Seminar 2

Announcements Please enter any SWS related announcements here.

Last Seminar Recap It’s important to start saving and investing now because of the time value of money and compounding interest! Create a financial plan for your personal investing needs, goals, and risk tolerance. Remember that diversification can help mitigate risk. Fully understand the risks and returns of investing in different asset classes before making your decision. Do your research on brokerages, mutual funds, IRAs, and other opportunities before investing your money. Be aware of the costs of investing, specifically transaction costs and tax effects that have a large impact on your returns.

Tonight’s Agenda Market Update Introduction to Stocks The Stock Market Investing in Stocks Investor Behavior Lessons from Successful Investors

Market Update Have speaker comment on what happened in the markets for past week. We encourage speakers to create a slide of important occurrences (see next slide for example).

Market Update Example Slide There were mixed technology results as Apple & Microsoft posted solid positive third quarter earnings; raising concerns about semiconductor valuations Merrill Lynch wrote down $7.9b in losses from subprime losses, which adds more wariness around the health of the housing market. Bank of America announced 3,000 job cuts, which adds concern to the state of the economy. Crude oil futures climbed above $92; analysts expect it to surpass $100, a strong sign for the economy. S&P500 gained 2.3% on the week; DJIA was up 2.1% while the NASDAQ was up 2.9% as investors seemed less concerned about risks in the credit markets.

What are Stocks? A stock is a piece of an ownership in a company. If you own stock in Starbucks (SBUX), you own a tiny, tiny piece of the company. The earnings of that company get attributed to your share, and you get any dividends paid to you. As the value of the company increases, so does your stock. Historically, companies issued stock certificates, indicating how many shares you owned. Today, a stock certificate is no longer issued, but you still own a piece of the company. Stocks are traded in the stock market (there are several markets) and the company is often referred by its ticker (a one, two, three, or four letter symbol). For example, the ticker for Starbucks is (SBUX).

What are Stocks? Stocks are also often referred to as equities Types of stock: Common, Preferred, and Treasury Common stock is the most prevalent and is the type most issued by companies for the public to purchase Attributes of stocks Market Capitalization (Size) – Changes everyday Large-cap, $5 billion Mid-cap, $1-5 billion Small-cap, below $1 billion Classification Growth, Value, Income Cyclical, Defensive, Blue-Chip Classification can change with time as a company matures (Microsoft, MSFT) or reinvents itself (Apple, APPL) Domestic and International Market Cap = How many shares outstanding x Current price of one share of stock Example: McDonald’s (MCD): 1.12 billion shares x $70/share = $78.4 billion market cap

Stock Classifications type of stock what kinds of investment example value growth income Refers to a stock that is undervalued in terms of its trading price v. book value. Typically, such a stock has been sold off by investors for reasons such as litigation, product issues, marketing. Book value of the company based on tangible assets, however, exceed the current market price Orleans Homebuilders (OHB) A growth stock is a company with incredible growth potential because of its market, product, segment or situation. For example, pharmaceutical companies manufacturing specific drugs may be considered growth stocks. Growth stocks are generally hard to identify and are usually riskier Google (GOOG) Income stocks are companies with a reliable track record of paying out dividends on a regular basis. Income stocks are very popular with retirees or investors who want a steady inflow of income Southern Company (SO) Source: moneyinstructor.com

Stock Classifications type of stock what kinds of investment example cyclical Typically, cyclical stocks are companies whose earnings tend to follow the business cycle. Cyclical stocks are often more risky than stocks in companies that are less subject to changes in the business cycle. Highly cyclical industries include oil and other natural resources, steel, and housing. Caterpillar (CAT) Source: moneyinstructor.com defensive Prices of these stocks tend to remain stable or perhaps rise during periods of economic downturn. During economic upturns, they tend to show poorer results relative to other companies. Defensive stocks produce goods or services that are generally still in demand during an economic downturn, such as food, beverages, and pharmaceuticals. Clorox (CLX) blue-chip Refers to a company with a well established reputation that has a long record of financial stability. Usually these companies pay out dividends. “Blue-chip” designation is debatable General Electric (GE)

“ Stock Market” is the Total Market for Stocks/Equities All Stocks Available to Publicly Buy or Sell Stock Prices are Affected by a lot of things Fundamental Analysis of Earnings, Cash Flow, Etc. Herd Behavior and Investment Sentiment are Large Factors Behavioral Finance The “Market” is Global Total Global Market Cap. Is Approximately $51 Trillion More than 50% of the Market Capitalization of Stocks is Outside the U.S. The Stock Market

Stock Exchanges Stock Market vs. Stock Exchange An “Exchange” is where you buy or sell stocks The “Market” is ALL stocks traded on exchanges U.S. and Global Stock Exchanges Major U.S. New York Stock Exchange (NYSE) - Stocks traded on the NYSE have tickers with 1-3 letters. Ex. Ford (F), Coca-Cola (KO), McDonalds (MCD) National Association of Securities Dealers Automated Quotations (NASDAQ) – Just known as NASDAQ. Stocks traded on the NASDAQ have tickers with 4 letters. Ex. Microsoft (MSFT) and Starbucks (SBUX). The NASDAQ used to be primarily technology or smaller companies, as the NYSE was the main exchange. This is becoming less of the case. Regional U.S. (Boston, ICE / Denver, Philadelphia) Asia (Nikkei / Japan, Hang Sang / Hong Kong, etc.) Europe (London, Frankfurt, Milan, Paris, etc.) Stocks don’t have to trade on an exchange. Lots of small companies trade on what they call Over the Counter or (OTC).

A stock index is a grouping of stocks constructed to measure past performance and trends An index can be used for a proxy for how the “market” is performing in point and percentage terms Indices are constructed of various firms Dow Jones– Dow Jones Industrial Average (DJIA) – This is 30 of the large companies in the US Standard and Poors (S&P 500) – This is 500 of large, actively traded companies Russell Co. (Russell 1000) – Comprised of 1000 companies Wilshire (Wilshire 5000) – Comprised of 5000 companies Companies can and often are in multiple indices Stock Index

Dow Jones Industrial Average (DJIA) The “Dow” is 30 “Blue Chip” stocks selected by the Wall Street Journal Most widely quoted in the press but narrow representation of the broad market Includes American Express (AXP), ExxonMobil (XOM), General Electric (GE), and AT&T (T) Standard & Poor’s 500 (S&P 500) The “S&P” is 500 primarily large cap U.S. stocks selected by Standard & Poors to give a broad representation of the U.S. stock market The S&P500 is the Standard Institutional Benchmark and measure of stock market performance Most mutual funds and other managers are ultimately compared the S&P500 for benchmarking Includes Amazon (AMZN), ConAgra Foods (CAG), Costco (COST) U.S. Broad Stock Indices

Why Do Stock Prices Change? Stock prices can change both in the short term and long term for different reasons. In the short term, these may be some of the reasons: In the short term, the stock price can change because of a lot of factors. Investors are trying to quickly determine what will impact the value of a company. Company Specific News (CEO quits, new product launched) Industry News (Tobacco litigation, Hurricane Katrina disrupt oil refining/delivery) Earnings Announcements (Shaw Group (SGR) reports quarterly profits are up because of increased construction of power plants) Direct Competitor Makes an Announcement (Coca-Cola (KO) says it will dramatically raise marketing spending. Pepsi (PEP) stock is affected negatively) General Investor Confidence (People are concerned with the financial crisis, so they begin selling out of financials and other industries affected) Often time, short term fluctuations are hard to understand and are often irrational. This is why market timing is so tough. We’ll focus on the long-term.

Why Do Stock Prices Change? In the long term, these are likely the reasons: Over the long term, the stock price goes up as the company becomes more valuable. This likely happens because the company has increased earnings, which occurs when a company is increasing revenue (selling more), cutting costs, or a combination of both. Additionally, the stock price can also go up because people believe the future looks better for a company. This is related to the valuation, which we’ll discuss later. Short term price fluctuations can be hard to understand and predict. In SWS, we focus on long-term price changes as we can conduct research here to help us determine what will happen. We look at a minimum investment of one year.

Stock Returns Returns - What you “get” from your investment Capital Gains Current Price minus Purchase Price Realized (what you earn if you sell) Unrealized (paper return if you don’t sell and hold) Dividends - A cash payment that is made to stock holders Annual Pre-Tax Rate of Return This shows you how much of a return your getting on your money. You should always measure your returns on your investment. Returns vary by asset class. Formula [((Current Value + Dividends – Commission Fees)/Purchase Value)^(1/# of years)] -1

Stock Returns Annual Pre-Tax Rate of Return Formula [((Current Value + Dividends – Commission Fees)/Purchase Value)^(1/# of years)] -1 Returns example (This does not take into effect dividends, commission fees, or taxes.) January 1, 2007 – You buy 100 shares of Chipotle (CMG) for $55 per share or $5500. January 1, 2008 – The stock is $127, you continue to hold and don’t sell. You have an unrealized gain of $7200, (127-55)*100, which is an annualized rate of return of 131%. January 1, 2009 – The stock is $53, you continue to hold and don’t sell. You have an unrealized loss of $200 (53-55)*100, which is an annualized rate of return of -2%. January 1, 2010 - The stock is $92, you decide to sell. You have a realized gain of $3700 (92-55)*100, which is an annualized rate of return of 19%. [(9200/5500)^(1/3)]-1 = 19%

Commissions Commissions are fees that a broker charges you to buy or sell a stock Dealers typically charge a flat amount, regardless of the number of shares. For many brokers, this is $10 to buy or $10 to sell – so for a completed transaction, you can be charged $20. Why do the fees matter? Because they decrease your return and can significantly affect your return on small numbers of shares. In this continuation of the previous example, a commission of $20 can take your returns from 18.7% down to 18.6% (100 shares), 17.3% (10 shares), 16% (5 shares) or 7% (1 share) Always pay attention to fees, especially how they’ll affect your return if you are only buying a few shares. It may make sense to buy fewer stocks and more of each one.

Dividends Dividends are a cash payment made to shareholders Dividends will increase your return as you are getting additional value from your stock. Typically, larger, more mature companies issue dividends, while smaller, growing companies do not. Dividends can be reinvested in the stock or they can just accrue in your account. Dividends are typically quoted on a per share basis, so a $1.00 dividend means that for every share you own, you get $1 back. If you own, 100 shares of Chipotle and they issue a dividend, you’ll get $100 extra dollars. Typically dividends are issued quarterly. Dividends can be taxed differently than capital gains. As you can see below, dividends will increase your return.

Taxes Like many things in life, you have to pay taxes on your realized investment gains. Investment Taxes* Dividend and Income Rate 35.0% Short-Term Capital Gain Rate (Sell before one year) 35.0% Long-Term Capital Gain Rate (Sell after one year) 15.0% Unrealized Capital Gain Rate 0.0% Taxes have a significant affect on your return. While you don’t want tax implications to drive your investment decisions (i.e. holding a bad investment for longer just because of tax benefits), it is important to keep in mind. On this investment, with no taxes, it is 18.7%, if taxed as long term (15% tax rate), the return is 15.9%. If taxed as short term (35% tax rate, the return is 12.2%. *Taxes frequently vary, so check online for the most recent rates.

Taking a Long Term View Source: Neuberger Berman and Standard & Poor’s. Please see Additional Disclosures page for complete index description. The data presented herein represents securities industry market data as of the dates specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. Indices are unmanaged, and the figures for the index shown do not reflect any fees or expenses. Investors cannot invest directly in an index. We strongly recommend that these factors be considered before an investment decision is made. Past performance is no guarantee of future results. Please note: This chart is presented in a logarithmic scale, which shows the index’s gains or losses on a percentage basis, for ease of comparison. (Log. Scale) S&P 500 Index – Month-End Values (January 1950 – December 2005) Escalation of Vietnam War; Kent State Shootings 1962 Market Panic; Cuban Missile Crisis Prime Rate Hits 21% Persian Gulf War 1987 Market Panic 9/11 Attacks Korean Conflict Heightens Dollar Hits All-Time Low Price Controls; Nixon Resigns; Oil Embargo War in Iraq

Stocks Can Be Negative But … 0 Year to Date - through December 31, 2002 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 0 2 -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 0.0% 31.7% 23.9% 18.4% -1.0% 52.6% 31.6% 6.5% -10.8% 43.4% 12.0% 0.5% 26.9% -8.7% 22.8% 16.5% 12.5% -10.1% 24.0% 11.1% -8.5% 3.9% 14.3% 19.0% -14.7% -26.5% 37.2% 23.9% -7.2% 6.6% 18.6% 32.5% -4.9% 21.5% 22.6% 6.3% 31.7% 18.7% 5.3% 16.6% 31.7% -3.1% 30.5% 7.6% 10.1% 1.3% 37.6% 23.0% 33.4% 28.6% 21.0% -9.1% -11.9% -22.1% Percentage Gain or Loss Copyright © 2003 CRANDALL, PIERCE & COMPANY • All rights reserved. • 14047 West Petronella Drive • Libertyville, Illinois 60048 • 1-800-272-6355 • Internet: www.crandallpierce.com Sources: Standard & Poor's Corporation; Copyright © 2003 Crandall, Pierce & Company • All rights reserved. This copyright protected illustration is for internal use only. Under no circumstances may this illustration be copied, reproduced or redistributed in whole or in part including the data contained herein, without prior written permission from Crandall, Pierce & Company. The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results. 40 53 13 75% 100% 25% 20.94% 13.19% -10.65% Positive All Years Negative Number of Years Percentage of Years Average Return 0

… Make Money Over Time And ... Source: Standard & Poor’s, Neuberger Berman. Please see Additional Disclosures page for complete index description. The data presented herein represents securities industry market data as of the dates specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. Indices are unmanaged, and the figures for the index shown do not reflect any fees or expenses. Investors cannot invest directly in an index. We strongly recommend that these factors be considered before an investment decision is made. Past performance is no guarantee of future results. Best 10 Years: 20.08% 95th Percentile: 18.32% Median : 11.07% 5th Percentile: 01.50% Worst 10 Years: -00.85% S&P 500: 10-Year Rolling Returns Annualized, 1935-2005

Over the Long Term Outperform $13,706 12.7% $63 5.3% Ending Value Average Return $2,657 10.4% $18 3.7% $11 3.0% Hypothetical value of $1 invested in 1926. Source: Ibbotson Associates, Neuberger Berman. Past performance is not indicative of future results. Small Company stocks represented by the fifth capitalization quintile of stocks on the NYSE for 1926-1981 and performance of the Dimensional Fund Advisors (DFA) Small Company Fund thereafter, Large Company Stocks represented by the S&P 500 Index which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds represented by 5-year US Government Bonds; Cash is represented by the 30-day U.S. Treasury Bill. Please note that indices are unmanaged and do not take into account any fees or expenses of investing in the individual securities that they track, and that individuals cannot invest directly in an index. Data about the performance of these indices is prepared or obtained by Neuberger Berman and includes reinvestment of all dividends and capital gain distributions. See Appendix for complete description of each index. 1926-2005

The Potential of Stocks 0.10 1 10 100 $10,000 1,000 1926 1946 1966 1986 1936 1956 1976 1996 2006 $15,922 $3,077 $72 $19 $11 Compound annual return • Small stocks 12.7 % • Large stocks • Government bonds • Treasury bills • Inflation 10.4 5.4 3.7 3.0

The Tax Impact $1,000 100 10 1 0.10 1926 1936 1946 1956 1966 1976 1986 1996 2006 $11.26 $6.23 $15.66 $34.16 $617.28 Compound annual return • Stocks 8.3 % • Municipal bonds • Government bonds • Treasury bills • Inflation 4.5 3.5 3.0 2.3

Tax and Inflation Impact .10 1 10 $100 1926 1936 1946 1956 1966 1976 1986 1996 2006 $0.55 $1.39 $3.03 $54.83 Compound annual return • Stocks 5.1 % • Municipal bonds • Government bonds • Treasury bills 1.4 0.4 – 0.7

Risks to Consider Market timing Inflation Risk Credit Industry/company Market Interest rate Call/reinvestment Liquidity Political/economic Currency

Major Investment Risks Defined Market Risk Negative Performance in the Stock Market Inflation Risk If Your Returns Do Not Outpace Inflation Your Purchasing Power Goes Down Stocks Can Be A Good Hedge Against Inflation Bonds Can Underperform In Periods of High Inflation Company Risk Individual Stock Risk Due to Poor Management or Financials

Risk Considerations What Is Your Definition of Risk Absolute or Relative Volatility (Standard Deviation of Returns) or…. Money Lost Understand Liquidity Needs Have a Long-Term View but…. Time Is On Your Side Start Early

Company Risk and Market Risk 1 2 4 6 8 16 30 50 100 1000 Risk • Company risk • Market risk Number of stocks in portfolio Target for Effective Company Risk Reduction

Behavioral Finance Perceptions and sentiment can effect stock prices Behavioral finance relates to the emotional factors that affect investors, which can be pervasive and strong. Overreaction Investors tend to overreact to news. They think that bad news is horrible and good news is fantastic. These overreactions can cause price swings. Anchoring Investors can fall in love with a particular investment and refuse to see changes in the company, industry, or environment. Herd Mentality (Bubbles) Bubbles occur when the price of something rises dramatically then collapses. Typically during a bubble, the price of something varies from the actual value. It is as if people begin moving in a herd, don’t pay attention to what something is worth and just keep paying more. They often believe that they can sell it to someone else for more money Bubbles have existed for a long time (the first was a tulip bubble starting in 1634 and lasting until 1637) and they continue to this day, with the most recent being the housing bubble (starting in the early 2000s, peaking in 2007, and continuing to fall).

Tulip Bubble (1634-1637) Believe it or not, there was a tulip bubble 1634-1637 (the first known bubble) where prices for tulips skyrocketed and collapsed suddenly.

Tech Bubble (1995-2000) Source: Bigcharts.com The tech bubble shown through stock prices

________________ Source: Strategic Insight. Indices are unmanaged, and the figures for the index shown include reinvestment of all dividends and capital gain distributions and do not reflect any fees or expenses. Investors cannot invest directly in an index. We strongly recommend that these factors be considered before an investment decision is made. The data presented herein represents securities industry market data as of the date specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. Past performance is not indicative of future results. Money Flowing into Mutual Funds – Tech / Telecom At the height of the technology market bubble, investors flocked to tech funds at precisely the wrong moment ($ billions) March 13, 2000: NASDAQ peaks at 5049 Don’t Follow the Herd

Housing Bubble (early 2000s-2007)

Dangers of Market Timing Annualized Returns for Hypothetical $10,000 Investment in the S&P 500 (10 Years Ending December 31, 2006) End Value Return Fully invested $22,447 8.42% Minus 10 best days $13,985 3.41% Minus 20 best days $9,632 (0.37%) Minus 30 best days $6,909 (3.63%)

Means to an End – Not A Competition No One Investment or Investment Style Fits All Pick “Your” Way Have a Long-Term View Diversify, Diversify, Diversify Stocks, Bonds Cash Large Cap, Small Cap, International Balance of Growth and Value Styles Stay Emotionally Balanced Understand Your Risk Investing Tips 16

Diversification in Stocks Risks of No Diversification Large Cap Growth Stocks -22.42% Small Cap Growth -22.43% Rewards of Prudent Diversification Small Cap Value Stocks 22.43% Bonds - Fixed Income 11.85% Large Cap Value 7.01% 1 Year Returns – Period Ending 12/31/00

Lessons From Successful Investors

Peter Lynch – Fidelity Peter Lynch Started Managing the Fidelity Magellan Fund in 1977 $18 million to start Lynch Left Magellan in 1990 $14 billion at the end Outperformed the S&P 500 11 out of 13 Years Produced an Average Annual Return of 29% Source: Wikipedia.com Harvard SWS members with Peter Lynch

Lynch’s Philosophy Know What You Own Do It Yourself Futile to Predict Economy and Interest Rates Focus on Individual Companies Avoid Long Shots Buy Good Businesses and Good Managers Be Flexible and Accept Mistakes Before You Purchase Have Targets "Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it." "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them." Lynch chose one company, Hanes, in the 1970s because his wife bought and loved its new L’Eggs pantyhose line — the first department-store-quality pantyhose sold to American women via supermarkets

Warren Buffett After reading “The Intelligent Investor” by Benjamin Graham, decided he wanted to study under Graham Started a family investment partnership at age 25 In First Year Tripled His Money ($100,000 to $300,000) Over the course of the next five years, the Buffett partnerships racked up an impressive 251.0% profit, while the Dow was up only 74.3% Ten years after its founding, the Buffett Partnership assets were up more than 1,156% compared to the Dow's 122.9% Today he is one of the richest men alive in the US, with approximately $52 billion. Original SWS Founding Team with Warren Buffett

Buffett’s Philosophy Proponent of Value Investing (buying undervalued assets) Investing Style of Discipline, Patience and Value Outperforms Over the Long-Term Buffett Invests in What He Calls “Wonderful Businesses” Good Return on Capital, Low Debt Strong Cash Flow Strong Brand Recognition with Pricing Power Simple Business Models (Easy to Understand and Run) Predictable Earnings Management Has Shareholder Interest (“skin in the game”) Don’t know what these all mean? – Don’t worry you will. SWS practices the Lynch and Buffett philosophies. Source: Wikipedia.com, investopedia.com

Seminar Recap There are many different types of companies and stocks, which change with time. As an investor, you have to understand what meets your investment goals and invest in those types of stocks and investment vehicles. The stock market has many moving parts, but understanding how the process works is important when investing. Investors are not always rational, which leaves opportunities for you to invest. Make sure you don’t become an irrational investor. Some of the best stock pickers in the world rely on a few fundamental investment rules, which should help guide you as well.

Week 3: Coming up with investment ideas Finding information and resources Learning how to create investment reports Week 4: Understanding industry trends Analyzing an industry Completing qualitative analysis of a company Weeks 5-7: Learning how to analyze a company through its financials Week 8: Putting it all together with an investment recommendation Weeks 9-10: Guest lectures/presentations Coming Up

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