The 26 Best Managed Companies in America

The January 10, 2005 edition of Forbes magazine has a very interesting article (beginning on page 136) about these 26 companies which are a subset of the Forbes Platinum 400, the Best Big Companies in America.

These companies were first ranked within their industry by many financial metrics including growth in sales and earnings, leverage, stock market returns and earnings forecasts. And from these ranks each company then received a composite score.

Each company was then given an overall score for accounting and governance practices, as well as financial condition and earnings quality. In most cases companies that scored poorly on two or more of these items were dropped from further consideration.

Finally, the editors took a closer look at the top-ranked companies in each industry and considered factors that might not show up on a financial scorecard. And from this process a winner was selected for each industry. And the winners are:

DRS TECHNOLOGIES
WELLS FARGO
CATERPILLAR
DIEBOLD
ECOLAB
PERINI
RAYMOND JAMES
ALLEGHANY
WINNEBAGO
UNITED NATURAL FOODS
MGM MIRAGE
CORN PRODUCTS INTERNATIONAL
AMERIGROUP
COACH
PROGRESSIVE
BALL CORP.
UNIVISION
XTO ENERGY
ADVANCE AUTO PARTS
KLA-TENCOR
SYMANTEC
SANDISK
ALLTEL
EXPEDITORS INTERNATIONAL
EXELON

For more about these companies, go to www.forbes.com/platinum400

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POLITICALLY CORRECT SEASON'S GREETINGS!

We, hereinafter known as the Wishor, hereby request that you, hereinafter known as the Wishee, accept (not that we are putting you under compulsion; you are free to accept or reject) with no obligation, implied or implicit, our best wishes (not to imply that our wishes are any "better" than anyone else's wishes) for an environmentally-conscious, socially-responsible, high self-esteem, low stress, non-addictive, gender-neutral celebration of (pick one or more than one) "Christmas," "Chanukkah," "Kwanzah," "Winter Solstice," (or another term or terms of your choice, not that you are required to pick any if that is your choice) practiced within the most enjoyable traditions (solely as you define "enjoyable") of the religious persuasion of your choice, or secular practices of your choice, with respect for the religious/secular,faiths/beliefs, persuasions/inclinations, feelings and/or traditions of others, or their choice not to practice religious or secular traditions at all, or their choice not to make a choice.

And we also wish you a fiscally successful, personally fulfilling, and medically uncomplicated (not to imply that you are not already successful, fulfilled and healthy) recognition of the onset of what is generally accepted in the Western world as the calendar year 2005, but not without due respect for the calendars of choice of other cultures whose contributions to society have helped to make America great (not to imply that America is necessarily greater than any other country or is the only "AMERICA" in the Western Hemisphere, nor even to convince you that America is great if you choose to believe otherwise, since we recognize that the word "great" is subjective), and without regard to the race, creed, color, age, gender, physical ability, religious faith, weight, sexual preference or choice of computer platform of the Wishee.

As the Wishee, by accepting this greeting, you are also accepting these terms: This greeting is subject to clarification, or withdrawl. It is freely transferable with no alteration to the original greeting. It implies no promise by the Wishor to actually implement any of the wishes for her/himself or others, and is void where prohibited by law, and is revocable at the sole discretion of the Wishor. This wish is warranted to perform as expected within the usual application of good tidings for a period of one year, or until the issuance of a subsequent holiday greeting, whichever comes first; and warranty is limited to replacement of this wish or issuance of a new wish at the sole discretion of the Wishor.



Ed Note: the above was sent to me by a business colleague and I thought it to be quite amusing as well as also being a very sad commentary on a poisonous trend in this country!

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The 12 Timeless Rules of Investing

This is something that we talked about during one of the earlier meetings this year and now that we are on the eve of 2005, I thought it timely to remind everyone about the wisdom contained herein.


1. An attempt at making a quick buck often leads to losing much of that buck.

* The people who suffer the worst losses are those who over-reach.

* If the investment sounds too good to be true, it probably is.

* The best hot tip we've found is "there is no such thing as a hot tip."


2. Don't let a small loss become large.

* Don't keep losing money just to "prove you are right."

* Never throw good money after bad (don't buy more of a loser).

* When all you're left with is hope, get out!


3. Cut your losers; let your winners ride.

* Avoid limited-upside, unlimited-downside investments.

* Don't fall in love with your investment; it won't fall in love with you.


4. A rising tide raises all ships, and vice versa. So assess the tide, not the ships.

* Fighting the prevailing "trend" is generally a recipe for disaster.

* Stocks will fall more than you think and rise higher than you can imagine.

* In the short run, values don't matter.


5. When a stock hits a new high, it's not time to sell... something is going right.

* And, when a stock hits a new low, it's not time to buy... something is going wrong.


6. Buy and hold doesn't ALWAYS work.

* If stocks don't seem cheap, stand aside.


7. Bear markets begin in good times. Bull markets begin in bad times.

8. If you don't understand the investment, don't buy it!

* Don't be wooed. Either make an effort to understand it or else say, "no thanks."

* You can't know everything, so don't stray far from what you know.


9. Buy value, and sell hysteria.

* Paying less than the underlying asset's value is a proven successful strategy.

* Buying overvalued stocks has proven to underperform the market.

* Neglected sectors often offer good values.

* The "popular" sectors are often overvalued.


10. Investing in what's popular never ends up making you any money.

* Avoid popular stocks, fad industries, and new ventures.

* Buy an investment when it has few friends.


11. When it's time to act, don't hesitate.

* Once you're in, be patient and don't become rattled by fluctuations.

* Stick with you plan ... but when you make a mistake, don't hesitate.

* Learn more from your bad moves than your good ones.


12. Expert investors care about risk; novice investors shop for returns.

* If you focus on the risks, the returns will eventually come for you.

* If you focus on the returns, the risks will eventually come for you.

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Season's Greetings!

'Tis the week before Christmas, and therefore I would like to wish all the members and friends of the West Suburban Sub-Group a Very Merry Christmas as well as a Happy, Healthy, and very Prosperous New Year!

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Creating An All-Weather Portfolio

Harkening back to our meeting of this past Thursday, I thought that it would be prudent to re-state some important points that we tried to make.

How your assets are allocated will have a huge impact on portfolio performance over time!

The two biggest determinants of asset allocation are risk tolerance and investment time horizon.

The more risk averse you are as an investor, the greater the portion of bonds/cash versus stocks you should have in your portfolio.

Likewise, the shorter your time horizon, the larger the percentage of your portfolio that should be devoted to bonds/cash.

Here's a good rule of thumb for setting an asset allocation: Subtract your present age from 110, and this will give you the percentage of your portfolio that should be in stocks. Then split the remainder between bonds and cash.

Don't forget that whenever you are allocating assets, be sure to take into account ALL of your assets!...This may include 401K and/or IRA plans; various stock accounts; annuities; mutual funds; as well as cash.

You should always consider ALL of your various portfolios as ONE big portfolio, for asset allocation purposes.


Building an All-Weather Portfolio:

For those investors who abhor market volatility and want to protect their assets as much as grow them, an "all-weather" portfolio should fill the bill.

Note: Keep in mind that any portfolio that attempts to minimize risk will also give up a bit in terms of long-term growth. But what we are trying to achieve with this type of portfolio is to reach an acceptable combination of reasonable return without huge swings in portfolio value!

The following "all-weather" allocation should achieve that goal:

Stocks: 67%

Bonds: 25%

Cash: 8%


Stock selection:

You'll want to accomplish two things when allocating within stocks:

1. You want to make sure that you are not overexposed in any one industry sector.

2. You want to make sure that you are not overexposed in any one stock.

The S&P 500 Index is a good benchmark to use for industry sector portfolio weightings, and one useful tool for doing this is Risk Grades, located in our "Links" section.

As for stocks, the amount of exposure to individual stocks should be based on several factors: 1) The amount of money available to invest; 2) your time horizon; and 3) the type of stocks that interest you... And it would be well to limit your weightings to no more than 4% in any one stock!

How many stocks to have in your portfolio?

Research has shown that stocks have become more risky over the last several years. This in turn implies that diversification across a number of stocks is more necessary now than ever before... And you should be aware that by owning 10 or 15 stocks, you are taking on greater risk today than you may have been assuming just a decade ago. If that increased risk puts you outside of your comfort zone, then you probably need to diversify by choosing an alternative to individual stocks such as an equity index mutual fund as the way to achieve diversification for your portfolio.

Finally, if you gain nothing else from reading this information, let it be the point for you to begin spending time in thinking about portfolio creation, and realizing just how valuable it can be to spend your time in doing exactly that.

Everyone usually focuses on individual investment selection, but it's how you combine individual investments together into a cohesive portfolio that will ultimately determine the success or failure of your own personal investment program!

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Fortune Magazine's Investor Guide 2005

The December 27, 2004 "special issue" of Fortune magazine is out, and among the very interesting topics therein is a book excerpt on the new Jeremy Siegel book (beginning on page 165), "The Future For Investors."

In this book, Jeremy Siegel shows why the tried and true beats the hot and new. His research shows that not only do new firms and new industries fail to deliver good returns for investors, but their returns are often inferior to those of older companies in slow-growing or even shrinking industries.

How can this happen? There's one simple reason: In their enthusiasm to embrace the new, investors invariably pay too high a price for a piece of the action and are doomed to suffer poor returns. The concept of growth is so avidly sought after that it lures investors into overpriced stocks in fast-changing and overly competitive industries, where the few big winners cannot begin to compensate for the myriad losers. And Siegel calls this, "The Growth Trap."

Then Siegel reminds the reader that the basic principle of investor return states: The long-term return on a stock depends not on the actual growth of its earnings, but on the difference between its actual earnings growth rate and the rate that investors expected. Investors will receive a superior return only when earnings grow at a rate higher than expected, no matter whether that growth rate is high or low.

The power of the basic principle of investor return is magnified when the stock pays a dividend. Consider this. If earnings are better than expected, that means the stock is underpriced, and purchasing more shares through dividend reinvestment will enhance your returns even more.

So your ultimate goal is to find stocks whose growth will be high relative to expectations. The best way to determine those expectations is by looking at the price/earnings ratio of a stock. High P/E ratios mean that investors expect above-average earnings growth, while low P/E ratios indicate below-average growth expectations.

What are the most important lessons that can be taken from this discussion?

1. The basic principle of investor return states that stockholder returns are driven by the difference between actual and expected earnings growth, and the impact of this difference is magnified by dividends.

2. The best-performing firms for investors have been those with strong brand names in the consumer-staples and pharmaceutical industries.

3. No technology or telecommunications firm made the list of best-performing stocks. This is because investors generally expect the technology firms to have very strong earnings growth, so even when these firms do prosper, these optimistic expectations have already been built into their prices.

4. The majority of best-performing firms have had slightly higher-than-average P/E ratios and average dividend yields but much higher-than-average long-term earnings growth. None of them had an average P/E over 30.

5. Portfolios invested in the lowest-P/E stocks (those with modest expectations for growth) far outperformed those with higher valuations and expectations.

6. Be ready to pay up for good stocks, but there is no such thing as a "buy at any price." Buying stocks with proven long-term growth potential at moderate valuations is the key to a winning strategy!

Bottom Line: the lower a stock's P/E ratio, the more the stock is likely to return.

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Checking Out Your Broker!

Over the past several years, complaints against stockbrokers have surged to record highs. To find a broker you can trust, an important step in the investigative process is doing a background check. If a broker has had run-ins with investors or been convicted of a crime, you can find out about it in records that the securities regulators make available to the public. Even if you uncover no wrongdoing, simply inspecting a broker's employment history can be useful. How do you play detective? Simply follow one of these two paths:

Path A:

1. Go to nasdr.com (which you will find in our "Links" section under NASD), site of the National Association of Securities Dealers. Then click on Broker/Advisor, then NASD Regulation Public Disclosure Program, then Perform an Online Search.

2. Type in a broker's name and firm. You should see a job history dating back 10 years and the states where the broker is licensed. If the broker has switched firms frequently, ask why?

3. To find out if a broker has been convicted of a felony or filed for bankruptcy, click on Disclosure Events. If "Maybe" appears, request e-mail copies of the records.

4. If the broker has been involved in securities arbitrations, go to www.nasdadr.com for further details.


Path B:

1. Find links to state securities regulators by visiting www.nasaa.org , the site of the North American Securities Administrators Association. State regulators can send you Central Registration Depository (CRD) reports, which offer more detailed disciplinary records than those NASD provides.

2. Call the phone number listed at your state regulator's Web site to request a broker's CRD report. (Unfortunately, states don't offer this information online.) The report may take weeks to arrive, but it's usually worth waiting for. It often lists complaints that don't appear at NASD's site.

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The 10-K - An Investor's Best Friend!

One of the best tools available to any investor is the SEC's Web site, which we have listed among the links available to you at this Information Blog. At that Web site, you can obtain a wealth of information on any publicly traded company.

One document that you really should review when considering a stock is the firm's 10-K report.

This report, provided in conjunction with the firm's annual report each year, provides the most detailed information that you could ever need in order to properly determine the suitability of a given company as a "fit" for your particular investing style.

The 10-K is especially useful in providing background information on the company's business. The 10-K also contains all financial statements and,
more importantly, the footnotes to those financial statements.

You really should consider a company's 10-K as must reading - before making any investment in that company. That's because by reading a 10-K, you will develop a much stronger impression about a particular company. And, you'll remove a lot of the guesswork that goes with picking stocks. Plus, you'll have a stronger conviction in your opinion.

In short, you'll make much smarter investment decisions because by spending time with this important document, it will definitely help you become a better investor!

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Some Facts To Bear In Mind

Margin Dividends Cost More!

If you buy stocks on margin, the dividends you earn from those stock holdings are not taxable at the lower 15% rate. They are taxed as ordinary income. That law was on the books last year, but the brokerage houses were not ready to distinguish between qualified dividends and nonqualified dividends... So this is just one more reason to avoid margin purchases.


Changes in Standard Deductions

The 2003 tax law raised the standard deduction to $9,500 in 2003 and to $9,700 in 2004.

Couples filing jointly with itemized deductions of less than $9,700 in 2004 should take the standard deduction for 2004 and defer paying expenses such as state taxes, mortgage interest, and charitable donations into 2005, when the total of your itemized deductions might be large enough to make itemizing worthwhile. By shifting expenses into alternating years, you can use your deductible expenses most efficiently.


Retirement Plan Distributions

If you turned 70-1/2 in 2004, you must begin to take required minimum distributions from IRAs and other tax-deferred retirement plans by April 1, 2005 (based on the amount in the account at year-end 2003). The second distribution must take place by December 31, 2005 (based on the year-end 2004 amount).

Note: If you take two distributions next year, the added income may push you into a higher tax bracket. The alternative is to act now to take one distribution in 2004 and the other in 2005. It may be wise to check with your tax advisor to see if this makes sense for you.

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Obituary Of An Old Friend

We are mourning the loss of a beloved old friend who recently passed away. His name was Common Sense. Common Sense lived a long life but died in the United States from a vicious contagious disease.

He selflessly devoted his life to service in schools, hospitals, homes, and factories. For decades, petty rules, frivolous lawsuits, and ludicrous verdicts held no power over Common Sense.

He was credited with cultivating such valued lessons as to know when to come in out from the rain, why the early bird gets the worm, and that life isn't always fair. Common Sense lived by a simple and sound financial policy. Don't spend more than you earn. Common Sense also lived by other time-tested strategies like: The adults are in charge and not the kids; and, it's okay to come in second or third.

A veteran of the Great Depression and the Technological Revolution, Common Sense survived cultural and educational trends such as body piercing, "whole language" and "new math." But his health declined when he became infected with the "I'm not responsible for my own actions" and, "It's alright if it feels good" viruses. He watched in pain as good people became ruled by self-seeking lawyers. His health rapidly deteriorated when schools endlessly implemented zero-tolerance policies. Reports of a six-year old boy charged with sexual harassment for kissing a classmate, and a teacher fired for reprimanding an unruly student only worsened his condition.

It declined further when schools had to get parental consent to administer aspirin to a student, but could not inform the parents and get their permission when their children were given mind-altering drugs or birth control pills; and when universities turned into cesspools of debauchery and socialist propaganda.

Common Sense lost his will to live when criminals received better treatment than their victims; when the Ten Commandments became contraband; and, when priests molested young boys. When a woman failed to realize that a steaming cup of coffee is hot, and was awarded a huge settlement. And when the President of the United States sold security related technology to a hostile nation, Common Sense fell into a coma.

As the end neared, Common Sense drifted in and out of consciousness, but was kept informed of new questionable regulations, such as thought control and partial birth abortion. Finally, when another President, claiming to steadfastly protect the country from terrorist atrocities, yet simultaneously allowing the same villains to invade the country through borders and ports of entry that are - as if by design - inexplicably easily violated; being fully aware of what the grave consequences of such contempt by the chief executive for the nation's security can be, Common Sense died of sudden cardiac arrest.

Common Sense was preceded in death by his parents, Truth and Trust; his wife, Love; his daughter, Responsibility; and his sons, Diligence and Reason. He is survived by three stepbrothers, Deception, Greed, and Ignorance.

Not many attended his funeral, however, because so few even noticed that he was gone!

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General Records Checklist

Below is a list of general records the IRS advises everyone to keep on hand.

Income: Keep your W-2s and 1099 forms, as well as your bank and brokerage statements.

Expenses: For major purchases, keep invoices, receipts, canceled checks, or other proof of payment.

Home: Keep the closing statements, all proof of payment, and insurance records. If you sold a home before 1998, you should keep IRS Form 2119.

Investments: File regular statements from your broker.

If you owe money on a return, the IRS suggests you hang on to your documents for three years. If you file a loss claim for worthless securities, keep your records for seven years.

Finally, if you don't file a return or you knowingly file a fraudulent return, the IRS says there's no limit to how long you should keep your documentation.

The IRS offers more advice about keeping records in Publication 552.

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NEXT MEETING: Thursday - December 16, 2004

The next meeting of the AAII - West Suburban Sub-Group will take place on Thursday, December 16, 2004. Since this is the last month of the calendar year, it provides the appropriate timing for our topic which is:"Caring For and Feeding Your Portfolio."

We'll be talking all about asset allocation and diversification, as well as that most frequently omitted third element of portfolio maintenance which is, rebalancing!

Our meeting begins at 7:00 PM and ends at 9:00 PM. The room number is posted on an easel located near the reception desk in the main lobby.

Membership remains at $15.00 per year. And there is a $5.00 charge per meeting for guests or former members.

We meet at DePaul University in Naperville, Illinois which is located at:
150 West Warrenville Road (at the intersection of Herrick Road)
Naperville, Illinois

our mailing address is:

AAII - West Suburban Sub-Group
P.O. Box 411
Westmont, IL 60559-0411

Any comments, questions, or suggestions may be sent by e-mail to:

rwm123@hotmail.com

Thank you.

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