Value Investing / Main Index / previous / next

April, 2014


Warren Buffett suggests, to paraphrase, that we look at investing as if we had a maximum of about a dozen different choices in the course of our lives, and each time we use one we reduce that number. A dozen should be plenty, but we need to select wisely, then stick with the best ones that we understand. Otherwise, we may be tempted to dabble in first one strategy, then another, never really committing to things that work in the investment marketplace. Even worse, we may succumb to the typical investor mistake of selling or buying just at the wrong times for our given techniques, buying high and selling low. The average investor, in fact, gets total returns about 2-3% lower than if he or she had simply bought shares in low-cost exchange traded funds representing the major market indexes and left them alone for the long haul.

What seems to occur is that investors are swayed on the one hand by their enthusiasms for new investment methods, funds, or stocks to pay too much when getting into them, then, on the other, worried when there are corrections or bear markets that they will lose more money and so sell below their cost bases to protect themselves from further losses.

Yet suppose one really only had 10-12 ways to make money in one's lifetime. Clearly, then, it would pay to get really good at the best of those one could take in and just stick with them. In sports, after all, we do not run a little one day, play golf a short time the next, throw a baseball for awhile the next, spar a few punches of boxing the next, etc. We note, sooner or later, that we have some ability at golf, tennis, soccer, football, swimming (my favorite when younger), basketball, or whatever it is, then concentrate mostly on that, perhaps engaging in just a few other athletic pastimes to vary things, but never giving up the true focus.

By such reasoning, personally I have come to accept that investing in low price to book value assets works best for me. Yet there are a handful of other techniques that enhance investment returns while lowering overall risk. Combining them, an effective risk-adjusted portfolio is made possible, one that should do relatively well come bull or bear markets. It may not always exceed the averages, but it should have less downside than the indexes when things go sour for most investors. Thereby, it succeeds as does a marathon competitor, not a sprinter.

Such a portfolio for all seasons is likely to provide about 15% average annual total returns. It also stays interesting, for in any given quarter, month, or week there is likely to be at least one stock or exchange traded fund offering good value as a potential buy and another that may have run its course and, like ripe produce, be ready for harvesting.

A Low Price to Value Blend

Company or FundRecent
Price to
to Book
AGIIArgo Group International Holdings, Ltd.$ P/BK Longer Term
ANATAmerican National Insurance Co.$111.4211.20.692.8%Low P/BK Longer Term
NWLINational Western Life Insurance Co.$ P/BK Longer Term
PREPartnerRe, Ltd.$102.679.70.802.6%Low P/BK Longer Term
SYASymetra Financial Corp.$20.2511.60.802.0%Low P/BK Longer Term
FNFGFirst Niagara Financial Group, Inc.$9.1812.20.693.5%Low P/BK Shorter Term
SNESony Corp.$18.715.30.631.2%Low P/BK Shorter Term
UWMProShares Ultra Russell 2000 ETF$81.0320.01.000.0%UWM Portfolio
KKRKohlberg Kravis Roberts & Co., L. P.$23.0610.02.456.1%Goldilocks
AAPLApple, Inc.$524.9413.03.572.3%High Return with Relatively Low Risk

Here are a few strategies that, for my money, offer excellent profits for their risk levels, and provide worthwhile combined results:

  1. Low Price to Book Value Longer Term - Buy the best stocks one can find with higher net assets than their per share prices. Hold till up 100% and their price to book values are one or above or for five years, whichever first. Then sell and replace with new low price to book value bargain stocks. It is better to do one's own research, but, for me, examples of good low price to book value stocks for the longer term include: AGII; ANAT; NWLI; PRE; and SYA.

  2. Low Price to Book Value Shorter Term - Buy stocks as in #1 above except that they also should be suggested by one or more major investment services as likely to at least double in the next 3-5 years, i.e. projected to have total yearly returns averaging 19% or more in the next four years. Sell when up at least 5% and they no longer meet the anticipated total return buy criterion. Examples of stocks meeting these purchase guidelines include: FNFG and SNE.

  3. UWM - This exchange traded fund is intended to provide double the short-term return of the Russell 2000 Index, which itself tends to go up more than the S&P 500 Index. Take a purchase position in UWM when it has recently been down. Thereafter, sell when up 5% or more since one's purchase or buy more when down 5% or more since the previous transaction. Repeat indefinitely. (To avoid violating wash sale rules and if selling within a few weeks after purchases, the sell price should be the greater of: a. 105% [or above] the average cost bases or b. higher than each of the per share prices of the various cost bases.)

  4. Goldilocks - Assets in this category have relatively high yield, typically about 3.5% or better, are reasonably low risk (average or better safety rank and financial strength), have a price to earnings ratio no higher than 12, have significant positive price performance in the last 12 months, and, as with #2 above, are suggested by one or more major investment services as likely to at least double in the next 3-5 years. These are to be held until up at least 5% and no longer meeting the buy criteria. A stock presently meeting these purchase guidelines is KKR.

  5. High Return with Relatively Low Risk - Finally, stocks in this category have among the best ratings for financial strength plus a dividend and projected 19% or better total return over the next 3-5 years. Sell when up 50% or more and no longer meeting the buy criteria or after two years if at least profitable, whichever first. AAPL recently met these selection guidelines.

On average, the above cited assets have below average price to earnings and price to book value ratios, at 11.1 and 1.2, respectively. Adhering to the indicated rules with a mix of stocks that meet one or another of the investment methods should lead to better than S&P 500 Index performance. Over a five-year period, such a blend of strategies would likely double the market's cumulative total returns.


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.)

Value Investing / Main Index / previous / next