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October, 2011


How one feels about equity investing may depend a lot on the perspective. If focused mainly on the day to day gyrations of the indexes, which often may rise or fall 2-3% in a single trading session and double-digits over a week's time, things may look awfully daunting of late. However, if one concentrates on acquiring a more objective and stable form of equity asset value, the ups and downs of Wall Street may even be a welcome means to achieve investment success.

Warren Buffett's company, Berkshire Hathaway, has seen its measure of queasiness inducing peaks and troughs. Meanwhile, though, through over 40 years of heading that company, Buffett has managed to increase its book value (its worth per share less the liabilities per share) at an average annual rate of 20%. Despite the markets' volatility, market value has tended over time to exceed even that stellar performance. So, if an investor had simply bought BRK based on its book value, more shares when the price to book was low and fewer when it was high, the mean return would have better than doubled the cost basis (the amount spent, including commissions, to acquire the shares) every four years.

I hardly expect in my lifetime that BRK or any other company will repeat that kind of performance. Yet, a simple dollar-cost-average strategy of buying more shares of equities when their book values were high in relation to price would tend to be rewarding. Since cash yielding and higher cash flow companies tend to also do better than the index averages, a person could do a lot worse than to limit one's low P/Bk purchases to the shares of companies that have positive cash flow per share and that also return a portion of earnings to shareholders in dividends.

Historically, such shares have returned an average 15% or better annually to investors, still good enough to double one's investment roughly every five years. Even though the financial climate may not show such benefits in the short-term, a patient, consistent approach of adding value is likely to be successful over the long-haul, just as was true for Berkshire Hathaway investing, notwithstanding periods like this when the news appears bleak.

Ideally, one can invest in high book value, cash paying companies once a year, quarter, or month, depending on personal preferences, 401k plans, etc., ignore all the news of market volatility in the meantime, and smile all the way to the retirement "bank."

Personally, it is appealing as well to set an annual target for increasing my total book value holdings. This can provide a sense of genuine accomplishment regardless of what the crazy markets may be up to. Thus, if for instance I have set a goal of increasing total portfolio book value by at least 12.5% a year and of having average stock dividend yields of 2.5%, I can see a total increase in my value plus cash of 15% a year, whether or not in a bear market.

Fortunately, markets over the long haul tend to go where the most value is, so if my total book value has risen to $100,000 but the market value of my stocks is down around $80,000, then in the short- to medium-term (or at most the long-term), they will very likely increase their traded prices 25% or more, bringing them back into greater parity with their real values.

If a relatively low stress method such as this sounds promising, it may be good to select among assets with price to book value 1.5 or lower, some dividend, a dividend payout ratio of 0.5 or below, at least some net cash per share, a positive price to earnings ratio, and debt to equity 0.5 or below.

I like to also select among the several candidates those with the highest ratio of estimated forward dividend percent to estimated forward price to earnings (P/E).

The following six equities currently look good using such criteria:

A High Book Value Plus Income Portfolio

Air T, Inc.AIRT$7.713.20%
Arcelor MittalMT$19.183.20%42.436.050.46
Computer Sciences Corp.CSC$30.112.60%36.656.410.59
Flexsteel Industries, Inc.FLXS$14.002.90%0.008.860.73
Molson Coors Brewing Co.TAP$41.923.10%24.4511.330.95
Sims Metal Management, Ltd.SMS$14.215.00%9.9912.150.94

Their average yield and price to book value are 3.33% and 0.73, respectively. Thus, a $7300 net investment provides $10,000 in book value plus an estimated $243 in cash per year. By buying shares in companies of this type, one starts out ahead of the game. ($10,000 less $7300 = $2700 + $243 = $2943 divided by $7300 = 40.31%.)

So long as one can do so while still achieving both total book value and average yield goals, high book value plus cash assets can be rebalanced annually (or, in taxable accounts and with profitable trades, after a year and a day, for long-term tax treatment), in other words each year selling off assets that no longer meet the criteria and replacing them with ones that do.

Happy investing.


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.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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