Conundrum

One of my stocks that I have held in my conservative side of my portfolio has been Intel, and it has quietly gone up about 13%. Pretty much on par with the broader market. To me it still seems cheap (ranks about #100 in my top 200) and pays a decent dividend (around 3%) and just announced they are increasing.

However, one of my favorite stock market writers, Jim Jubak blatently said to "sell Intel" today (Sell Intel (INTC) | Jubak Picks). Jim isn't always right, I followed his sell on FSUMF around $3.20 a year and a half ago and it has doubled since then... that would have been a LOT of green. On the other hand, Jim Cramer just picked Intel as a top pick in the Dow (Mad Money's Jim Cramer: The Dow's Top 3 Stocks for 2011). Finally, I have preached about patience and trying to be more of an investor and I have only held Intel about 6 months. I could always "split the baby" and sell half my shares (I have a pretty sizeable chunk). Tomorrow night is earnings, so ideally I make the call by noon tomorrow (I am leaning towards just holding).

I am still debating what stock to buy next. SUPG is the latest one I am considering.

Food for Thought

I have been reading a “new” book this week. “The Intelligent Investor” by Benjamin Graham. Of course, I had always known about this book. But as it was first written many years ago, I expected it not to be in touch with the “reality” of markets today. I thought it would essentially say, only buy a stock if its margin of safety is 100%, when in today’s world of information, it would seem unlikely a stock could fall to such a level.

And perhaps that is what the book will say as I get further into it. But even the first few chapters are enough to put it on my short list of “must-read” investing books. If only because it reminds us of what we should already know:

• · Investing is different than speculating. It is ok to speculate some, in fact that is human nature. But no more than 10% of total funds should be in speculation. And it should be a totally different account.
• · Bonds should play a key role. Graham says they should be between 25% and 75% of the total portfolio. I’d suggest most “investors” undershoot this mark, and to their detriment the past 10 years.
• · Graham spends a lot of time on psychology. He comments that it is difficult to not sell a position when the price is declining, even if you have done your homework. And conversely, it can be difficult to sell when the price is rising sharply.
• · He really drives home Greenblatt’s points that sometimes the market just goes nuts, in both directions. And an “Intelligent Investor” will recognize when the market is nuts and either buy or sell.

· Graham just finished a chapter on inflation. Now my version was penned in 1971, but it could have been written yesterday. He comments that while stocks should be a better hedge against higher inflation than bonds, that they have not been. He also comments that using gold as an inflation hedge is a bad idea. His recommendation if you’re going through an expected inflationary stretch is “cash equivalents” (by which I believe he means short duration bonds and CDs) and (surprisingly to me) utility stocks. He comments that utility by law are entitled to a “fair return” and will be able to raise prices (and therefore earnings) in times of inflation.

· Graham does distinguish between a “defensive” investor and an “enterprising” investor. A defensive investor is more concerned about protection of capital and doesn’t want to be thinking about his portfolio all the time. (Note Graham uses “he” all the time, which shows to me that 1971 investing was considered for men only).

I will post more as I go through the book. But it made me ask myself the hard question, am I an investor or a speculator? Then in addition, if I am an investor, am I a defensive investor or an enterprising investor? I have to say after reading what I have read that I am less of an investor than I’d like to be considered. I do have too short a horizon. I do not know the companies I buy well enough. It is an interesting aside that while my Average annual return since 2003 is about 7.5% for my overall portfolio that for insurance stocks it is in excess of 25%. I think we can surmise that as I am in the insurance industry, that I am an “intelligent investor” in that space.

If I work hard, I can move more towards becoming an investor in all that I do. I do think that last June, paring my portfolio down to a more manageable number of stocks and beginning to focus more on quality dividend payers was a good start. But it is all too easy to listen to the siren’s song of “get rich quick” and so I have bought too many stocks (in MFI) that are fairly deemed “speculative”. I will work towards reducing that portion of my investments. Finally, I need to do some soul searching about bonds and utility stocks. Of the money that I manage (not counting company stock and funds in wife’s IRA or kids’ college funds), I have about 20% in bonds, preferred stocks or utility stocks. That is really too little and I need to find a way to ramp it closer to 30%... guess those Chinese small caps gotta go!

I think the MFI approach can still “work” with the “intelligent investor” world. I think the differences are that I should be considering holding stocks for more than the year (RAI is coming up and I will continue to hold for instance), I need to focus more on the quality of the company and learn more about each company before pulling the trigger. A classic example was buying JGBO and not realizing that they owed $ to debt holders despite tons of cash. That should have been a red flag. I still like the stock at today’s price, but I should not be unaware of information like that.

Enough preaching and introspection. If anyone is interested, the other books on my short list are (of course) “The Little Book that Beats the Stock Market”, “You Can be a Stock Market Genius” and “The Richest Man in Babylon”. Finally, I would love to read Seth Klarman’s book, “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor”. That would make a great birthday present (in case my wife is reading))!