Gen-X Investors

Sunday May 25th 2000

GEN-XINVE$TOR$

A Proven Investment Philosophy

Principle 1: Invest Regularly, Regardless of the Market Outlook

Principle 2: Reinvest All Earnings

Principle 3: Invest in Growth Companies- earnings per share and sales are growing at a rate higher than that

of the economy as a whole

Principle 4: Diversify to Reduce Risk

Setting Investment Goals• Attain average growth in prices and dividend

income of 14.9% compounded annually – Double value of holdings every five years

• Realize a 4 to 6 percent yield over timeon investment from dividend income

• Plan to stay a member until retirement years– 15 year club in which each member pays in $20 per month should

reach a worth of $22,190 in five years

Growth

• Comes in a number of ways– Industry is new and has a new market to satisfy– New product, material, or service– Produced by vigorous, talented, driven

management

Portfolio

• Diversify to reduce risk – 8 to 12 stocks first year– Increase ownership of the best performers and substitute better

stocks for the poor performers– Concerned not in how many or how few stocks we own, but that

each meets our qualifications

• Range of Large, Medium, and Small companies– ¼ Large : growth potential of 5 to 7 percent– ¼ Small : growth potential of 12 percent– ½ Medium : growth potential of 7 to 12 percent

Key Factors in Investment Analysis

• No stock will be purchased without advance analysis

• Analyze every prospect for– Management Capability

• Single most influential element of growth– Reasonable current share price

• expected to rise as financial results improve in the future

Three Tests of Management

• Rate of growth• sales have increased at least at the expected rate for their size• Offer the promise of continuing advances

• Pre-tax profit margin• Deducting costs from sales and then dividing the result (profit

before taxes) by sales• Higher margin is preferable – careful if too high or low

• Earnings on stockholders’ equity• Net earnings divided by the sum of the value of preferred

stock, common stock, and retained earnings

Three Tests for Reasonableness of Share Price

• Earnings per share– Should grow on a per-share basis at approximately the

same rate as sales• Dividends

– Pays out no more than half of its earnings– Dividend yield of 4 to 6 percent on the price paid for

the stock usually can anticipate stock price appreciation• Price Range

– Review the lows and highs over the past few years

Two Methods of Stock Selection• Fundamental Procedure

– Study the company, its industry, and its market– What makes the company run and what its future will be– Looking for companies to grow and increase in value over a long

time period• Technical Procedure

– Focus on stock market and stock price– Expect to make more money from the price movement caused by

different stock market forces– Goal is usually to catch fairly quick price moves

* Individuals who followed short-term, technical techniques over a sixty-year test period had to be right 80% of the time to achieve the same results as the investor who bought good-quality growing companies, held them for long periods of time, and made few changes

Finding Companies to Study

• Business Publications– Wall Street Journal, Business Week, Fortune, Forbes, or NAIC’s

Better Investing – “Stock to Study”

• Local companies• Family, Friends, Business Acquaintances who work or are

familiar with other industries or markets• Internet• NAIC Low-Cost Investment Plan

NAIC Low-Cost Investment Plan

• Enables us to reinvest earnings and additional funds in additional partial shares of stock with little or no expense

• One-time $7.00 charge for each stock• Information on a Plan companies is readily

available for your investment analysis• As a Plan participant, we will be following

NAIC’s proven philosophy• Contact NAIC for more information

Annual Reports

• Public relations document also including full financial disclosures

• President’s “Message to Stockholders”• Financial statements

– Balance Sheet– Income Statement– Statement of Cash Flows

• Narrative sections focusing on different product lines, research activities, foreign operations

• Independent auditing firm’s certification

Annual Reports - The Balance Sheet

• Depicts a company’s solvency or financial position at a specific date

• See handout for example

Balance Sheet Terminology

• See Chapter 3 of the NAIC Official Guide –”Starting and Running a Profitable Investment Club”

Analyzing the Balance Sheet


Annual Reports – The Income Statement

• Also called a profit and loss statement• Reports income, costs, expenses, and profits

(or losses) over a period, usually one year• See handout for example

Income Sheet Terminology


Analyzing the Income Statement


Tools for Smart Investing

• Stock Check List• Stock Selection Guide and Report (SSG)• Stock Comparison Guide (SCG)• Portfolio Management Guide• Portfolio Evaluation Review Technique (PERT)

Gen-X Investors

Business

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