Let Your Investing Journey Begin Having a portfolio is a lot like going on a trip. If you don't have a destination for your trip, how do you know when you get there? You need a plan for your portfolio too. Otherwise how do you know where you currently are or where you're headed? It's nice to plan before you start on building a portfolio, but many people find themselves with a portfolio and without a plan. The answer for them is simple. Stop. When you find yourself in a hole, stop digging. Simply make yourself a written plan outlining your investment philosophy and goals. Then see how what you have fits into your plan. What doesn't fit is what you need to change now. An excellent discussion of BetterInvesting philosophy is available for free download in the ToolKit 5 manual by Ellis Traub by clicking here. BetterInvesting Basics Before you are exposed to the BetterInvesting stock evaluation and portfolio management forms an over view of the pholosophy is in order: 1. You want to buy a diversified portfolio of quality growth stocks that are priced to produce your desired rate of return. The Stock Selection Guide (SSG) and the Stock Check List (SCL) will help you with this. The SSG will help you find quality and potential return and the SCL will help you compare different stocks before purchase. 2. You will hold these quality growth stock forever or until you want or need the money UNLESS the quality or potential return deteriorates. The PERT Reports, PMG, and Challenge Tree will help you with this. Only you can decide when or if you need the money, but these reports will help you monitor quality and return potential for problems. BetterInvesting (NAIC) Guidelines BetterInvesting's basic philosophy is to use fundamental analysis (checking sales and earnings) to buy growth stock at a reasonable price. BetterInvesting (NAIC) has given us a few basic guides for establishing a portfolio:
BetterInvesting (NAIC) also supplies a complete system for selecting and managing a portfolio of stocks. For stock selection:
For portfolio management:
In addition to these paper-based forms, BetterInvesting offers a large selection of software that offers these forms in electronic versions. The required data can be electronically downloaded from the BetterInvesting web site for a $25 annual fee. Click here to learn more about the software offerings. A Written Plan One plan will NOT work for everyone. Different people will have different levels of risk comfort and should have a portfolio that lets them sleep well at night. It is important to put your philosophy and goals in writing so you can honestly refer to them in the future. Below is a sample written plan. It won't work for everyone, but it is intended as a starting point for you to consider. Click here to see a sample plan. Don't Go It Alone! Now you've established your philosophy and set your goals. You're ready to begin looking at possible stock to purchase. But wait. You don't have to do this alone. You don't even have to do this with a small group of club members! Consider yourself personally invited to join two of the most knowledgable BetterInvesting groups in existence! These groups consist of thousands of experiences BetterInvesting members who are ready and willing to answer your questions. I'm talking about the I-Club-List (and it's archives) and the NAIC CompuServe Forum. Both require free registration, but once you're part of the group there are no other requirements. Please consider joining one or both. They will make your learning process much easier and you'll meet some simply wonderful folks. Click here for the CompuServe FAQ. (Frequently Asked Questions) Buying That First Stock You've defined your investing philosophy, set you goals, and joined a support group. You're ready to start looking for stocks. Where do you look? Here are three levels of ideas: Level One: Brian Lewis' 20 ideas for stocks to study Level Two: Phil Keating's Value Line Growth Screen in BetterInvesting Magazine. Companies listed on the BetterInvesting Growth Screen meet four tests: They are projected by Value Line to double earnings in the next five years, have actually doubled earnings in the past five years, are selling at price-earnings multiples (P/Es) that are 110 percent or less of Value Line's projected earnings growth rate, and have a Value Line safety ratings of average or better. Level Three: ICLUBcentral's Roster of Quality - about 100 stocks with historical and current quality. Future quality and valuation projections are up to you. This is a subscription service. A free sample is shown. Level Four: Investor's Advisory Service (IAS), another subscription service from ICLUBcentral. The right side menu offers a free sample download for your inspection (169 kb). Each month this service presents an overview of about 80 stocks selected by an team of veteran analysts utilizing BetterInvesting philosophy and methodology. Three stocks are presented in detail each month as buy recommendations. Each presented stock has a fully completed SSG and company overview. Each month there is also an overview of the economy and an update of all the followed stocks. I caution you to view the BetterInvesting 100 or 200 with a jaundiced eye. These are the most widely held stocks by BI investing clubs. They are not necesarily quality stocks. Only you and your judgment can determine that. Evaluating a Stock for Quality and Value The main tool of BetterInvesting is the Stock Selection Guide or SSG as you'll soon refer to it. Its goal is to help you find quality growth comapnies at a reasonable price. Click Here for an overview. You can learn more about the various parts by selecting the "To learn more, click here" option. Once you've found 3 to 5 fairly valued, quality stocks from within the same industry you can use the Stock Comparison Guide (SCG) to select the best candidate for quality and value. Click here for a discussion of the SCG. I found a GREAT stock, but it is too high! What now? Prices fluctuate so perhaps creating a collection of good quality stocks that are out of the "buy" zone and monitoring them to see when their prices do enter the "buy" zone would be a good idea. THis idea is called a "watch list" or "pounce pile." Click here for more thoughts on a watch list. Portfolio Management vs Portfolio Tracking It is important to differentiate between portfolio tracking and portfolio management. Portfolio Tracking Portfolio Tracking is simply following the price changes and dividends you receive form the stocks you purchase. You're asking "How much have I Made?" You can use NAIC's Portfolio Record Keeper, (PRK) Quicken, or Microsoft Money for this type of purpose. Click here for thoughts on investment record keeping. Portfolio Management Portfolio Management is the buying and selling of stocks primarily based upon their fundamentals and secondarily based upon their valuation to optimize your portfolio's return. After you've purchased a stock We'll assume you have purchased a selection of 12 stocks that are well diversified by size of sales, sector, & industry. This is the job of BetterInvesting's Stock Selection Guide & Stock Comparison Guide. These forms aid you in finding a quality company at a reasonable price. Now how do you manage them? Portfolio Management Terms Two terms you will constantly run into are defense and offense. These terms are used by Ellis Traub in hisToolKit 5 manual and in his book, Take Stock. They are taken from his experiences playing football. Defense is practiced when the other team has the football. With excellent defense you'll prevent the other team from ever scoring and the worst you'll do is end in a tied game 0 - 0. With poor defense you could lose 0 -70. Defense is important. Very Important. Offense is practiced when your team has the football. It earns you points. If you have a strong defense and a strong offense could win 70 - 0. Defense prevented them from scoring any points and offense scored you a lot of points. PERT Report The PERT Report is the primary BetterInvesting tool used to follow a portfolio. To learn more about the PERT Report, click here. Defensive Portfolio Management With a portfolio of twelve stocks your goal will be to monitor their quality by quarterly checking that their fundamentals of sales, pre tax profit,and eps growth and pre-tax profit margin are meeting or exceeding your forecasts. This is called defensive portfolio management. If you don't check on your stocks and one develops a serious problem you will be holding a stock whose price is not rising because sales or earnings are not rising. If you sold this stock and bought another whose sales and earnings are still rising you would see a price increases. By holding the troubled stock you lose the potential return from the healthly stock. This damage from holding a fundamentally flawed stock is the most import problem to avoid. Offensive Portfolio Management Once you have checked that your stock's fundamentals are intact you can proceed to offensive portfolio management. The other case you'll have to look out for is when the stock's price gets way ahead of what its sound fundamentals will support. It has become grossly overvalued. Another way of looking at this is that the price has climbed much further than one would expect and will either come back down or just stay there until the fundaments catch up with it. You could replace this fundamentally sound stock with another of equal quality whose price is in line with its fundamentals or behind its fundamentals and capture the excess profit of the first stock. You'd be capturing some extra profit. Replacing quality (fundamentally sound), grossly overvalued stock with stock of equal quality and fair value to capture excess profit is called offensive portfolio management. It is less important than defensive portfolio management, but to obtain maximum return potential you'll need to practice both. You don't have to perform offensive management. You must do defensive management. Monitor Diversification You started your portfolio with guidelines for the number of stocks you'd like, the maximum percentage of the portfolio you'd like in one stock and a desire to not be concentrated in too few sectors or industries.. You need to check these values periodically Cy Lynch's NAIC Portfolio Theory Workshop Several years ago Cy Lynch wrote an indepth look at "WHY" BetterInvesting believes what it does. It's a little bit more than a beginner may want to read, but is is an excellent paper on the reason of why we believe what we do. Cy's article can be found at the BetterInvesting web site by clicking here. Coming soon! Bonnie Biafore's Portfolio Perspectives
Bonnie Biafore is the author of the NAIC Stock Selection Handbook. Her Porfolio Perspectives column contains pithy advice about NAIC style investing and portfolio management. You can ask her questions about your portfolio, and read her answers to questions other clubs have asked. Comment on this Page Last Modified 2008-04-30 |
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