Financial investment work map
Statistics and outlines
interest profile check list
For building the capacity to handle one's investing
Start here
Foundational information
The kind of investment approach to pursue Defensive vs. Enterprising see page xiii - page 15 of “The Intelligent Investor”
Defensive (conservative)
Do I have enough money available for investment to justify the time and effort to practice selfmanagement?
Yes
Self-managed
Basic investment information
Enterprising
The basic problem of bondstock allocation (page 41 of “The Intelligent Investor”)
Other preparation See “A gift from the gurus” June 3, 1985 Forbes page 251
Page 1
prepared by Bob Embry (google: bobembry "contact info")
2/18/05 11:43 AM
Mutual funds
No
Peter Lynch’s “Beating the Street” and others
The decision of which ones to purchase
Decision of what to do with them once you own them
What type of stocks are in their portfolio?
Chapter 14 Stock Selection for the Defensive Investor General Portfolio Policy: the Defensive Investor
Defensive Investor and common stocks
Chapter 12 Security Analysis Things to for the Lay Consider about Investor: General Per-Share Approach Earnings
Other topics in the Intelligent Investor
Think through sell decision strategy
Portfolio Policy for the Enterprising Investor: Negative approach
Organize the tools & resources needed to run portfolio Portfolio Policy for the Enterprising Investor: The Positive Side Chapeter 15 Stock selection for the Enterprising Investor
Page 2
prepared by Bob Embry (google: bobembry "contact info")
2/18/05 11:43 AM
Some basic investment information
Some basic investment information
q Basic strategic map s Population and economic growth are reflected in the stock market. Productivity and innovation (that has a substantial impact on the social environment) are the real sources of wealth
7/26/03 2:15 PM
Basic investment info.isf
Page 1
Some basic investment information
s Prices of individual securities between any two dates form a curve. The market averages (DJI & S&P) tend to fall below the median individual stock price
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Page 2
Some basic investment information
s Individual corporate and industry profits are constantly shifting position
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Page 3
Some basic investment information
s Prices that stock buyers pay for a given level of profitabilty vary considerably
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Page 4
Some basic investment information
q The Investor and His Advisors
Chapter 10 of "The Intelligent Investor" by Benjamin Graham
s Be careful … m Dishonest people m Misinformed people m Uniformed people s If anybody actually believed they knew what they were doing they would: m Not bother advising other people m Borrow money at low rates (3-5%) and invest at high rates (above 15%) and their names could be found on the Forbes wealthiest list. m Have small portfolios consisting of only those stocks at the top whose rates of return are well above 40%
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Page 5
Some basic investment information
q The New Speculation in Common Stocks
Page 292 of "The Intelligent Investor" by Benjamin Graham
s The uncertain validity of past phenomena as a guide to the present and future s The paradoxes and pitfalls of primary emphasis upon future expectations s The margin of safety and the middle course s and more … Click link to go to s See what am I going to do about high P/E ratios? q Technological Companies as Investments
document
Page 305 of "The Intelligent Investor" by Benjamin Graham
s Very risky, low expected return, often a sucker's game q The Investor and Market Fluctuations
Chapter 8 of "The Intelligent Investor" by Benjamin Graham
s Buy low (when other people have given up hope) s Sell high (when other people think that prices will go up, up, up!) s Acquiring and holding suitable securities and suitable prices s “If it is virtually impossible to make worthwhile predictions about the price movement of stocks, it is completely impossible to do so for bonds”
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Page 6
Some basic investment information
q The decision on whether to be a speculator or an investor
Chapter 1 of "The Intelligent Investor" by Benjamin Graham
q The decision on whether to be a “defensive” or an “enterprising” investor
Chapter 1 of "The Intelligent Investor" by Benjamin Graham
q Mutual fund decision s Chapter 9 of "The Intelligent Investor” s See Peter Lynch’s “Beating the Street” (also available on tape) s Warren Buffett web site info s Decisions m Which type to buy m Which specific ones to buy m Whether to jump from one fund to another chasing performance m See the Investor and Market Fluctuations s What type of stocks are in their portfolio?
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Page 7
Some basic investment information
q Summary of investment principles
Page 286 of "The Intelligent Investor" by Benjamin Graham
s Know what you’re doing m or stick to normal interest & dividend income s Keep other people’s hands off your money s Do your arithmetic
Click link to go to document
A fair chance to yield a reasonable profit
m See Stock Return Calculator s “To achieve satisfactory investment results is easier than most people realize. To achieve superior results is harder than it looks” m Have the courage of your knowledge and experience j Or … t Limit ambition to capacity t And confine activities within safe and narrow path of standard, defensive investment q Organization Evolution
Page 288 of "The Intelligent Investor" by Benjamin Graham
7/26/03 2:15 PM
Basic investment info.isf
Page 8
What am I going to do about high P/E ratios?
Sell high P/E (nonhigh growth and non-leaders)
Buy best values
if best values are not available
Buy mid-term fixed income?
Begin
Do a "breakeven calculation" on others
Only a thinking model–used to illustrate a concept
Keep good values
Stock Return Calculator Rate of return
Facts & assumptions: $2.15 Current earnings (EPS) 10.00 % EPS growth rate 1 5 yrs EPS growth period 1 5.00 % EPS growth rate 2 0.25 Current dividends 5.00 % Dividend growth rate 1 5 yrs Dividend growth period 1 3.00 % Dividend growth rate 2 $45.00 $0.25 1.00 % 15 yrs 13.0 x 5.00 % 35.00 % Calculations: $45.70 20.9 x 4.5 x 3.25 % $5.64 0.6 x $72.34 $6.46 $9.32 $69.48 2.83% Year Current price Spread Commission rate Length of time stock is to be held (25 years is the maximum) Future P/E ratio Before tax rate of return on dividends re-invested elsewhere Marginal income tax rate (now and in the future) Current net price (spread & commission) Current P/E ratio Current Price/Book Value After-tax rate of return on dividend re-investment EPS when sold Ratio of future P/E to current P/E Net price when sold (spread & commission) Future value of dividends (after tax) Taxes on capital gain Total proceeds after taxes Rate of return (after tax) EPS Dividend growth growth rate rate 10.0 % 5.0 % 10.0 % 5.0 % 10.0 % 5.0 % 10.0 % 5.0 % 10.0 % 5.0 % 5.0 % 3.0 % 5.0 % 3.0 % 5.0 % 3.0 % 5.0 % 3.0 % 5.0 % 3.0 % 5.0 % 3.0 % 5.0 % 3.0 % EPS Dividends Dividend payout 11.1 10.6 10.1 9.7 9.2 9.0 8.9 8.7 8.5 8.4 8.2 8.1 % % % % % % % % % % % %
Growth check
$10.00 Book value per share (BVPS) Growth check calculations 21.50 % Return on equity (ROE=EPS÷BVPS) 11.63 % Dividend payout (DPO=DPS÷EPS) 19.00 % Sustainable growth
Compare to EPS growth rate
Add some comparison data. What are the probability distributions for growth rates, future P/E ratios, interest rates and tax rate assumptions?
This is the “answer” to use in the comparison of investment alternatives
BVPS
ROE
1 2 3 4 5 6 7 8 9 10 11 12
2.37 2.60 2.86 3.15 3.46 3.64 3.82 4.01 4.21 4.42 4.64 4.87
0.26 0.28 0.29 0.30 0.32 0.33 0.34 0.35 0.36 0.37 0.38 0.39 Page 1
$12.10 $14.43 $17.00 $19.84 $22.99 $26.30 $29.77 $33.43 $37.28 $41.33 $45.59 $50.07
21.4 19.6 18.2 17.1 16.2 14.8 13.6 12.7 11.9 11.2 10.7 10.2
% % % % % % % % % % % %