Investing for the Long Run Chad Brand Founder/President Peridot Capital Management LLC July 7, 2005
Today’s Agenda <ul><li>Background on Peridot Capital </li></ul><ul><li>Getting Started Early </li></ul><ul><li>Investment ...
An Overview of Peridot <ul><ul><li>Some people want to invest but don’t have the time, inclination, or both, to get too in...
The Earlier You Start, The Better Start at age 25 Start at age 35 Start at age 45 Someone invests $3,000 annually and earn...
How To Get Started <ul><li>Open an account with an online brokerage firm </li></ul><ul><ul><li>E*Trade Financial (www.etra...
Tax Savings with Traditional and Roth IRAs Example : *Invest $3,000 per year for 40 years beginning at age 25, retire at a...
Five Investment Choices <ul><li>Brokers   (Morgan Stanley, Merrill Lynch, Edward Jones, etc) </li></ul><ul><li>*Brokers ac...
The Arguments for Each <ul><li>Brokers </li></ul><ul><li>*The broker can work with you personally, unlike mutual funds </l...
The Pitfalls of Each <ul><li>Brokers   </li></ul><ul><li>*Conflicts of interest due to investment bank/mutual fund company...
Why Not Just Buy An Index Fund? <ul><li>Most stock brokers and mutual funds lag the overall market’s performance and few i...
Why Not Just Buy An Index Fund?
Building a Portfolio <ul><li>Choose an asset allocation of stocks, bonds, and cash </li></ul><ul><ul><li>Historical averag...
Diversify Your Portfolio <ul><li>Diversification is crucial to minimize volatility and avoid heavy losses </li></ul><ul><l...
Not All Stocks Are Created Equal <ul><li>The past is the best predictor of future stock market fluctuations </li></ul><ul>...
Be a Good Shopper for Investments <ul><li>Value Investing – Contrarian Style </li></ul><ul><ul><li>Remember the goal is to...
Careful Stock Selection <ul><li>Index funds are down over the last 5 years (S&P 500 down about 20%), but good companies in...
Careful Stock Selection <ul><ul><li>Determine an area of the economy that stands to do well </li></ul></ul><ul><ul><li>Stu...
Track Insider Transactions <ul><li>Track “legal” insider trading </li></ul><ul><li>Unlike Martha Stewart, most company ins...
In Closing… <ul><ul><li>About 85% of mutual funds and most brokers fail to beat the market </li></ul></ul><ul><ul><li>Cont...
Questions? <ul><ul><li>My Contact Info </li></ul></ul><ul><ul><ul><li>Email -  [email_address] </li></ul></ul></ul><ul><ul...
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Investing for the Long Run

  1. 1. Investing for the Long Run Chad Brand Founder/President Peridot Capital Management LLC July 7, 2005
  2. 2. Today’s Agenda <ul><li>Background on Peridot Capital </li></ul><ul><li>Getting Started Early </li></ul><ul><li>Investment Choices </li></ul><ul><li>Investment Strategies </li></ul><ul><li>Questions & Answers </li></ul>
  3. 3. An Overview of Peridot <ul><ul><li>Some people want to invest but don’t have the time, inclination, or both, to get too involved themselves </li></ul></ul><ul><ul><li>Investors who know what types of financial goals they have, but are unsure how best to reach them, can turn to Peridot for help </li></ul></ul><ul><ul><li>Customized Investment Portfolios: </li></ul></ul><ul><ul><ul><li>Based on client’s goals, time horizon, and risk tolerance </li></ul></ul></ul><ul><ul><li>Fee Structure: </li></ul></ul><ul><ul><ul><li>Not commission-based, so trades are placed only if there is a need </li></ul></ul></ul><ul><ul><ul><li>Clients pay a percentage of assets, between 1% and 2% per year </li></ul></ul></ul><ul><ul><ul><li>This successfully aligns the interests of both manager and client </li></ul></ul></ul>
  4. 4. The Earlier You Start, The Better Start at age 25 Start at age 35 Start at age 45 Someone invests $3,000 annually and earns an average return of 10% per year
  5. 5. How To Get Started <ul><li>Open an account with an online brokerage firm </li></ul><ul><ul><li>E*Trade Financial (www.etrade.com) </li></ul></ul><ul><li>Types of investment accounts: </li></ul><ul><ul><li>Roth IRA </li></ul></ul><ul><ul><ul><li>After-tax money is used to fund the account (no tax deduction for contributing) </li></ul></ul></ul><ul><ul><ul><li>Withdrawals of contributions are tax-free anytime, profits can be withdrawn tax-free beginning at age 59 ½ </li></ul></ul></ul><ul><ul><li>Traditional IRA </li></ul></ul><ul><ul><ul><li>Pre-tax money is used to fund the account (contributions are tax deductible) </li></ul></ul></ul><ul><ul><ul><li>Income taxes are owed on all withdrawals beginning at age 59 1/2 </li></ul></ul></ul><ul><ul><li>Individual Taxable Account </li></ul></ul><ul><ul><ul><li>Any investment income is taxed at rates between 15% and 35% </li></ul></ul></ul><ul><ul><ul><li>Dividends and profit on stocks held for more than 1 year (15%) </li></ul></ul></ul><ul><ul><ul><li>Profit on stocks held for less than 1 year (taxed as ordinary income) </li></ul></ul></ul>
  6. 6. Tax Savings with Traditional and Roth IRAs Example : *Invest $3,000 per year for 40 years beginning at age 25, retire at age 65 *Assume a 33% income tax rate and a 10% annual investment return Trad IRA: $1,107,000 Roth IRA: $1,600,000 Taxable: $1,067,000 Trad IRA: $533,000 Roth IRA: $0 Taxable: $533,000 Trad IRA: $40,000 Roth IRA: $0 Taxable: $0 $1,600,000 $120,000 After-Tax Value at Age 65 Income Taxes Paid Tax Deductions Earned Pre-Tax Value at Age 65 Total Dollars Invested
  7. 7. Five Investment Choices <ul><li>Brokers (Morgan Stanley, Merrill Lynch, Edward Jones, etc) </li></ul><ul><li>*Brokers act as salespeople for certain investment options </li></ul><ul><li>*Compensation is mostly commission-based </li></ul><ul><li>Mutual Funds (Fidelity, T. Rowe Price, Putnam, etc) </li></ul><ul><li>*Thousands of investors’ money are pooled together </li></ul><ul><li>*A portfolio manager manages the portfolio and all investors earn the same return </li></ul><ul><li>Index Funds (S&P 500 Index, etc) </li></ul><ul><li>*Computer automated portfolio management owns hundreds of different stocks </li></ul><ul><li>*Meant to simulate the performance of the entire market as a whole </li></ul><ul><li>Investment Advisor (Peridot Capital Management) </li></ul><ul><li>*Portfolio manager creates individualized portfolios for each client </li></ul><ul><li>*Compensated with a “percentage of assets” fee </li></ul><ul><li>Do-It-Yourself </li></ul><ul><li>*Individuals open their own brokerage accounts and choose investments themselves </li></ul>
  8. 8. The Arguments for Each <ul><li>Brokers </li></ul><ul><li>*The broker can work with you personally, unlike mutual funds </li></ul><ul><li>*They have an entire research department at their disposal </li></ul><ul><li>Mutual Funds </li></ul><ul><li>*A professional portfolio manager (not a saleman) manages a single portfolio in order to maximize profit </li></ul><ul><li>Index Funds </li></ul><ul><li>*Extreme diversification, hundreds of stocks owned </li></ul><ul><li>*Lack of active management keeps fees down </li></ul><ul><li>Investment Advisors </li></ul><ul><li>*Same service as brokers but they have investment backgrounds </li></ul><ul><li>*Are incentivized to make you money, not solely to generate commissions </li></ul><ul><li>Do-It-Yourself </li></ul><ul><li>*Why pay someone to do a job you can do yourself? </li></ul>
  9. 9. The Pitfalls of Each <ul><li>Brokers </li></ul><ul><li>*Conflicts of interest due to investment bank/mutual fund company relationships </li></ul><ul><li>*High commissions to brokers promotes trading, not profit </li></ul><ul><li>*Studies have shown little or no value in their investment recommendations </li></ul><ul><li>Mutual Funds </li></ul><ul><li>*No investor personalization </li></ul><ul><li>*84% of fund managers can’t match the market’s return (high fees/over-diversification) </li></ul><ul><li>Index Funds </li></ul><ul><li>*No chance of making more, or losing less, than the market’s return </li></ul><ul><li>Investment Advisor </li></ul><ul><li>* ??? </li></ul><ul><li>Do-It-Yourself </li></ul><ul><li>* Might not have the time, knowledge, or inclination to do the job </li></ul>
  10. 10. Why Not Just Buy An Index Fund? <ul><li>Most stock brokers and mutual funds lag the overall market’s performance and few individuals have the time and/or knowledge to beat the market </li></ul><ul><ul><li>Long-term stock market returns can be cyclical </li></ul></ul><ul><ul><ul><li>Average returns of 10% are based on mean returns of the entire market since the 1800’s, assuming you bought on day one and held your stocks up until the current time </li></ul></ul></ul><ul><ul><li>The picture can change dramatically based on the time period </li></ul></ul><ul><ul><ul><li>The market peaked in 1929 and did not reach that level again for 25 years in 1954 </li></ul></ul></ul><ul><ul><ul><li>In 1976, stocks had averaged a return of only 3.5% per year for the prior 50 years </li></ul></ul></ul><ul><ul><li>Buying an index fund leaves you with very little control </li></ul></ul><ul><ul><ul><li>You are at the mercy of the market, which might be very problematic if your timing is poor, such as was the case in the previous examples </li></ul></ul></ul>
  11. 11. Why Not Just Buy An Index Fund?
  12. 12. Building a Portfolio <ul><li>Choose an asset allocation of stocks, bonds, and cash </li></ul><ul><ul><li>Historical averages for the 75-year period between 1925 and 2000: </li></ul></ul><ul><ul><ul><li>Stocks 11.0% </li></ul></ul></ul><ul><ul><ul><li>Bonds 5.3% </li></ul></ul></ul><ul><ul><ul><li>Cash 3.8% </li></ul></ul></ul><ul><ul><ul><li>Inflation 3.1% </li></ul></ul></ul><ul><ul><li>There has never been a 20-year period where stocks have not been the best-performing asset </li></ul></ul><ul><ul><li>So, if you have a long-term time horizon, you should focus on stocks rather than assets like bonds, money market accounts, or bank CDs </li></ul></ul>
  13. 13. Diversify Your Portfolio <ul><li>Diversification is crucial to minimize volatility and avoid heavy losses </li></ul><ul><li>All sectors should be represented in any portfolio, avoid putting all your eggs in one basket </li></ul><ul><li>Companies in similar businesses track each other even if they aren’t direct competitors </li></ul>
  14. 14. Not All Stocks Are Created Equal <ul><li>The past is the best predictor of future stock market fluctuations </li></ul><ul><li>Smaller, cheaper stocks have outperformed larger, more expensive stocks </li></ul><ul><li>Between 1954-1994, small companies returned 11.6% per year versus just 9.9% per year for large companies </li></ul>
  15. 15. Be a Good Shopper for Investments <ul><li>Value Investing – Contrarian Style </li></ul><ul><ul><li>Remember the goal is to buy low and sell high </li></ul></ul><ul><ul><li>Must be contrarian to get the best price </li></ul></ul><ul><ul><li>Think of smart shopping habits </li></ul></ul><ul><ul><li>Sports Illustrated Covers </li></ul></ul>
  16. 16. Careful Stock Selection <ul><li>Index funds are down over the last 5 years (S&P 500 down about 20%), but good companies in growing industries have made a lot of money during that time </li></ul>
  17. 17. Careful Stock Selection <ul><ul><li>Determine an area of the economy that stands to do well </li></ul></ul><ul><ul><li>Student Loan Corp (STU) is one of the nation’s largest education lenders </li></ul></ul><ul><ul><li>The stock is up more than 400% over the last 5 years </li></ul></ul>
  18. 18. Track Insider Transactions <ul><li>Track “legal” insider trading </li></ul><ul><li>Unlike Martha Stewart, most company insiders do follow the rules </li></ul><ul><ul><li>Company executives are required to disclose when they buy or sell company stock </li></ul></ul><ul><ul><li>The SEC collects this information and makes it public for investors </li></ul></ul><ul><li>Insider Selling </li></ul><ul><ul><li>Investors should gleam very little from these transactions </li></ul></ul><ul><ul><li>Insiders can have many possible undisclosed reasons for selling stock </li></ul></ul><ul><li>Insider Buying </li></ul><ul><ul><li>Unlike selling, there are very few reasons already rich insiders would buy more stock </li></ul></ul><ul><ul><li>Investors should always take note of these less common transactions </li></ul></ul>
  19. 19. In Closing… <ul><ul><li>About 85% of mutual funds and most brokers fail to beat the market </li></ul></ul><ul><ul><li>Contrary to many opinions, index funds are NOT investors’ best option </li></ul></ul><ul><ul><li>Successful strategies can beat the market consistently over time </li></ul></ul><ul><ul><li>Peridot’s average annual returns versus the S&P 500: </li></ul></ul>
  20. 20. Questions? <ul><ul><li>My Contact Info </li></ul></ul><ul><ul><ul><li>Email - [email_address] </li></ul></ul></ul><ul><ul><ul><li>Phone - 314.922.7782 </li></ul></ul></ul><ul><ul><ul><li>Web - www.peridotcapital.com </li></ul></ul></ul><ul><ul><ul><li>Blog - www.peridotcapital.blogspot.com </li></ul></ul></ul><ul><ul><ul><li>Feel free to call or email anytime! </li></ul></ul></ul>
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