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March, 2012


The square of 12 is 144, also known as a gross. 12 is a dozen. 13 is a baker's dozen, and twice 13 is 26. Interestingly, though it is rare for one to achieve this, for every $100 a person successfully invests at an average annual performance rate of 26% there will be $1000 at the end of 10 years (assuming in a tax deferred account and with all distributions reinvested at the same rate of return). So, in saving and investing, it can be fun to play with numbers, and they often are our friends.

Take again, for instance, a gross, or 144. Ben Graham became famous for teaching and practicing the art of value investing, indicating that his firm had managed average gains of 20% a year using the methods he had suggested. He also in his later writings had advocated that among the general investing public it might make sense to sell value assets within a couple years. It turns out that an investment held two years which provides an annualized total return of 20% is at the end of that period worth 144% of the cost basis. Since Graham also suggested that the average value investor seek gains of 50% or better and sell after about two years, yet for more sophisticated investors he thought a longer holding period might be appropriate, one of my own formulas for stocks with good value and margin of safety has been: Buy with low debt to equity and at a 33% or greater discount to book value, and then hold till up at least 50% or till the market value represents the greater of 144% of the cost basis (if kept for two years) or till it can be sold at a 20% net annual total return (if kept longer).*

A number of others trained by Graham himself or in his style of stock analysis and portfolio management have taken up the value investing challenge. Several of these are featured, for example, in a fall, 1984, paper by Warren Buffett, in Hermes, "The Superinvestors of Graham-and-Doddsville," and in a later article in Business Week, "Heroes of Value Investing," June, 1999. Sure enough, their long-term average returns have often been right around 20% a year, in some cases even higher and for periods of many years. An overall 20% annual return will double one's investments, on average, in about 4 years. There are, of course, some periods when one's assets perform significantly worse. They may be balanced by considerably better annual returns at other times.

If interested in companies whose shares are now selling at levels which could offer one gross profits, check out the table.

to Book
Constellation Energy Partners, LLCCEP0.13$2.650.0%
Hartford Financial ServicesHIG0.43$21.701.8%
Presidential Life Corp.PLFE0.41$11.582.3%
Symetra FinancialSYA0.50$11.342.5%
The L.S. Starrett CompanySCX0.60$13.063.1%

Many mention the risks of stock investing as reasons to stay away. Yet they can be far greater in bonds (thanks to the meager returns after inflation), gold, etc. If equities are bought with the concept of margin of safety in mind, they can be both more profitable and less likely to result in one losing one's shirt on a long-term basis.

As always, I suggest folks check with trusted financial consultants and/or do their own research before any investments cited in these essays.

Meanwhile, though, I wish everyone gross profits!

*This hardly covers all contingencies, of course. A few assets may just sit there year after year, barely traded, and need to be replaced eventually by ones that have better prospects. Others may be merged, have spin-offs or corporate name changes, be bought out, have severely reduced earnings, so that they now look far less attractive, even at the same price, etc. In general, though, value investing can provide average annual total returns of 15-20%.


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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