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January, 2000


The plight of the value investor in U.S. equities has been a challenging and sometimes embarrassing one for the past several years, as the prevailing trend, instead, has been to pour great amounts of money into stocks or mutual funds that represent promising momentum plays, with little regard for the underlying fundamentals. The mood seems to be: If it has gone way up recently, we must jump on that bandwagon too and ride it up to still more stellar prices, however little the company whose shares we are buying may actually be making in net profits. Itís like the game of musical chairs. Everyone thinks or at least gambles that each time the music stops he or she will be among those who find a safe place to sit. Or, itís like the greater fool principal. Everyone likes to buy the rising stock and then sell it to an even greater fool, at a higher price, before the market as a whole wakes up to the reality that the shares are really worth much, much less than any of the greater fools have paid for them. Value stocks, those traditionally available for less that their intrinsic value, have for the most part been languishing in relative neglect during this period. Their day will come again, but certainly is not here yet. There are few market timers so good as to accurately predict just when that will be. Meanwhile, the major market averages, driven mainly by the skyrocketing prices of a handful of extremely favored growth assets, many of which have no underlying profits at all, keep leaping ahead, some to new records just this past week.

Even though our portfolio is largely filled with value picks, several of which have suffered such inglorious fates as Fruit of the Loom (FTL), which finally declared bankruptcy in the last week of December, after falling from around $13, when we had started buying it, to just over a dollar before that declaration, our equity assets have gone up significantly more than 15% per year lately. We distrust a market that gives even our picks, overall, such good returns. Ha. Accordingly, we have begun paring back on our equities. Each week our equities exceed 15%/Yr., we sell off the excess and put it into bond assets or money market funds. We figure this will give a little cushion when the inevitable major drop in equities finally comes.

If you are still wanting to invest in stocks now, James Grant, a celebrated value investor of similar caution to our own and some success in stock picking as well, recently was recommending Tenneco Automotive (TEN) (price $9 15/16).

If, on the other hand, you feel more concerned about the chance of a market meltdown and think bond assets offer good value here, as we do, you might check out the following two promising closed-end bond funds, each with an above average safety rating from "Value Line:"
1. ACM Govít. Inc. (ACG) (recent price $7 1/16)-This fund sells at a substantial discount to net asset value (-15.4%) and has a dividend yield of 12.7%. It is a very volatile fund and lost 30% last year. But, for the long-term investor, the high yield may be attractive, so long as one does not worry about the short-term fluctuations in the fundís market value. Later, once weíre again in a bond-friendly economic environment, the N.A.V. and market price will likely rise. The fund is recommended by "Value Line," which projects a 3-5 year total return of 45-90%.
2. Nuveen Municipal Value Fund (NUV) ( price $ 7 3/4) - This fund also sells at a substantial discount to its net asset value (N.A.V.) (-16.1%). Most of its income (dividend yield 6.9%) is exempt from federal income taxes. The fund is recommended by "Value Line," which projects a 3-5 year total return of 40-90%.

(Of possible interest as well to some readers, the Jan., 2000, issue of "Money" magazine recommends, among its best investments for the year 2000, Invesco Health Sciences, a perennial favorite of Andyís.

The Feb., 2000, issue of the same magazine recommends Cisco (CSCO), one of Timís earlier suggestions.)


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

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