Using the Value Stock Buy List Program Productively - CEFs (Closed End Funds) - Part 1

If you didn't have questions, the "Selection Universe" itself, and the refined and filtered "Value Stock Watchlist" would be just another stock picking gadget, easy to slip into like a well worn pair of loafers. This is not your ordinary list of hyped up "story" stocks. It is the result of applying a time tested set of selection rules, concepts, and experiences, to a pre-selected group of securities that are of a known level of quality i. e., Investment Grade only. Here's a fairly comprehensive Question and Answer [more accurately, a Question & Discussion] list that should help you to use the Value Stock Buy List Program productively. Remember, the program is designed to follow the investment process defined and explained in "The Brainwashing of the American Investor". The more times you read it, the better your performance will be. Steve Selengut has been kind enough to answer some questions about his methodology. Here are my questions (and some that he has fielded directly). with his responses. (If you have additional questions, please send them to: brainwashed@optonline.net.)

CEFs (Closed End Funds):

Why can't the Value Stock Buy List Program be used with respect to CEFs?

• The stock selection strategy of the "Brainwashing" book tracks individual, Investment Grade, Common Stocks. Although CEF common shares represent individual Investment Companies, the investment purpose is significantly different. The CEF shares are being purchased because they represent the experience of a diversified portfolio of Fixed Income or Equity Securities.
• Yes, you should still look to sell them and move on to another if the 10% gain objective is reached, but there is no need to look for a 20% decline in price for a purchase decision. With a fixed income fund, focus on the yield, avoiding those that are unusually high or low, and diversify with a maximum of 10% to 15% if possible.
• Yes, I do use Equity CEFs, and not just in very small managed portfolios, where they are the primary security. When the "Buy List" shrinks to 10 or fewer issues, you can "steal" some Capital Gains dividends while continuing to participate in a broad rally with one or two of the best CEFs. With an Equity Fund, diversify with a maximum of 15% to 20% in portfolios under six figures, and normally above that level.
• I absolutely never touch an Index CEF.
• For a more complete discussion, and links to other websites (click here).

What do you use to rate the quality of CEF's?

• Actually, I don't use a rating guide at all. Remember that these are portfolios of securities of a (presumably) less risky nature so an absolute rating of quality might be a little hard to believe in. I look at the range of price movement over a minimum of three to five years to assess risk based on the current price, and try to avoid buying at extremely high historical levels.
• The next issue is reasonableness of the yield vs. the amount of leverage used. Avoid excessively high or low leverage in the same way that you avoid excessively high or low yields.
• The relationship to NAV is certainly important to consider, but don't let it become the primary issue.
• The S & P Stock Guide is "still the one". Most of the information you need is provided, toward the back of the book.
• A significant issue, and this is something you need to develop, is confidence and experience with these securities both generally and specifically. It takes time and patience.
• Remember, the ability to trade is a secondary benefit of fixed income CEFs.