What Memorial Day Means to Me

Exactly one year ago I made a big mistake.  In my tabulation of the men and women who died in military service to the United States, I omitted the Korean War (officially termed the Korean Conflict, largely in order to avoid the necessity of a declaration of war by the U.S. Congress.)  Happily, astute readers alerted me to the error, and I corrected it in the following issue, and added a few more military conflicts as well.
 
Here’s the expanded list
 
Revolutionary War – 25,324 dead
Indian Wars – 6,125 dead
War of 1812 – 2,260 dead
Mexican War – 13,283 dead
Civil War – North – 363,020 dead
Civil War – South – 199,110 dead
Spanish American War – 2,893 dead
Philippines War – 4,273 dead
World War I – 116,708 dead
World War II – 408,306 dead
Korean War – 54,246 dead
Vietnam War – 58,219 dead
Iraq War – 4,070 dead … and counting

Those are the big ones. Unlisted are dozens of smaller conflicts, including the Barbary Wars of 1801-1815, the China Boxer Rebellion of 1900, Haiti in 1915-1920, Grenada in 1983 and Desert Shield/Storm in 1990 and 1991.
 
I sincerely appreciate that these people made the ultimate sacrifice, and I honor them on this special day.  Also, I promise never to forget the Korean War again.
 
As for the title of today’s email, “What Memorial Day Means to Me,” I have a few thoughts.
 
Since I was child, Memorial Day has meant a canoe trip with family and friends on the Ipswich River here in Massachusetts, and that’s where I am today, enjoying nature, unplugged.
 
A small part of the day, as always, will be devoted to honoring those men and women who made the ultimate sacrifice. But for me, a larger part will be devoted to wondering whether war will ever become obsolete as a tool for conflict resolution.
 
In the short term, I have no hope; in fact I fear that the increasingly desperate hunt for energy will increase cross-border tensions.  Did you notice just last week that the House passed a bill to sue OPEC?
 
But in the long term, I’m optimistic that mankind will eventually evolve to put the practice of war behind us.  War is destructive, and I’d rather be productive.  But I’m not holding my breath.
 

 
Value Investing

Now, on to the investing segment.  I like to say there are many successful investing systems, and that one of my jobs is to help you find the one that’s right for you.
 
So today I want to talk about the system used by Cabot Benjamin Graham Value Letter, which is designed for patient investors who want to buy good companies when they’re cheap, and then hang on patiently until they’re fully valued.
 
It’s a great system for investors who don’t like to watch the market every day, or can’t tolerate the risk that comes from investing in strong growth stocks.  And the results are terrific.
 
Since inception in 2002, for example, the Classic Benjamin Graham Value Model has achieved a compound annual return of 20.7%, versus 7.1% for the Dow Jones Industrial Average.
 
Since inception in 1995, the Wise Owl Model, which is less volatile, has achieved a compound annual return of 16.5%, compared to 6.8% for the S&P 500.
 
To give you an example of how this system works, I went back to this month’s issue of two years ago to see what editor J. Royden Ward was recommending, and here’s what I found.
 
In his Classic Value Model, Roy recommended these five stocks:
 
Briggs & Stratton (NYSE: BGG)
Building Materials (NYSE: BLG)
Bunge Ltd. (NYSE: BG)
ConocoPhilips (NYSE: COP)
Reliance Steel (NYSE: RS)
 
In Roy’s Wise Owl Model, which incorporates a measure of technical strength, these 10 stocks were recommended:
 
Bed Bath & Beyond (BBBY)
General Electric (NYSE: GE)
Goldman Sachs (NYSE: GS)
Home Depot (NYSE: HD)
Johnson & Johnson (NYSE: JNJ)
Nabors Industries (NYSE: NBR)
Oracle Corp. (NSDQ: ORCL)
Total S. A. ADR (NYSE: TOT)
United Parcel Service (NYSE: UPS)
Wal-Mart Stores (NYSE: WMT)
 
And How Have These 15 Stocks Done Since?
 
The best was Bunge, a fertilizer company, up 113%.  The worst, Building Materials, down 89%, and Briggs & Stratton, down 55%.  As a group, the 15 stocks are up an average of 6.5%.  But that doesn’t come close to telling the whole story.
 
First, Roy has advised selling 10 of the stocks in the past two years.  Three of the stocks were sold because they hit Roy’s target price.  That included Bunge, which was sold in April 2007, up 43% from May 2006, and Goldman Sachs in February 2007, when it was up 40% from May 2006. (Since then, as you know, it’s had a little trouble.)
 
Seven of the stocks were sold because the fundamentals of the businesses deteriorated.  One was Building Materials, sold in December 2006 when it was down 19%.  Another was Briggs & Stratton, sold in November 2006 when it was down 25%.
 
In short, if you had bought all 15 of these stocks in May 2006 and followed Roy’s selling advice until now, your average gain would be 9.9% (the S&P 500 is up 9.2% in the same period), and you’d still be holding five stocks: ConocoPhilips, General Electric, Johnson & Johnson, Oracle and Wal-Mart.
 
But the story is more complex than that.  Remember, Roy gives each stock he recommends a Maximum Buy Price.  If a stock is trading above that price, you don’t buy it.  Buying low gets you a “Margin of Safety.”  Of the 15 stocks recommended back in May, 2006, four were trading above their Maximum Buy Price, and if you waited to buy until they declined below that Maximum Buy Price, you would have done even better, earning an average return of 12.5%.
 
And there’s more!  Because you’ve sold 10 of those stocks, you’ve been able to reinvest the money in new undervalued stocks.  I can’t say exactly what you would have bought.  Nevertheless, I can calculate the expected return.
 
Those 15 stocks that were bought two years ago were held for a total of only 261 months, not 360 months (24 times 15).  The average holding period to date has been 17 months.  If you assume that the average rate of return has continued with the replacements, you end up with a return of 17.3%, which falls right in the middle of the long-term records of both of Roy’s models.
 
To me, it’s proof perfect that Roy’s system, when followed as directed, works.
 
If this makes sense to you, and sounds like a system that suits your style, then I invite you to give it a try.  A one-year trial subscription costs only $87, and if you don’t like it, you can have your money back!  What could be fairer than that?
 
To get started, simply click the link below.
 
http://www.cabot.net/info/bgv/bgvir01.aspx?source=wc01
 
Cordially,
 
Timothy Lutts
Publisher
 
P.S.  In these days of record-high energy prices and commodity inflation, a reliable guide to low-risk investing will likely be more valuable than ever.  So give it a try; you have nothing to lose!
 
http://www.cabot.net/info/bgv/bgvir01.aspx?source=wc01
 

Comments