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What is a BetterInvestor?

Graphics courtesy Ellis Traub's book, Take Stock

For more detailed info see the book, click here.

Speculation vs. BetterInvesting

Ellis Traub clearly differentiated between a speculator or day-trader and an investor.

He showed a graph of several years of weekly high - low price changes for a company that has been steadily growing its sales and earnings. There was a lot of price fluctuations on a week to week basis, but the trend was clear. The price went up over the long term. Price follows earnings.

Speculators or day-traders try to predict the short term price directions and prosper by buying low and selling high. They don't need growth stocks, BetterInvestors do. BetterInvestors use the Stock Selection Guide to find these growth stocks and then pick purchase entry points and ride the long term upward trend in price.

Click here for an overview of various styles of investing.  The BetterInvesting ("NAIC") style is described under "Growth Investing" here.

Overview for the beginning BetterInvestor

Every beginning BetterInvestor should be exposed to Ellis Traub's presentation entitled "Why Investing Our Way Works."

The following is an overview of Ellis' presentation.

Long Term Investing Made Simple

You don't have to understand what's under the hood to drive the car. You don't have to understand esoteric details to successfully pursue stock investing.

Think of your investing education as a tree with three basic parts: roots, trunk, and all the little branches and leaves.

The trunk gives the tree its form and strength. It represents basic investing skills. The leaves and branches are continually growing and give the tree its source of energy. They represent the experience and with time, the wisdom you'll accumulate in investing. The root are the source of water and nourishment for the tree and represent curiosity-driven learning. This desire to learn will continually feed your investing basics and grow your investing experience and wisdom.

8 "Secrets" of Long Term Investing

• 1. What money is and how it's created.
• 2. What a share of stock is.
• 3. The difference between "BetterInvesting" and BFS/STS.
• 4. 10 terms required to understand a company.
• 5. The two most important tests of a company's quality.
• 6. The two most important tests of a company's value.
• 7. The only two times you should sell a stock.
• 8. The two strategies for portfolio management.

1. What's Money?

Originally people traded goods and/or services directly between one another. This wasn't always practicle because their needs might not occur at a mutually acceptable time. If you grew vegetables and needed something in the summer you were fine, but what if you needed something in the middle of winter? Or what if the fellow whom had wha you wanted didn't need what you had?

The solution to this predicament was the development of currency, or money in simple terms. People could exchange their vegetables for money in the summer and buy needed goods and services in the winter with that money. Money would be accepted anytime for the goods or services you needed. You didn't have to worry about having something desirable to trade with.

Where Does Money Come From?

From doing or making something someone is willing to pay for. It could be making a loaf of bread or cleaning a house, but you've done something of value for someone who is willing to pay for it.

A business is a combination of people and things whose sole purpose is to make money for its owner(s).

2. What's a Share of Stock?

A method of letting more than one person share in the ownership of a company.

Evidence of ownership in a company, aka "a piece of the action."

A right to share in the company's income.

What's It Worth?

Short term - What anyone is willing to pay.

Long term - The value of its earning ability.

Here lies the difference between a day-trader and a BetterInvestor. It's a BIG difference. Day-traders try to figure out which way the price of a stock is headed in the short term. BetterInvestors look for companies that are able to earn more each year (growth stock) and watch the price follow those earnings right on up.

So Where Did the Stock Market Go Wrong?

The ease of electronic trading has encouraged short term, day-traders and produced today's misunderstanding of investing. Knowing this you're already on your way to becomming a BetterInvestor.

The next time someone gives you a tip about a hot stock that's going through the roof ask them What increases the stock's value and entitles them to that profit? Short term investors will tell you a story not involving profits.

3. What's the Difference Between a BFS/STS investor and a BetterInvestor?

              BFS/STS                                  BetterInvestor

• Hunches & Stories                                          Educated selection
• Poor or NO Track Records                               Good Track Records
• Technical Analysis                                          Fundamental Analysis
• Odds Against You                                           Odds in Your Favor
• Short Term                                                   Long Term
• Exciting                                                        Boring

Advantages of Long Term Investing

• 80% Success with Stock Selection
• 15% Annual Portfolio Return
• Simple Procedures
• Carefree Portfolio Maintenance
• Unrealized Gains NOT Taxable

4. The Only Ten Terms You Need to Know

KISS Investing

1. You buy a company earning $1 per share ($1 EPS)

2. You buy that share for 20 X EPS ($1.00) = $20.00

3. The company grows earnings to $2 per share (EPS = $2)

4. You still sell it for 20 X EPS  (20 X $2 =$40)

5. It's worth $40 and your money has doubled!

That's the secret of BetterInvesting.

The Only Two Things You Need to Know About a Company

• 1. Is this a good quality company?
•     Quality = Growth + Efficiency
• 2. Is the price right?

5. The Two Most Important Tests of a Company's Quality

• 1. Are sales and earnings growth strong and stable?

     You can tell this with only a glance. Click here to see how easy this can be.

     Or click here to see an actual quality company.

• 2. Is management capable of sustaining that growth?

     Management's report card has only two subjects. How efficient were they in turning sales into profit and how efficient were they in using the company's equity to generate that profit. You get to grade them. Click here to see management's report card.

6. The Two Most Important Tests of a Company's Value

1. What is the potential reward?

2. How much risk must I take to obtain it?

7. The Only Two Times You Should Sell a Stock

1. You want or need the money.

2. The company fails to perform as you predicted.

In a 2007 seminar at www.stockcentral.com Ellis clarified the second condition of the company fails to perform as you predicted. He specifies "fails to perform as you predicted" means the quality deteriorates or the return potential deteriorates.

He then combines this into the sentence: You hold a quality stock until you want or need the money unless the quality or potential return deteriorates.

     The Rule of Five says one in five of the stocks you pick using BetterInvesting methods will develop unforeseen problems and need to be sold. Click here for a visual presentation of the Rule of Five.

8. The Two Strategies of Portfolio Management

1. Defense - Has the quality deteriorated?

2. Offense - Has the return potential deteriorated?

Defensive portfolio management deals with making sure the growth you found and forecast is actually occuring. There will always be short term interuptions in growth which result in buying opportunities, but stocks with long term, serious problems must be caught early and delt with decisively by selling them.

Offensive portfolio management deals with grossly overvalued situations and is less urgent to persue. Here your focus is to capture excess profit when a stock temporarily becomes overvalued by REPLACING it with another stock of equal or grater quality and greater return potential.

Missing a defensive portfolio management problem can result in serious harm to the return of your portfolio, whereas misssing an offensive portfolio management problem only results in a little lost extra profit. You'll still own a quality stock.

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