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December, 2011


This is the time of year when all sorts of self-described experts on investing like to trot out their lists of the best investments for the coming 12 months. Odds are, most of these selections will actually provide but mediocre performance. Being quite as capable as the next person of stock picking mediocrity, I too shall weigh in with top equity asset choices for the next orbit of our world about the sun. 2012, as it happens, is also forecast to be mankind's final year, numerous sooths saying that it marks our "end of days." So, looking at the investor's glass as half-full, I am pleased to note that, while the assets indicated have advantages which may lead to their doing better than the market averages, perhaps doubling or tripling one's investments over the next several years, nonetheless, should that expectation prove in error, at least one will not have long to grieve over this, for the destruction of civilization as we know it seems destined to trump all other concerns.

Before offering the 2012 buy list itself, a few suggestions or caveats are in order:

  • Re the first asset listed (below), symbol ARLP, it is my understanding that since this is a limited partnership any taxable gains or deductible losses need to be filed with IRS using special partnership forms which, however, can be cumbersome to properly complete. Hence I believe it is advantageous to hold this security only in tax-deferred accounts.

  • As a group, this set of suggested equities likely has reasonably lower than market risk, and it is only in the context of several holdings at once that particular ones are recommended, since individually they may have relatively high volatility.

  • The effects of price swings can also be diminished, and even benefited from, by spreading an investment out over time. Thus it seems best with these stocks or funds to dollar-cost-average (investing the same amount of money in them over several equal investment durations, for instance quarterly) or to invest additional amounts, after an initial smaller purchase, when they have fallen significantly in price, either procedure thus assuring that one gains more shares when the price is down, reducing one's average asset cost basis.

  • The equities are not intended for short-term trades but as long-term holdings, for instance to be kept in one's portfolio for 3-5 years or longer.

  • It is particularly important not to enter into such a portfolio of investments with the idea that one can quickly get out if the stock market begins to go south. As a rule, most investment losses occur when one abandons her or his strategy for the assumed lower risk of cash reserves or short-term bonds. These types of assets, however, offer nothing like the inflation-beating potential of stocks or stock funds and cannot adequately compensate a person for the consequences of having sold below their previous holdings' cost bases.

My last point is to note that a significant omission from the list this time is Berkshire Hathaway (BRK/A or BRK/B). For many years, I have felt that one could hardly do better on a risk-adjusted basis than BRK. Warren Buffett has now managed to raise that company's book value (assets less debt) by an average of about 20% annually for the last 46 years (at least through 2010). Generally, the market price has done better than that! Even if Berkshire Hathaway performance should slow down considerably, it is likely to continue exceeding the S&P 500 Index. Berkshire Hathaway usually accomplishes such feats while keeping large amounts of short-term bonds or cash reserves. Plus, its business holdings, such as Geico or See's Candies, as well as its major shareholder positions, such as in Coca Cola, are among the most lucrative, with the best returns on investments, available.

The one significant fly in that attractive ointment, however, is that Warren Buffett is now in his 80s. It is hard to imagine anyone else, even the best person he might select ahead of time, being able to easily or reliably match his legacy. My anxieties along these lines were not allayed on learning that David Sokol, till then one of BRK's best executives and earlier speculated as among Buffett's top picks to be his successor, left the company in some disgrace last spring after an ethically questionable act. Nor were they dispelled on learning this month that WB had selected his son, Howard, whose history has been somewhat checkered, to be Berkshire Hathaway's "guardian of the culture" and chairman after Warren dies. Finally, it is unlikely that any company as large as Berkshire Hathaway has become (market capitalization $186 billion this month) can continue to grow its profits at anything like the 20%+ annual rate it has in the past.

All that being said, I do still hold a number of Class B shares of Berkshire Hathaway in our nest egg and expect to add to them when the price is off substantially as well as to reduce them when the stock quote is again lofty. Market-offered fractions of Buffett's superior company are particularly attractive at the moment since Buffett currently is buying shares back while their price remains low, thus enhancing the per share earnings of remaining shares, and since this stock is presently selling for a nice discount (25% or better) to conservative estimates of the company's intrinsic value.

Nonetheless, due to understandable skittishness about BRK, as above, I have excluded it from my current suggested purchases for 2012.

Here, then, are a dozen other equity candidates for your 2012 consideration:

SymbolCompany or FundRecent
ARLPAlliance Resource Partners L.P.$73.30
DISThe Walt Disney Company$35.32
DXJWisdom Tree Japan Hedged Equity Fund$31.28
IFAberdeen Indonesia Fund, Inc.$12.28
INTCIntel Corporation$23.23
LAQAberdeen Latin America Equity Fund$31.09
MMM3M Company$78.87
MTArcelor Mittal$17.16
PAASPan American Silver Corp.$22.15
STMSTMicroelectronics N.V.$5.48
TDFTempleton Dragon Fund, Inc.$24.80

Each of the dozen chosen has at least one factor in its favor which appears to give it an edge in performance over an average equity asset. For example:

  • DXJ is a fund specializing in large-cap Japanese equities. In that country the average security is now priced below its book value and so is at a bargain level. (By comparison, the stocks of U.S. public enterprises are generally selling at about twice their book value.) Yet the majority of companies in Japan are productive and have low dept. In addition, the fund hedges against currency risk, so that, even if the Japanese Yen falls relative to the U.S. dollar, most of the fund's returns to U.S. investors will be unaffected. (Note: Folks willing to take on somewhat higher risk for the long-term prospect of higher returns on Japanese equities may want to select the SPDR Russell/Nomura Small Cap Japan ETF [JSC] instead. It is not hedged against currency risk. However, some of Japan's finest price to book value stock deals are said to be among the smaller cap equities which, accordingly, should ultimately provide more exceptional returns for patient investors.)

  • IF, LAQ, and TDF have each shown total returns of about 20% or greater per year for at least a decade, are selling at discounts to their net asset values, and are focused on thriving emerging markets (Indonesia, Latin America, and China, respectively) that are expected to continue, though with ups and downs along the way, to grow at paces superior to those of most developed nations.

  • INTC is considered low risk and yet is a dominant IT company with estimated performance of around 100% in the next 3-5 years, high return on equity, low debt, and an annual yield of about 3.6%.

  • PAAS is a well established silver producing company and should do well once there begins to be a pick-up in the global economy, as many industrial processes require silver, which is also seen as a good hedge against inflation.

  • STM sports a forward dividend estimate of 6.2%, about three times what one can obtain from ten-year Treasuries, yet has reasonably low debt and a low dividend payout ratio as well as a low price to earnings ratio and a price to book value of only 0.6.

Nonetheless, please be aware that past performance is no guarantee of future returns and that there is nothing magic about my having picked these 12. Even with the best investment skills, unanticipated developments may result in the loss of principle. Investors are advised to assure a margin of safety in the shares which are bought and also to follow the counsel of a trusted financial advisor and/or to do her or his own due diligence before making any purchases.

Happy investing, for 2012 and beyond!


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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