Better investing for newbies

BetterInvesting & I
Investing basis for the newbies
(c) BetterInvesting.org

Who is BetterInvesting?
• Founded in 1951
• Is a non-profit with the goal of educating individuals on becoming
successful lifetime active (vs. passive) investors
• Has 60+ chapters nationwide
• In CA, there are 5 chapters: S.F, Silicon Valley, Sacramento, San Diego,
Channel Island & Alhambra.
• Chapters are run by volunteers. 700+ volunteers nationwide.
• 4500+ investment clubs, with 100,000+ active investors

One of the Investment Clubs: Lakeside Investors

Will you take :
• a) $1 million today?
or
• b) 1c on day 1, double every day for the next 30 days?

1c on day 1, double every day for 30 days,
will turn into $5,368,709

“Compound interest is the eighth wonder of
the world. He who understands it, earns it ... he who
doesn't ... pays it.” -- Albert Einstein
The wonder of Compound Interest:

Indices and gains over recent decades:

Why active investing? 5 year comparisons:
Amazon (AMZN) vs. Vanguard Total Market Index (VTSMX)
Can you see which is which?

5 year comparison:
Facebook (FB) vs. Vanguard Total Market Index (VTSMX)

5 year comparison:
Square (SQ) vs. Vanguard Total Market Index (VTSMX)

5 year comparison:
Cognizant (CTSH) vs. Vanguard Total Market Index (VTSMX)

2 Schools of thought:
• Technical (Momentum): people’s perception / emotion is REAL. Go
with the herd so that you don’t get picked out by the predators.
• Fundamental: buy quality companies (good sales growth, earning
growth, good P/E (price-earning) ratios, and strong balance sheet) at
a fair price, and hold long-term.
• 3rd school: Do both! Swim with both arms. (1) Buy only if it is a
Quality company, (2) buy when the price is going up, with the hope
that it will goes up faster.

2 different investment objectives:
• Growth -- i.e. Price Appreciation
• Income -- i.e. Dividends (coupled with price appreciation)

What drives Stock Price?
• The magic word is – GROWTH!!!
• We are looking for high growth in sales, which drive earnings, which
drives EPS (earning per share), which drives stock price.

Corporate Life Cycle
Small-Cap is considered
Speculative. Its stock price is
highly volatile.
Mid-Cap is where you can find
explosive Growth minus the
volatility.
Large-Cap is matured and
tends to pay dividends. The
growth tends to be slow.

SSG (Stock Selection Guide) Demo:

Cheat sheet: our Expectation for small, mid,
large-cap stocks:

Value vs. Growth Stocks
• Value stocks are cheap. They are sold below what they are worth
due to negative circumstances.
• Growth stocks are pricey. They are expected to achieve high
growth, hence investors are willing to pay high price for.

Case Study: Value Stock - Gilead
Enter Ticker (or
company name)
here. Click Go.

SSG Front-end: (Quick) Visual (should take only 10 min)
Legend shows
which line is
sales, Pre-tax
profit, EPS, and
Shares
outstanding.
These 3 lines
should be Up,
Straight and
Parallel (for
sales drives
profit. Profit
drives EPS.)
Pay attention to
changes and
Analysts
Consensus
Estimates.
Compare peers

Compare Peers: we search for the best
Click to select a
peer.
The numbers
are stated here.
Click thru the tabs here to view
comparisons.

Read the
figures / trend
here.
Click inside this
Historical EPS
box to see
historical data
for sales, EPS,
Pre-Tax Profit.

Selecting any of
these item here
will display 10
year history as
shown above
for Sales.
For 5 year EPS
Growth Rate,
with Preferred
Procedure, you
can enter your
numbers here to
fine tune the
calculation.

SSG Back-end: (your) Judgement on Growth (future
performance) that determine future Stock Price
(plan to spend at least 1 hour to study research materials)
Note all the circled areas,
especially average High P/E,
Low P/E and current P/E.

To determine HIGH Price:
High Price = High P/E x High E.P.S
-Click at the box
will open this input
box.
-Enter your
forecasted high P/E
and High EPS. Click
“update” to
compute HIGH
price 5 year into
the future.

To determine LOW Price:
Low Price = Low P/E x Low E.P.S
-Select a method
to determine low
price.
-or enter your
forecasted LOW
P/E and LOW EPS.
Since we’ve determined
this is a growth
company, we usually use
the most recent 12
months’ EPS as the low
point for earnings.
-check that this
figure is 20%
below CURRENT
price.

3 Zones: Buy, Sell or Hold
-With High and
Low prices ready,
SSG will
automatically
divide the price
spread into 4
zones. The lowest
25% is BUY, middle
50% is HOLD, and
the top 25% is SELL
zone.
-click on
“show/hide chart”
to get a visual of
the zones vs.
current price.
-We like Upside
Downside ratio to
be 3:1 or better.

5 year (Potential) Total Return:
-Yield refers to
Dividends.
-SSG automatically
calculates
potential Total
Returns (dividends
+ price
appreciation)
based on High or
Average P/E.
-We like annual
return of 15% or
more (vs.
expectation from
market 12%)

Research tab:
-Click on
“Research” tab to
access various
resources.
-Go to “Company
Website” ->
Investor Info, view
CEO presentation
to investors.
-Read “Analyst
Estimates” such as
Yahoo, Zack. (You
have to pay to read
Morningstar
premium reports.)

Company website: Investors tab
-Company’s Investor tab
provide a wealth of info for
investors. Read News,
Earnings, etc.
-Commonly posted is
Presentation for Investors on
what the company sell. How
it makes money.
-You can watch / join
quarterly earning call /
discussion. Listen for CEO
outlook for near future. It is
important for Growth drive
stock price.

Libraries’ resources:
SF Library (sfpl.org) pays a lot of money for these databases, and made available to the
public for free. You need only the library card barcode to access remotely.

Morningstar and Value Line are inside
Databases tab:

SFPL databases:
-To find Morningstar and Value
line databases; go either by
Topics -> Business & Finance,
browse the databases listed in
alphabetical order, or search by
A-Z tab.

Morningstar, click “Read Full Analyst Report”
to access the 4 page detailed write-up

-Note the date.
-Read the whole 4 page
analysis. The analyst has
done the hard work for
us.
-click thru all the tabs to
read more info
-click on the Printer icon
to print.

Same way to access Value Line:

-Enter the Ticker to pull
the report
-click PDF Reports to pull
the 1 page report which
is dense with info.

-Bold numbers are
projections
-”Earning per share” is
projection into 2022

-The summary /
discussion is very good
-Note the date it was
written. It should not
be too old.

To recap:
2 most important questions we ask:
Management, Management, Management:
1. • We ask: Is this company well-managed?
We seek management with talented, capable executives who will
ensure the company thrive in good time and bad time, for they are
responsible for sales & growth.
Then, we ask :
2. • Is its stock reasonably priced?

We like consistent growth over the long term.
This graph shows a railroad-track-like growth of the
company’s sales and earnings; reassures us about the capability of management.

With the estimated High Price and Low Price, we check to see if this
stock will provide a suitable return.
SSG (Stock Selection Guide) divides the price range into three zones: Buy, Hold, Sell.

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