4 Basic Principles recommended by the NAIC:

1. Invest regularly regardless of market outlook

The markets overall trend has been upward, about 10%, despite intermittent cycles of boom and recession.

Investors minimize risk when they purchase shares that they intend to hold onto (as long as the business continues to perform).

2. Reinvest all Earnings

Maximize profits through compounding

3. Invest in Growth Companies

Buy shares in businesses whose sales and earnings are moving faster than the gross domestic product.

Buy in companies whose records suggest they will be far more valuable in 5 years.

4. Diversify to reduce Risk

Diversification is the best principle in investing. You can spread the risk. You can realize your average return objective with less risk.

Dollar cost averaging:

Regular purchases with a set sum regardless of the market timing.

Selling

You should buy carefully and seldom sell because you have purchased quality companies with high growth potential.

GOALS:

Attain an average growth in prices and dividend income of 14.9 percent compounded annually.

You will double your investment in 5 years.

Dividends

Goal should be a 4 – 6 % yield over time on your investments from dividend income.

This is often difficult, but it is a goal to strive for.

Club members should plan on staying members util their retirement years. Someone in their twenties and maintain membership for 40 years could have $1,913,034 (at a rate of 10% return).

Growth Companies:

Typically sell at higher price/earnings multiples than do other issues.

Growth comes in a number of ways, it comes when an industry is new and has a new market to satisfy. It can come from a new product, or from good management.

Growth produced by good management tends to be the most dependable. A short period of growth could be a lucky accident, so it is important to look at companies with a minimum 5 year history. The NAIC believes that the investor profits most dependably by placing money in a company whose history suggests that it will be worth substantially more 5 years in the future.

It is important to understand where the growth in a company is coming from so your can understand how long it will continue and its potential.

Good management produces a fairly consistent increase in sales and earnings per share, superior pre-tax margins and high earnings on invested capital.

Investment clubs should not own more stocks than they can remain informed about.

New clubs should own no more than 12 stocks. That number can increase as the club gains experience, but shouldn’t exceed 20-25 issues. One member can keep up with four stocks. If only two or three members are actively involved, then the clubs stocks will be restricted.

Diversification includes adding small, mid and large companies to the portfolio.

Small = $400 million or less in annual sales

Mid = $400 million to $4 billion

Large = $4 billion or more

When selecting stocks for your club’s portfolio, try to put ¼ of your holdings in major companies in major industries and another ¼ in small companies. The remaining half should be in mid-sized companies.

Small Aim for 10 –12%growth

Mid Aim for 7 –12% growth

Large Aim for 5 –7 % growth

These growth rates should average a 10 –12% price appreciation. In addition to the dividends, you will attain the 14.9% overall gain that the NAIC suggests.

Prospective purchase analysis:

1. The company’s management capability (growing sales, etc.)

2. Reasonable current share price that can be expected to rise as financial results improve in the future.

The 3 Tests of Management:

1. Rate of Growth – investment should increase in value at about the same rate that sales grow.

2. Pre-tax profit margin – this margin is calculated by deducting costs from sales and then dividing the result, profit before taxes, by sales.

Pre – tax profit

(sales – costs) = % Pre-tax profit

sales

Compare with other companies in the same industry.

3. Earnings on Stockholders equity – (net earning divided by the sum of the value of preferred stock, common stock and retained earnings. Compare companies in the same industry.

Always keep an eye on your share price!

Three ways to test for reasonableness of price:

1. Earnings per share. Earnings should be growing on a per-share bsis at approximately the same rate as sales.

2. Dividends – a quality growth company pays out no more than half of its earnings.

3. Price range – study the range over 5 years.

Two broad procedures investors use to select stocks

Technical procedure – the goal is to catch fairly quick price moves. They pay attention to the stock market and the stock price rather than the individual company.

Fundamental procedure – the investor studies the company, its industry and its market and tries to understand what makes the company run and what its future will be.