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Not a single loser in my portfolio of value stocks

Norman Rothery was the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

It's time to harvest a bounty of gains from the Strategy Lab portfolios.

I'm pleased to say that my crop of value stocks has gained 95 per cent since the portfolio was planted five years ago. It raked in a 14.2-per-cent compound annual return over the period.

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But the value portfolio didn't just contain stocks. It started life with 30 per cent of its assets in cash and ended with 28 per cent in cash thanks to dividends and a couple of sales along the way.

The large cash position was included in an effort to curb the enthusiasm of stock pickers. It corresponds to a suggestion by Benjamin Graham, the father of value investing. In his book The Intelligent Investor, he recommended holding between 25 per cent and 75 per cent of a portfolio in stocks with the remainder in safer assets such as bonds.

In this case, the value portfolio maintained roughly 70 per cent in stocks and 30 per cent in cash, which put it on the aggressive end of the range.

The value portfolio required eight trades to set up and two stocks were sold over the years. Dell Inc. was subject to a successful takeover offer by its founder, which resulted in a quick 41-per-cent gain. Crimson Wine Group, a small Leucadia spin-off, was sold more recently.

Over all, trading was limited and no fund fees were incurred. As a result, the value portfolio was both low-cost and reasonably tax-efficient.

Looking at the individual results, I'm happy see that there wasn't a single loser in the bunch.

The best return was provided by the Bank of America, which jumped 241 per cent. The bank isn't as cheap as it once was, but it still represents a reasonable value. It trades near book value and at 15 times earnings.

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The second best gain was posted by Warren Buffett's Berkshire Hathaway Inc., which advanced 164 per cent. Berkshire Hathaway is now the sixth largest firm in the United States by market capitalization. Unfortunately, it's hard to grow such a huge firm at a rapid pace and Mr. Buffett's advanced age doesn't auger well. Investors should expect more muted returns from this one in the future.

Old Republic International Corp. came in third place with a 163-per-cent gain. The insurance company fell on hard times during the financial crisis, but it rebounded nicely. Income investors will appreciate its 3.9-per-cent dividend yield and habit of regularly growing its dividend.

Its stock trades at a reasonable 1.1 times book value and 12 times earnings. But I'm not convinced it'll fare as well over the next five years.

American International Group Inc. was at the centre of the 2008 financial meltdown, but it returned to health and generated a 124-per-cent gain. It trades at a modest 0.7 times book value and, despite poor results over the past 12 months, it still has room to grow.

General Motors Co. zoomed up 112 per cent despite running into a few potholes along the way. The stock pays a 3.9-per-cent dividend yield and trades at just six times earnings.

The numbers look good, but I admit to being somewhat leery of GM's long-term prospects at this point due to the development of self-driving cars, the cyclical nature of the business and intense competition.

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Fairfax Financial Holdings Ltd. managed a gain of 73 per cent. While an equity-hedging program weighed on its results, chief executive Prem Watsa has been growing the firm via acquisitions and interesting overseas ventures. With a little luck, it'll gear up over the next few years.

Leucadia National Corp. proved to be the biggest disappointment of the group with a gain of just 36 per cent. But it trades at 0.8 times book value and 14 times earnings. It might catch up to the others in the fullness of time.

I'd like to thank everyone who followed Strategy Lab. I hope that you picked up a few useful tips and profits along the way.

Kudos also go to the leaders of the other portfolios and to the kind people at The Globe and Mail for running the Lab over the years.

Video: Money Monitor: Is now a good time to invest in gold? (The Canadian Press)
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About the Author

Norman Rothery, Ph.D., CFA, is the founder of StingyInvestor.com and has been catering to value investors since 1995. He publishes the Rothery Report, a value stock newsletter. Norm obtained a Ph.D. in atomic physics from York University before following his passion for investing. More

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