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April, 2000


(written 4/15/00)

As many who look for good value in their equity purchases could have foreseen, though not just when this was to occur, in the past couple weeks some of the previously high-flying stocks, with huge P/Es (price to earnings ratios) have had a great fall. Is this the end of the greatest bull market for stocks in U. S. history? Who knows? But it may at least be the beginning of a more rational approach to evaluating what is a good buy and what are realistic expectations for an investor's future fate, with shares bought using his/her hard-earned money.

In a November, 1999 issue of "Fortune," 11/22/99, "Mr. Buffett on the Stock Market," Warren Buffett points out that in the 17 years between 12/31/81 and 12/31/98 the Dow Jones Industrial Average (D.J.I.A.) rose from 875 to over 9000, a better than nine-fold increase, representing a 19% compound annual return. However, in the preceding 17 years, between 12/31/64 to 12/31/81, the D.J.I.A. went from 874.12 to 875.00, a return of just about 5¢ a year! There is no guarantee, no matter what our preferences and expectations may be, that the 17 years from 12/31/98 through 12/31/16 will be much better than that preceding 17 year period. His best guess: after all the costs of investing, this new 17-year period should produce real increases (after inflation) in the neighborhood of 4% a year, on average.

But Mr. Buffett is still investing, no doubt optimistic that his brand of stock selection can outstrip that low level of return. While we should strive to be realistic about the possibilities for investment gains, we are also hopeful that a value orientation will generate above average long-term returns.

Besides Warren Buffett's own Berkshire Hathaway (BRK.A or BRK.B), we currently like Tri-Continental Corp. (TY) (recent price $24.00), a closed-end mutual fund, meaning it is a mutual fund that trades like a stock. It currently has a discount of 22.9 % to its net asset value, so that, for each dollar of equity value, the stock buyer pays only about 77¢ (plus commission*).

"Value Line" says of TY that it has an above-average safety rating and a projected 3-5 year total return of 146-229%. They add, in their 4/14/00 issue, page 980, "Its long-term performance record makes it worthy of consideration by conservative investors seeking a core equity holding. The fund takes a value approach to investing in stocks, looking for issues that are trading at below-average price-earnings multiples that also possess what management deems to be a catalyst that may help push the stock's price closer to the valuations of its industry peers."

*With respect to commissions, truly long-term investors who are also seeking bargain rates for their trades might look into an internet broker that has won praise from "Barron's" (3/13/00, p. 52): Buy and Hold.Com. You cannot use margin for your stock purchases at this brokerage and must wait for their two hourly trading windows per week to have your orders executed. But "Barron's" rates them as excellent for ease of site use and for their commission charges, which are a mere $2.99 per purchase transaction and $19.95 per sale. (Hint: they encourage investors, as have the likes of value investors Ben Graham and Warren Buffett, to take the long view and buy a stock only if you intend to hold it for many years, preferably forever.) They have other convenient services, such as automatic investing through your bank account, for dollar-cost-averaging, and purchases of fractional shares. You can, for instance, buy a small portion of BRK.A (that currently sells for around $50,000 a share), but keep doing so over a period of time till you have a whole share! Ha. Buy and Hold.Com is certainly not for everyone. And they have a limited number of stocks they can buy, though most of the major ones. One can open an account with just $20. So, it can also work as a place for younger folks to try their hand(s) at 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.

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