolio principle had to be redeemed), gained 3.05% in 2005. (The S&P 500 Index was up 2.97% in the same period.) Our portfolio is up 22.89% after expenses since my retirement, on 12/31/01, and 45.60% since the end of the low, bear market year, 12/31/02. Our total equities' book value now stands at $342,700, 12.7% higher than its level a year ago.

My top-ten equities this week are AOC; CELL; FRD; HD; HNT; SCVL; URGI; VLGEA; VLO; and VSEC.

The focus for the current entry is on another Leapin' Lizard, Shoe Carnival (SCVL) (recent price $21.92). Shoe Carnival's P/E is 17.22. It has a market cap of $290.07 million. It has no dividend. It's price to sales ratio is just 0.45. SCVL has positive cash flow, a return on equity of 10.15%, debt to equity of only 0.07, a current ratio of 3.65, and a price to book value ratio of 1.61. The company's share price is up 65.62% relative to the S&P 500 Index over the past 52 weeks. Its shareholder equity to total assets ratio is 0.68.

Incidentally, since I had stopped reporting on our closed positions for awhile, TAIT was sold on 12/22/05 from Classic Value, with a loss of 29.25%, and HEMA was sold on 12/30/05 from the Leapin' Lizards, with a slight (3.23%) gain. Each had been held in its respective portfolio for a minimum of one year and a day.

For at least the next year, when in town I intend, about each 7-10 days, to provide my pick of either another Classic Value, Leapin' Lizard, or Yummy Yielder selection, along with other equities that appear attractive at the moment.

Personally, I plan to be a little less conservative in 2006 than I have been in recent years. It is heartening to realize, from the stats above, that I have a good chance of beating the market, yet with less than market risk, even if we do not keep a substantial portion of the overall portfolio in money market reserves, short-term bond holdings, or other non-equities.

I wish everyone a happy, richly fulfilling, and profitable New Year!

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