Investment Education for Individuals and Clubs Since 1951 Investment Education for Individuals and Clubs Since 1951 Fundamental Analysis the BetterInvesting Way October 6, 2007 Presenter: Brian Goodhart DC Regional Chapter - BetterInvesting The D.C. Regional Chapter of the BetterInvesting is a voluntary education and information-based organization that does not The D.C. Regional Chapter of the BetterInvesting is a voluntary education and information-based organization that does not make recommendations on specific securities. make recommendations on specific securities.
Course Outline ● Introduction to BetterInvesting ● BetterInvesting’s Investing Philosophy and Strategy ● BetterInvesting’s Method ● Tools Page 2 D.C. Regional Chapter - BetterInvesting
Introduction to BetterInvesting Page D.C. Regional Chapter - BetterInvesting 3
What Is BetterInvesting? ● National Association of Investors Corporation ● Founded in 1951 ● Non-Profit ● Volunteer Organization ● Investment Education and Information ● 11,600 Investment Clubs ● 119,000 Individual Members ● 92,000 of these members belong to clubs Source: BetterInvesting web site – http://www.betterinvesting.org/Public/Our+Members/Member+Profile+Data.htm Page 4 D.C. Regional Chapter - BetterInvesting
The Typical BetterInvesting Investor ● Follows a long-term buy-and-hold strategy – Not “buy and forget” ● Average holding period is greater than four years ● No technical analysis, no options, no shorting, no “trading” ● Combined portfolio value of BetterInvesting members is $70 billion ● Cumulatively, BetterInvesting members invest approximately $75 million of new capital per month Page 5 D.C. Regional Chapter - BetterInvesting
BetterInvesting is Volunteers BetterInvesting is a non-profit education organization 501c (3). BetterInvesting neither recommends nor endorses specific securities. All instructors and assistants are volunteers. “When one teaches, two learn” Page 6 D.C. Regional Chapter - BetterInvesting
Regional Chapters ● Over 110 Regional Chapters ● Over 1,500 volunteer members ● Classes ● Investors’ Fairs Page 7 D.C. Regional Chapter - BetterInvesting
Web Site: http://www.better-investing.org Page 8 D.C. Regional Chapter - BetterInvesting
Individual Membership Page 9 D.C. Regional Chapter - BetterInvesting
Annual Convention Page 10 D.C. Regional Chapter - BetterInvesting
Regional Conferences and Compufest • Your registration fee includes: • Two days of sponsor presentations, classes, computer lab and more! • Investors Fair book with screen shots and other information from every class offered, as well as information from each of the sponsors. • Computer lab - come with your software questions and problems, test drive BetterInvesting software • Classes - a link to the complete list of classes will be available here closer to the event • The opportunity to meet and speak with representatives from this year's sponsors both days as well as other companies in Friday evening's Investor Showcase. Page 11 D.C. Regional Chapter - BetterInvesting
Better Investing Magazine Page 12 D.C. Regional Chapter - BetterInvesting
Publications Page 13 D.C. Regional Chapter - BetterInvesting
BetterInvesting’s Investing Philosophy and Strategy Page 14 D.C. Regional Chapter - BetterInvesting
Four Principles ● Invest regularly for the long term (5+ years) ● Reinvest all income (interest and dividends) ● Invest in leadership growth companies » Companies whose records suggest they are growing faster than the general economy, and will be worth substantially more in the future ● Diversify your portfolio by company size and industry Page 15 D.C. Regional Chapter - BetterInvesting
Company Size Small : Under $500 Million in sales Medium : $500 Million to $5 Billion in sales Large : Over $5 Billion in sales Size is a factor in a company’s ability to grow Page 16 D.C. Regional Chapter - BetterInvesting
Stocks, Bonds, Cash, and Inflation 1925 - 1997 Ending Average Wealth Return $10,000 Small Company Stocks $5,520 12.7% Large Company Stocks Government Bonds $1,828 11.0% $1,000 Cash Inflation $100 $39 5.2% $14 3.8% $10 $9 3.1% $1 $.10 1925 1935 1945 1955 1965 1975 1985 1997 Hypothetical value of $1 invested at year-end 1925. Assumes reinvestment of income and no transaction costs or taxes.
Long-Range History of Stock Prices 12,000 11,000 10,000 9,000 8,000 Dow Jones 7,000 Industrial 6,000 Average 5,000 (DJIA) 4,000 3,000 2,000 1,000 2000 1990 1980 1950 1970 1900 1940 1960 1920 1930 Year Page 18 D.C. Regional Chapter - BetterInvesting
Axioms Underlying the BetterInvesting Approach ● In the long run, growth in Sales will drive growth in Earnings per Share which will drive growth in stock price. ● Past performance is our best indicator of future performance (assuming management doesn’t change). Page 19 D.C. Regional Chapter - BetterInvesting
BetterInvesting’s Method Page 20 D.C. Regional Chapter - BetterInvesting
Two Sets of Tasks ● Evaluation and Acquisition ● Portfolio Management Page 21 D.C. Regional Chapter - BetterInvesting
Evaluation and Acquisition
Two Questions ● Is this a good company? – Degree and consistency of growth in sales – Degree and consistency of growth in Earnings per Share – Profitability: trend and position versus competitors – Return on Equity: trend and position versus competitors ● If it is a good company, can I currently buy its stock at a good price? – Current price in relation to earnings – Current price/earnings relationship compared to historical performance Page 23 D.C. Regional Chapter - BetterInvesting
BetterInvesting Tools for Evaluation/Acquisition ● Is this a good company? Stock Check » Degree and consistency of growth in sales » Degree and consistency of growth in Earnings Stock List per Share Selection (SCL) » Profitability: trend and position versus Guide competitors (SSG) » Return on Equity: trend and position versus competitors ● Is its stock selling at a reasonable price? SCL and SSG » Current price in relation to earnings » Current price/earnings relationship compared to historical performance Also: the Stock Comparison Guide (SCG) Page 24 D.C. Regional Chapter - BetterInvesting
Strategy: Fundamental Analysis ● Four Categories of Judgment – Make History Relevant – Estimate Future Company Performance – Estimate Future Price Performance – Accept or Reject Page 25 D.C. Regional Chapter - BetterInvesting
Make History Relevant ● Eliminate non-recurring events ● Discount early rapid growth ● Eliminate inflated Price/Earnings Ratios Page 26 D.C. Regional Chapter - BetterInvesting
Estimate Future Company Performance ● Estimate Future Revenue and Earnings Growth ● Estimate Future Profit Margins, Taxes, etc. (for method of estimating future EPS growth based on future sales growth known as the “Preferred Procedure”) Page 27 D.C. Regional Chapter - BetterInvesting
Estimate Future Price Performance ● Estimate Future Price/Earnings Ratios ● Estimate Future High and Low Prices Page 28 D.C. Regional Chapter - BetterInvesting
Accept or Reject ● Accept Results and Continue ● Reject the Stock ● Iterate: Place “Interesting” Companies on a Watch List Page 29 D.C. Regional Chapter - BetterInvesting
SSG Front Page: Visual Analysis • Evaluate This funny-looking graph paper means two things: historical • The straighter the line, the more consistent the growth • The steeper the line, the higher the historical growth growth rates of Sales, Pre-Tax Profit, and Earnings • Estimate future growth rates of The first two “good company” questions: Sales and • Degree and consistency of growth in sales Earnings • Degree and consistency of growth in Earnings per Share Page 30 D.C. Regional Chapter - BetterInvesting
Estimate Sales & Earnings • Evaluate historical growth rates of Sales and Earnings • Estimate future growth rates of Sales and Earnings Page 31 D.C. Regional Chapter - BetterInvesting
Evaluate Historical Growth ● Look at Recent Growth First ● Look at Quality of Growth: – How Strong is the Growth (slope of line)? – How Consistent is the Growth (“straightness” of line)? ● Eliminate Irrelevant Data – One or two blips earlier in company’s history – Rule of Thumb: Never eliminate an outlier if doing so increases the historical growth rate – Discount Early Rapid Growth (possible rule of thumb: eliminate early years of explosive growth until historical growth rate stops declining) Page 32 D.C. Regional Chapter - BetterInvesting
Quality of Growth “The first key to successful investing is to recognize predictable growth. The only skill you require is being able to tell a straight line from a crooked one.” - Ellis Traub Page 33 D.C. Regional Chapter - BetterInvesting
Quality of Growth Page 34 D.C. Regional Chapter - BetterInvesting
Eliminate Irrelevant Data – Early Blips Page 35 D.C. Regional Chapter - BetterInvesting
Eliminate Irrelevant Data – Early Blips Page 36 D.C. Regional Chapter - BetterInvesting
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