12 Timeless Rules of Investing

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

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

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

* Here's the best hot tip that you will ever receive: 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. In other words, 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 or 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 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.

* 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 then stand aside.


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


8. If you don't understand the investment then 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 do 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 be rattled by fluctuations.

* Stick with your 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.


* * * * *

Cash-Flow Hocus-Pocus

Many investors believe that cash flow is relatively immune to accounting games that companies have used to pump up earnings, but that is not necessarily true. Indeed, companies have found many opportunities to manipulate cash flow in order to shed a more favorable light on themselves.

Much of the manipulation is aimed at pumping up cash flow from operations - the first and most scrutinized of the three sections in the Consolidated Statements of Cash Flow that follow the Income Statement and Balance Sheet in corporate financial reports. (The two other sections report on cash raised or used through investing and financing activities.)

Management has an incentive to make its operating cash flow look good. Wall Street pays a premium for the stocks of companies whose core businesses generate prodigious amounts of cash. In fact, investors often look down on companies that can raise cash only through financings, such as debt offerings, or investment-related activities such as asset sales. After all, they can't sustain themselves indefinitely that way.

If you only look at cash from operations and take it at face value, you're not getting the whole picture. Of course, it's not always obvious when companies play fast and loose with the numbers.

One way companies boost operating cash is by securitizimg - or selling - their accounts receivable. These are the bills customers owe. By selling receivables, a company speeds its cash collections, taking into its coffers immediately the cash it would normally collect in the future. (There is a drawback. To sell those receivables, the company will have to accept fewer dollars than had it waited for the customers to pay.)

This is not necessarily a problem. Selling receivables can be a legitimate cash-management strategy. If the receivable sales increase each year at the same rate as revenues, the impact on the cash-flow statement is minimal. But when a company starts or steps up a securitization program, it can create the impression that the operating cash flow in that year is better than it really is.

Companies can also keep their operating cash flow high by the way they account for outstanding checks. (When a company delays payments to creditors, its cash balances rise.) Because the checks had yet to clear, the company is able to take advantage of generally accepted accounting principles (GAAP) that allow overdrafts to be lumped into accounts payable. So instead of reducing operating cash, the large balance of outstanding checks actually inflates it.

Another dubious source of operating cash is securities trading. Although GAAP rules allow cash raised by securities sales into the operating section of the cash-flow statement, it still comes from activities unrelated to the core operations of most businesses. As such, when gauging a company's underlying health, investors should exclude it from operating cash.

Certain companies have also given operating cash flow a lift by capitalizing some expenses. This maneuver boosts the bottom line, too. Why? When a company capitalizes costs, it creates an asset on the balance sheet and writes off the costs of establishing that asset gradually, in annual installments, instead of all at once.

How can capitalization boost operating cash flow? Normally, as a company spends money to produce goods, it deducts those costs from net income and thus, operating cash flow. But when a company capitalizes certain costs - the footnotes to annual reports are a good place to discover if this is happening - cash that goes out the door is considered an investment in an asset. As such, it is recorded on the cash-flow statement as a deduction to cash flow from investing activities. While the company's overall cash - what you get by adding the numbers from all three sections of the cash-flow statement - remains the same, its cash flow from operations is untouched. As a result, its operating cash flow will look better than companies that do not capitalize.

Cash flow is as vulnerable to manipulation as net income. So before using it as a measure of financial health, you have to check for the practices that mask weak performance or produce one-time gains.

* * * * *

Some Thoughts On Investment Basics

Many investors do almost everything wrong. They invest for the wrong reasons, they make the wrong investments at the wrong times, and they draw the wrong conclusions about the markets and the investments they are making. And as much as anything else, they fail to trade according to a disciplined trading plan - one that matches their goals and investment personalities - and as a consequence, they lose money.

Of all the elements that go into a successful investment program, two can probably be identified as the most important: matching your investment program to your own personality and implementing a clear investing plan. You must first assure yourself that your own emotions will not sabotage your investments, which means that you must select investments that suit you. Once that task has been accomplished, you must still follow an intelligently conceived investing plan to succeed in your efforts to improve your lifestyle - which is, after all, the final goal of investing.

Without an investing plan, you will find yourself returning whatever gains you achieve. You won't know when to take profits. If a profitable holding turns back down, you will continue to hold, convincing yourself that the setback is temporary. When the "temporary" setback carries the investment's price below your original purchase level, then you'll exit with a loss. And all such disappointments can be avoided, by simply adhering to an investing plan, which means you know why you are investing, your investments suit your goals and personality, you are investing in comfortable increments, and you know precisely at which points you are wrong or ready to take profits.

For some reason, many investors fail to approach their investments with a crucial overview - they fail to match their investments to their emotions and the demands of their lifestyles. People whose lives revolve around stability find themselves in a panic because they placed their investment capital in speculative investments; others who are unfettered by family responsibilities and financial obligations find themselves bored and inattentive of their investments because they have placed their investment capital in conservative investments. Most often, people who have not correctly matched their trading plans to their own emotions and living conditions lose their money, even when they could, and should, profit.

Usually, the error involves chasing investments that are too speculative for an individual's personality. Most people are unwilling to view themselves honestly enough to determine the true personal consequences of various investments, and therefore they select the wrong vehicles. Beginners in particular are first lured toward the fastest-returning vehicles, regardless of risk, and - worse - regardless of their needs and desires. Subsequently, they lose money quickly, when all they really wanted to do was to gain it slowly. This is tied to an equally important fact: Most investors tend to respond incorrectly to the realities of their own obligations and needs.

And while it is true that every individual case differs, the key ingredient here is honesty - being honest with yourself in matching your investing style to your emotional tolerance. You must make a very clear and honest appraisal of yourself both in terms of your personality, as well as your station in life, and then you should tailor your investments to that honest appraisal, otherwise your investments will fail to meet your true purposes and goals.

If your personality is not comfortable with the rigors of speculation and the degree of anxiety that risk can generate, then you really should pursue other investment choices. But if your lifestyle is flexible and your obligations are well under control then there should be no reason for you to avoid the risks that investing presents in your effort to acquire wealth. The big question to ask yourself is this: Can you handle the task emotionally?

This is actually both simple and difficult to do. It's simple because the questions are so obvious, and yet it's difficult because you have to be completely honest with yourself, about yourself. While you can ask yourself a long list of questions about your needs and obligations, it's much more difficult to determine your needs for the future. And once you have determined the requirements of your lifestyle, then you must figure out how you can meet those desires without placing an undo burden on yourself or your lifestyle.

Once you have an idea of the scope of your lifestyle, you can then begin to develop an investment program to match it. In short, your investment style should always match both your emotions as well as your station in life - at each and every stage of your life.

Your investment plan will always be closely tied to both your goals and the realities of your lifestyle. And if your investments do not match your dreams and your personality in equal measure, then no investment plan will work for you. But once you have assessed yourself realistically, then the task of creating an effective investment plan becomes merely a matter of economics, plus a way for you to circumvent your emotions.

The mechanics of it are fairly obvious. First you must determine the amount of risk capital that you have at your disposal. And it should go without saying that emergency funds are never to be considered as investment capital.

Regardless of the risks that you intend to assume, your investment plan should be carefully thought-out and followed with religious fervor. There will always be winners and losers in your portfolio, and your investment plan must be designed to identify those positions, and to then direct you toward new investments that will replace whichever changes have occurred in your portfolio. And the heart and soul of any investment plan is discipline.

No matter what it is that you choose to invest in, you must give yourself time. And all of your investments should be made within these parameters: 1) You have a reason for making the investment, whether it's due to someone else's recommendation or the result of your own research; 2) you have an objective toward which you think the investment should rise; 3) and most importantly, you have a point at which your investment will tell you the choice was wrong. In other words, you have an exit point.

Without a disciplined investment plan, you will likely take round trips on all of your profitable positions. All the emotional stresses to which people are subjected are things which will hurt you as an investor. Acting emotionally will never lead to profit in investment situations. Investments can only reap profits in direct relation to how objective, disciplined, calculating, and cool-headed you are as an investor.

In any event, once you have embarked upon an investment program, and once you have set in motion an investment plan that matches your goals and emotions, let it do its work for you. Let it do the job you gave it. And you may be surprised one day when the end result of that plan matches or even exceeds your hopes and aspirations!

* * * * *

The Zurich Axioms

First of all, I want to thank those of you who have expressed an interest in learning more about The Zurich Axioms. And while I said that I would put them up here on the WeBlog, I'm afraid that this will not be possible. There is a problem in that this material has been copyrighted and therefore I cannot publish it over this very public medium.

However, there is an alternative which is to do as I did in April, 2003 when we made The Zurich Axioms the topic for our meeting that month. So what I will do is to put together a synopsis of the twelve Major Axioms and 16 Minor Axioms in the form of a handout, and we will make this available to everyone who attends our next meeting in August, when we'll discuss the essence of these Axioms in greater detail.

The book that these Axioms came from was published in 1985, and is now out of print and no longer available from places like Amazon.com or Barnes & Noble.

* * * * *

How to Find Best Buys in Small-Cap Stocks

Small caps are those companies with market capitalizations of $100 million or less. They can represent real bargains but unfortunately, your broker will never tell you about the best buys in small caps. Individual investors are likely to hear only about stocks that Wall Street must recommend - the big household names, for example - or that a brokerage firm feels chummy with. That leaves a lot of respectable stocks out in the cold.

So investors generally have to track down these stocks alone. The few research firms that specialize in digging up Wall Street's buried treasures usually report their findings to institutional investors, such as money managers or fund chiefs. They get paid for their work by executing these institutions' trades.

Investors who want to go solo in small cap stocks should begin by identifying trends with staying power. Then, figure out the best ways to play those trends.

Once you've identified an appealing industry, narrow the field. There are several characteristics to look for before you can feel comfortable investing in a small cap company. These include:

Large ownership by management. Top management should own at least one quarter of the company themselves. That way, their motivations are the same as yours. Check the proxy statement.

Little or no debt and little need for fresh capital. Debt-to-equity ratios shouldn't exceed 15 percent, or else the company's growth could be sidetracked by the need to service borrowings. Calculate debt-to-equity by dividing the company's total liabilities by its shareholder equity.

A management that can verbalize its plan for the future. The company must be able to articulate a credible business plan for at least the next two years. Small-company managements are usually more available to discuss plans with investors; if they're unwilling, look elsewhere.

A product or system that's difficult to replicate or as close to being unique as possible. You don't want to invest in a me-too company; you want a specialist.

Little or no institutional ownership. Your goal: To own a stock before institutions spot it. Therefore, less than 10 percent of a stock should be held by institutions now. (A company spokesman can tell you this figure.) As the company increases its market value into the mid-cap range - to $100 million or more - it will begin to hit institutions' radars. When the bigs start buying, think about selling.

By following these suggestions, there is a very good chance that you can find stocks of smaller companies that will turn out to be very profitable investments!

* * * * *

The Case For Short-Term Investing

We who inhabit that universe known as Wall Street are often told that "speculation" is bad while "investment" is good, and to most people, "speculation" is the jungle of money management where ordinary people are apt to lose their shirts. In contrast, "investment" describes a benign and friendly territory full of promise and profit.

To be sure, speculation at its extremes, and particularly when it involves a lot of leverage, does differ materially from investment. But there is a large gray area, where speculation and investment overlap and are, for all practical purposes, the same thing. Each entails substantial risk and the possibility of great gain.

Risk is often in the eye of the beholder, and investors are often ambushed by a paradox: Very often the stocks perceived as the "safest" are risky because they are already universally accepted and richly priced, while a great many stocks that are perceived as "risky" are, in fact, quite safe because they are owned by investors who are aware of the stocks' problems, but feel these are already well discounted.

Then there is the contrast frequently drawn between the alleged vice of short-term investment, otherwise known as "trading," and the process of long-term investment, which carries with it the happy connotations of patience, wisdom, and prudence, not to mention profitability.

Great profits are frequently earned over the long-term. But what about the silent legions of long-term investors who are underwater on their favorite growth or undervalued stock? They may only be waiting to get out even, but will the gods hear their plea? And what about the round-trippers who have patiently watched their stocks go sky-high and then return to earth, or worse? Are they not also long-term investors?

A major question for the current market is whether investors should continue to follow a long-term strategy that has worked relatively well for quite a while, or shift to a strategy of taking some short-term gains when they occur. It is always hard to make a case for trading the market, and it is certainly difficult for most investors to trade successfully.

A classic indicator seems to confirm the wisdom of this theory. Politicians in Washington are often one of the great contrary indicators, reflecting as they do prevailing public sentiment. Whenever Washington zigs, it often pays to zag. But as we all learned while growing up, it doesn't always pay to do what you're told. And in the investment markets, it frequently doesn't pay to take the easy, obvious, or broadly recommended path, which may lead you over a precipice.

The average investor cannot hope to emulate the successes of famous investors such as Warren Buffett, Peter Lynch, or John Templeton, and shouldn't even try. For one thing, in the investment business, by the time they call you a genius, you are often only a few steps away from the banana peel. Even Warren Buffett may slip one of these days.

Nonetheless, there is a message here: Successful trading beats patient long-term investing without profit. So if you lack the skill to trade the market successfully yourself, then you need to hire a money manager who is capable of trading the market successfully. Otherwise you will likely languish in the land of mediocre single-digit investment returns in spite of your best efforts to do better.

* * * * *

Convertibles: Safer Than Stocks, Yet More Profitable!

Risk typically increases with potential return. To achieve higher returns, one normally needs to take on greater risk. There are, however, certain investments that historically have thrown off larger returns in proportion to risk than would be expected. Convertibles fall into that category.

It is easy to understand why convertibles are lower in risk than common stocks. First, they are of higher quality. If a company's earnings decline, it might skip its common dividend but would discontinue paying bond interest or preferred dividends only as a last resort, for if it did, bond and preferred holders could take control of the company. Further, if a company did fail, bond and preferred holders would get paid off before common stock holders. In addition, convertibles almost always offer a higher yield than stocks. So, if the price of the common falls, the higher yield helps support the bonds and preferreds.

What this means is that fairly priced convertibles are always "favorably leveraged." Leverage describes the price movement of one issue relative to another. A warrant is highly leveraged; it will rise or fall faster than its underlying stock. A convertible almost always moves more slowly than its underlying stock. An issue is described as "favorably leveraged" if it will rise more on a rise in the underlying stock than it will fall on a decline in the stock. Convertibles are favorably leveraged since they are free to participate in a rise in the stock, but their higher yields limit the extent of any drop.

Here's how this works: A typical convertible has a "conversion value" that rises as the underlying stock rises, and an "investment value" that remains reasonably constant. Because the issue converts into a fixed number of shares, its conversion value rises in line with the underlying stock. And its investment value is the price it would sell at if it weren't convertible, that is, if it were a "straight" bond or preferred stock of equal quality paying equal interest or dividends.

The investment and conversion values are "floors" that support the price of the convertible. If the convertible's price dipped below conversion value, arbitrageurs would snap it up, or convert it and sell the common to make an instant profit. Similarly, if the price dipped below investment value, income-oriented investors would snap it up to get the conversion privilege for free.

How a convertible trades: It usually trades at a premium over both its conversion and its investment value. Investors may pay more than conversion value because the convertible pays higher income than the corresponding common stock. And investors may pay more than investment value because there is a chance that if the stock rises, the convertible's price will rise, too.

If you examine the price path of a convertible, you can see that at any point, the convertible will rise faster than it will fall. This, then, is favorable leverage; it follows that the convertible must have a better risk/reward ratio than the stock, for it will share in a greater proportion of any rise than in a decline.

Studies show that convertibles consistently outperform common stocks, over periods of five years or more. Why this should be so is best explained if we look at what happens in various phases of the market. When the market falls, it's easy to see that convertibles will do better. Not only do they fall less, but they also provide greater income. In a flat market, their greater income is the deciding factor. In a rising market, convertibles do not normally appreciate in price as fast as the common, but if the market rise is slow, the greater income from convertibles causes the total return from convertibles to equal or exceed the total return from common stocks. Only in a rapidly rising market, then, do convertibles fall behind. That convertibles have historically outperformed common stocks suggests what we already know, that stocks don't spurt upwards most of the time.

And finally: One of the most attractive features of convertibles, a feature pointed out by consultants to pension funds, is that a convertible portfolio will typically be less volatile than a portfolio of common stocks... which means that convertibles offer investors a more favorable risk/reward ratio than common stocks.

* * * * *

This Week In Barron's

The July 11, 2005 edition of Barron's is out, and for those of you who take a serious interest in mutual funds, this issue contains Lipper's quarterly mutual fund list which is probably the most comprehensive listing of mutual funds that you can find anywhere!

* * * * *

Buy and Hold: The Rest of the Story

We all make a lot of our investment decisions by creating a pair of alternatives and then choosing between them. Many an argument about investing comes down to this kind of choice too: Either pursue a buy-and-hold strategy, staying fully invested in the market through all of its ups and downs, or else try to time the market, by moving out near predicted tops and back in near bottoms.

Unfortunately, it's easier to make bad decisions than good ones this way. Too often , the alternatives are described inaccurately. And almost inevitably, other viable choices are ignored.

The argument between buy-and-hold and market-timing strategies usually goes astray in just such a way. First, most studies supporting one strategy or the other are fantasies that have little to do with the way either works for real investors. Secondly, thinking only in terms of these two choices blinds investors to a third way, one that deserves your most serious consideration.

The best way to demonstrate why the either/or choice between buy-and-hold and market-timing is so misleading is to look at one of the studies that argues this side or that. According to this study, $5,000 invested in the S&P 500 Index at the stock market's peak each year for the past 20 years would be worth more than $465,000 at the end of that 20 year period... NOTE: A market peak is the worst time to buy, and yet, Buy and Hold, the study says, works!

But what exactly does that study prove? Almost nothing, it turns out. First, the study really says very little about the superiority of either market-timing or buy-and-hold. Instead, it's really an endorsement of dollar-cost-averaging, a proven investment technique that virtually everyone on either side of the market-timing debate endorses. In dollar-cost-averaging, an investor sets aside the same amount of money every month or every year and ignores market gyrations. In the case of a new investor building a market portfolio, it can be an excellent strategy -- provided that investor has many years to wait before needing his or her money.

Second, the study doesn't accurately describe the two alternatives. The period of the study - the past 20 years - is itself a sort of distortion. It's common knowledge that the past decade hasn't been representative of the long-term profits available from the stock market. True, the period 1995 to first quarter 2000 produced returns that were incredible, however, since that time we have been in a secular bear market in which we are presently enjoying a cyclical bull period which some market pundits are predicting may end within the next thirty days!

The timing of those market peaks and downturns is just as important as is their frequency. Suppose that study had begun in 1955 and run for 20 years, so that the period ended with the steep 1973-74 bear market decline. The outcome would be shockingly different. In this case, the investor's total profit would be only 36 percent. Imagine saving and investing regularly for 20 years and ending up with less than you could have earned from a savings account yielding 3 percent.

Buy and hold does make sense for the new investor. But the closer an investor is to retirement or to needing his or her investment capital, the more dangerous a buy-and-hold strategy becomes. The numbers are very clear.

A student of bear markets can point to other flaws in buy-and-hold studies. For example, most buy-and-hold arguments and historical studies use blue-chip averages like the Standard & Poor's S&P 500 Index and the Dow Jones Industrial Average in calculating bear market risks and losses. Both are large-company indexes that ride through market downturns very differently from small company indexes, like the NASDAQ or the Value-Line Indexes.

Of course, it's one thing to point out the problems in these pro buy-and-hold studies and quite another to prove that market timing is a superior, or even valid strategy - especially when most studies in favor of market-timing are seriously flawed in their own way. To prove that market-timing works, these studies often assume an ability to get in and out of the market at bottoms and tops. Market timing of this sort is virtually impossible.

But consider a third alternative. Most healthy bull markets share certain characteristics. These include declining or stable interest rates, broad participation and strong leadership among stocks, and an identifiable uptrend in market indexes. The more characteristics like these you can identify, the more aggressive an investment strategy you should employ. The fewer you see, the more cautious a course you should steer.

Merely knowing that the Federal Reserve had started to raise interest rates should have been strong confirmation that the first half of 2005 would not be good to investors. When indicators like this one start pointing to danger, prudent investors move to reduce the risk of bear market losses by shifting some of their portfolio out of the markets.

Most investors who use portfolio allocation only shift their assets between stocks and bonds, staying totally invested at all times. But that doesn't reduce risk when bonds fall at the same time as stocks. And as we saw in the inflationary decade of the 1970s, bonds can tumble even further than stocks.

There is a better option, one that treats cash (90-day T-bills or Treasury money market funds) as a viable investment alternative at specific times.

To avoid overestimating an investor's ability to know when to make a move, let's pick a very simple rule as a guide. We'll use a moving average to gauge the market's long-term trend. For example, a 150-day moving average of the S&P 500. We can calculate that average by taking the closing prices of the S&P 500 Index on each of the last 150 trading days, and averaging them. Then, we use this indicator to read the market. If today's close of the S&P 500 Index is greater than that average number, then we can conclude that the market is in an uptrend. If instead today's S&P Index is less than the moving average, the market is in a downtrend.

Now suppose we buy a mutual fund approximating the S&P 500 Index when the index is trading above the 150-day moving average. Suppose also that whenever the S&P 500 Index falls below the 150-day moving average, we then shift our portfolio into the safety of T-bills or a treasury money market fund.

Over the past 40 years, such a strategy could have more than doubled an investor's total return from the stock market - as compared with a buy-and-hold strategy for the same time period. These results come from risk management, and not from picking tops and bottoms.

The individual using the 150-day moving average to determine when to sit quietly on the sidelines in cash wouldn't have avoided all down markets, but the worst-case loss would have been a 15 percent loss. This strategy would have avoided every one of the major losses during this period, however, even though it never caught the exact top or bottom of the market. It merely introduced sensible risk management to any portfolio that followed this strategy.

There are alternatives to a blind buy-and-hold strategy. The wise investor knows that the best strategies don't just seek the highest possible return - but the highest return with the lowest risk!

* * * * *

NEXT MEETING: Thursday - July 21, 2005

We continue our Summer Series into the month of July, and this time we'll be discussing what can best be described as "Stock Market Rules" - I'm sure you've heard some of them such as, "Buy Low and Sell High" or "Buy on the Rumor and Sell on the News." There are more than 70 such investment axioms and we'll explain some, examine some, and debunk some others. And of course you will have a chance to add your own "two cents worth" into the discussion.

Then I'll introduce a "Stock To Watch" - but once again a reminder that this is NOT a recommendation to buy the issue. We merely bring it to your attention as an issue that pays a very nice dividend and has excellent prospects for future price appreciation. Beyond that, it's up to you to do your homework and to determine whether or not this company can be a "fit" for your portfolio.

Any remaining time we'll devote to our "Shoot-the-Bull-and-Bear-Session."

--------------------------------------

Our meetings are held at the DePaul University - Naperville Campus, located at 150 West Warrenville Road in Naperville, Illinois. Meetings begin at 7:00 PM and end promptly at 9:00 PM. These meetings are open to anyone who shares our interest in learning more about investing.

Because there are expenses associated with maintaining a group such as this, we do have a $15.00 yearly membership fee which entitles you to attend every one of the twelve (12) meetings we hold throughout the year. Non-members are welcome to any meeting for a $5.00 donation per meeting.

If you have questions or need further details then please send an e-mail to:
rwm123@hotmail.com

* * * * *

7 Habits Of Highly Effective Investors

Is the ability to rack up, say, a 15 percent return, year in and year out, a gift that some people have? Does the average investor need the services of some high-priced guru or a glitzy gimmick to survive in the market? The answer to both questions is no. Investing does not depend on alchemy. Effective investors are made, not born!

We've talked in the past about what it takes to make money in the markets, and we know that effective investors succeed using all sorts of different systems: Some are growth investors, while others emphasize income; some hold for the long term and measure their holding period in years, while others flip stocks in just a few days.

So what do they have in common? They approach investing as something that requires not only discipline and hard work, but also consistency. Whether highly efficient or almost irrationally idiosyncratic, their investing habits are as carefully orchestrated as are their portfolios. These investors have taken the time to learn what they need to know, and just as importantly, they have also learned what to ignore. But most of all, their investing styles grow out of their personalities and histories; they know their strengths and they also know how to compensate for their weaknesses. And best of all, just about anyone can become an effective investor!

Now let's examine these Seven Habits:

1. Enjoy The Process.

One of the keys to achieving success as an investor is to learn how to enjoy studying the stock market by finding ways to make it seem more like fun and not feel like work.

Although you may be living a very busy lifestyle, there are ways in which to weave the investing/learning process into the fabric of your busy days so as to make each step pleasureable, in and of itself. You need only to find those ways that best suit your particular set of circumstances.


2. Learn As You Earn.

Concentrate on one thing: your own growth as an investor. If you are just beginning the learning process, or if you have less than six figures of capital available for investing, then mutual funds are about the best place for you to be for the time being as you increase your own reservoir of knowledge.

Take the necessary time to improve your learning curve. Read and study books on investing, particularly those devoted to the areas of investing that interest you the most. And even more importantly, learn how to read and understand financial information such as that found in a company's 10-K report.


3. Leverage Your Knowledge.

Don't be like the large number of people who have potentially profitable information right under their very noses but don't take advantage of it.

Rather than blindly following the advice of those "experts" of dubious lineage - better known as analysts - instead, you should be actively investing in companies that you have studied and followed and understand - companies in which the upside potential should be mouthwatering, while the downside is limited to a point or two.


4. Narrow The Focus.

Nothing concentrates the mind like an investment that returns nearly 1,000 percent. And how do you find something like that? The message is very clear: Learn one industry, and learn everything about it. Ideally, you want to know as much as possible about an industry so you can filter out the BS!

When you concentrate on one area, you're not at the mercy of the market. If you really know the business and the company, you'll know when it's the market that's going crazy. A focused investor who knows the fundamental values of the companies in a sector should then be able to tell when that sector is becoming overvalued.


5. Wait For The Rewards.

Don't be afraid to make a long-term commitment to a stock that you have researched thoroughly and are convinced that it is a good buy. In essence, you should really approach every stock you buy with the intention of holding it forever.

Ideally, any prospective stock should be fast-growing, as well as a leader in its industry. It can't be trendy nor in a business that laymen can't understand. And if it passes these initial tests, then run a screen on the company's numbers. There are two important things to look for: Profits must have risen at least 15 percent annually for the past five years; and the last quarter's earnings must be higher than the preceeding quarter's.

Next, project the company's sales and earnings five years into the future, and look for the company to be growing significantly faster than the market average. Then calculate the company's average price-to-earnings ratio over the past five years, and consider the stock as a buy only if it is currently trading below that average.

Once you have done this analysis and made a purchase, you need not pay the company too much attention other than reviewing its price once a month. The goal here is to avoid falling into the trap of second-guessing that often undermines so many investors.

Genuine changes in a company's fundamentals - and not a transitory event like a price move - are the only events that should trigger a portfolio adjustment.

If one of the companies you are invested in should experience disappointing earnings, you should still hold on to it provided the explanation for that loss seems justifiable. And as you continue to monitor your portfolio periodically, the question you should always be asking yourself with respect to each investment is this: Knowing what I know, would I still buy this stock today?... If the answer is yes, then why worry?


6. Do Lots Of Homework.

If you have been investing for any length of time but are not having very good results, then a change in your habits is very much in order. And one of the best habits you can form is to devote a certain time every day toward reading books and periodicals devoted to investing. But books can only take you so far.

Also attending investment seminars (and I'm not referring to those "get rich quick" schemes you receive from some mailing list) or belonging to a support group such as A.A.I.I., are also very helpful. And one of the best "tips" I ever received is to never rely on a friend for investment advice, unless that friend knows more about investing than you do!


7. Get Paid To Wait.

One thing you learn after years of investing is that it doesn't pay to get excited. Calm, on the other hand, can be very lucrative, especially if you invest in a way that pays you in cash for staying calm. I'm speaking of course about dividends.

Whereas many investors seek out returns as high as 30 percent a year, to me, it just makes more sense to aim low. Be happy with 10 percent a year because more likely than not, your investment then will be in companies that are far more stable, and whose prospects for being able to continue paying out that nice dividend stream will also help to keep you from worrying. After all, peace of mind does have its price!

* * * * *

What To Look For In An Annual Report

As an investor, you probably are very aware of the prices of issues you own and those you are thinking of buying. And if you are particularly concerned about current income, you also pay close attention to dividend payments. However, most investors know very little about the fundamental figures that support both the price of a company's stock and its dividends. Although we may know where those figures can be found, many of us don't bother to look. Therefore, paying attention to a few basic items in the quarterly earnings reports and the annual report can be very revealing.

It is the bottom-line results of operations that you are most interested in. This is the final number on the Consolidated Statement of Income, and always is underscored by two lines. It refers to the company's net-income (the money the company has left over after paying bills, salaries and wages, taxes, interest on its loans, and other costs of doing business), which is the key earnings figure and the first one you should locate.

Look at the trend of the net-income figure in the five-year financial summary that appears in most annual reports. You would want to see that the trend is upward. Even more important, note whether net income is increasing at a faster rate than "net sales." Some companies show the year-to-year percentage increase in each of these figures, so you can easily compare them. Other companies calculate and report "return on sales" (that is net profit divided by net sales) for each of the five years. Any increase in return on sales means that profit margins on the company's goods and services are improving. The prospect for even higher earnings in the future may also be good.

To update a company's earnings trend over the course of the year, look at the net-income figure in its quarterly reports, issued every three months. There is much less information in these interim reports than in an annual report, but the net-income figures for the most recent months are compared with net income during the same three months in the previous year.

If the year-to-year comparison looks good, do not automatically assume that all is well. Look through the report - including the Chairman's letter and the footnotes -for any mention of "extraordinary" income or events that may have pushed-up current earnings. You cannot count on one-shot infusions of income and you can usually do better with companies that increase their earnings through regular operations.

To check on the prospects for dividend income, look at the Consolidated Statement of Shareholders' Equity in the annual report. There you again will find the net-income figure, and you will clearly see how much of those earnings have been paid out in "cash dividends." The dividend is not likely to be in danger if net income runs substantially higher than dividend payouts.

Earnings not distributed to shareholders are called "retained earnings" and are reported in the Consolidated Statement of Shareholders' Equity. These are funds that are reinvested in the company's operations. If these retained earnings are substantial and are growing year by year, you would want to see that the company earns at least as much on funds reinvested in its operations as you do on your own portfolio, or that the company is growing or has plans for acquisitions. Otherwise, the company might as well have distributed these funds as dividends.

The simplest way to measure how well the company is doing with these retained-earnings funds is to calculate net income as a percentage of the figure for shareholders' equity, which you will find in the section of the annual report called Consolidated Balance Sheet. Companies that are particularly proud of their return on shareholders' equity usually calculate that figure themselves (net income divided by shareholders' equity) and feature it in the summary of key financial information in the annual report.

* * * * *