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September, 2012


Last month, I focused on several companies and their stocks which have been among the worst performers but which appear likely, at least on average, to overcome that poor record in the next few years. This issue, I am taking more or less the opposite tack to my recommendations in August, emphasizing instead assets which have a long-term record head and shoulders above their peers. As regular readers will recall, last month, I focused on several companies and their stocks which have been among the worst performers but which appear likely, at least on average, to overcome that poor record in the next few years. Each of this month's stocks, by contrast, has given its shareholders total returns of 15% or better for 20 years or more. Every $1000 (net of commissions) invested in this group would have become $16,370 or more. In fact, that figure is a conservative estimate of one's total returns, for while the minimum total profitability of the equities has been 15% a year for a generation, some have done much better, both in their average annual total return and in the duration of their winning streaks.

Of course, it is up to each investor to do his or her own research and see if they believe such a great trend will continue for these securities. In my opinion, a portfolio of all of them will do so, though I am not as convinced the same is true for each component of that assortment. (The difficulty is that I do not know which ones will falter. Hence the recommended shotgun approach.)

As with the collection presented a few weeks ago, my suggestion would be to hold each asset four years or till up 100%, whichever first, then replace it with another having both an excellent past record and superior long-term prospects.

Price to
Berkshire Hathaway, Class BBRK/B$84.0117.9N.A.
BlackRock, Inc.BLK$176.0114.23.4%
Chesapeake EnergyCHK$
Expeditors Int'l of WashingtonEXPD$36.1921.91.5%
Forest Labs, Inc.FRX$35.0412.0N.A.
Limited BrandsLTD$49.7019.32.1%
Microchip TechnologyMCHP$34.4422.44.0%
Oracle Corp.ORCL$31.1716.10.8%
(Statistics are effective as of the close of trading on 8/30/12)

Are these 8 free of problems? Absolutely not. However, as a group they are likely to do well over the next few years, partly because their average total return for a long while has been exceptional, which argues for their having great leadership, so there is reason to think they can weather whatever adversity is on the horizon this time, and partly because what clear dangers are ahead have already been taken into account in their market prices.

Berkshire Hathaway (BRK/A and BRK/B), for instance, is not liked because its famous chief executive, Warren Buffett, has just turned 82, likes fudge, hamburgers, and cherry cokes, and has prostate cancer. Folks probably figure he will be dead any day now, and then his company's stock will plummet. Even if we assume the worst, though, and he dies tomorrow, his management style and means of increasing the Berkshire Hathaway's net worth have been built into it. That tradition is not going away when he departs the scene. And people who are avoiding the stock now because of Buffett's age and health have discounted the stock so much it is selling at only 0.68 of its conservatively estimated per share intrinsic value. Further, the company's policy is to buy more of its own shares if the stock price falls below 1.1 times its book value. Sure, the stock may go down later. That will be a terrific opportunity to load up on it at a still greater bargain level.

BlackRock generates tons of cash flow, has recent insider buying, and sports a dividend twice that of a 10-year government bond.

Or consider Chesapeake Energy. It has had some challenges of late. Yet its price to earnings and price to book value (0.9) combined with a debt to equity ratio of less than one make this a Ben Graham type value investment.

Expeditors Int'l. has zero debt, yet a return on equity of over 18%.

Forest Labs also has no debt, below average price to earnings, above average return on equity (over 14%), and is a holding of Fidelity's successful bargain seeking Low Priced Stock Fund (FLPSX).

Limited Brands, which includes such retail winners as Victoria's Secret, Bath and Body Works, and other outlets, has suffered in the current economic downturn, yet should have rising profits as we head into back-to-school and holiday buying periods and as the country's financial circumstances gradually return to normal.

Microchip Technology is another stock with a high dividend and low debt plus an above average return on equity (over 16%). A current ratio of almost 9 is also a plus.

Oracle is an international profit powerhouse and has a low forward P/E, a very nice return on equity (nearly 24%), reasonable debt (below 0.5), and apparently fine prospects for its software applications and other business lines. It's Java software has been found to be vulnerable to hacking, which can significantly jeopardize Java users' security. Oracle is moving to close Java's backdoors to hackers.

A person could do far worse, in my opinion, than to invest in all eight of these companies for the long haul. There are no guarantees, of course, yet taken as a whole, I would put my money on the portfolio handily beating the major market averages in the coming 3-5 year period.

You may be concerned, as I am, about the gridlock in Washington, the "fiscal cliff," and the debt crisis in Europe. This supports keeping one's powder dry with a larger than usual level of liquid assets in short-term reserves which can then be deployed at times when markets are down. It does not, to me, support a boycott of the stock market. Volatility is there to be used for our benefit as investors and should not serve as an excuse to keep us away from "the table."


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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