Investing for the Long Run


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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 ( </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Withdrawals of contributions are tax-free anytime, profits can be withdrawn tax-free beginning at age 59 ½ 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 - </li></ul></ul></ul><ul><ul><ul><li>Blog - </li></ul></ul></ul><ul><ul><ul><li>Feel free to call or email anytime! </li></ul></ul></ul>