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December, 2004


Since our year-ago investment essay A Case for Caution, several of the concerns expressed then are causing alarm today: rising interest rates, trade and federal deficits, debt levels, commodity costs, and equity prices relative to underlying value, but falling dividend yields (in relation to stock prices) as well as US dollar worth, compared to other major currencies.

The US market dividend now averages only about 1.7%, far below its historical level since 1928 of around 4%. The argument had been that companies can make better use of the dividend than to pay it to shareholders. The reverse turns out usually to have been true. Companies not currently in financial distress that nonetheless pay little or no dividend have often squandered the extra funds on huge pay packages for executives or on expensive empire-building purchases of other companies, though the combinations often add little to shareholders' profits.

The dollar has now fallen about 50% compared with the Euro in just the last three years. Such trends are unsustainable. Bond, stock, and real estate prices are all vulnerable.

The warnings of such eminent investors as John Templeton and Warren Buffett are at least as relevant now as in December, 2003.

The "Value Line Investment Survey" has tended to be optimistic by about 50-60% in its 3-5 year projections for stock appreciation. Recently it has suggested an average 3-5 year share price rise of only about 35%. Subtracting their historical excess expectations, a more reasonable forecast for the average stock might be a 10-20% loss over the next 3-5 years.

Such red flags notwithstanding, I could always be wrong, or a delay in a new decline in equity or real estate markets could be indefinitely extended. Thus I would not suggest the market timing approach of shifting all holdings into cash or short-term treasuries. Rather, positive steps might include paying down personal debt, rebalancing holdings to assure a blend of investments (reserves, bonds, equities, and real estate) consistent with one's preferred (conservative, moderate growth, or aggressive growth) investor profile, dollar-cost-averaging, and selecting stocks (or mutual funds) for purchase that appear to have substantial margins of safety, as do those cited below.

Here then is a value or contrarian bargain set of 10 picks for 2005 that, taken together, may offer the cautious yet growth oriented investor reasonable returns at a reasonable risk in the year ahead:

Berkshire Hathaway, Cl. BBRK/B$2861
Commerce Energy Group, Inc.EGR$1.35
Everest Re Group, Ltd.RE$88.40
Hirsh International Corp.HRSH$1.26
Home DepotHD$42.59
McKesson Corp.MCK$32.39
Metro One TelecommunicatiINFO$1.55
Taitron Components, Inc.TAIT$2.42

(Please note: while the above entire portfolio could well be less volatile than the market as a whole; each individual asset by itself may prove more risky than the major averages.)


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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