Slides from session 3- Sunset High School financial literacy

Here are the slides from my savings and investment class at Sunset:

Attention active investors: helpful red flags

Are you an active investor?  Do you go deep into company’s income statements, balance sheets, cash-flow statements to find undervalued stocks?

If so, this link on is a must-read.

In this article Richard Wyman uncovers in great detail common accounting tricks that corporations use to make their financial standing appear better than it actually is.  These tips will help you differentiate between a great undervalued stock and an Enron.

The million dollar mistake that 20-somethings make wrote this great article about the number of 20-30 year old’s who are abandoning their 401K plans at work because of the turmoil in the markets.  This is unfortunate.  I don’t know when the stock market will turn around but I am willing to bet my life savings that by the time I am ready to retire (in 20+ years) the market will have returned and appreciated many fold.

Here’s why NOT participating in a retirement plan during your early years can become a million dollar mistake:

Let’s compare a person who starts at the age of 23 versus 33.  We’ll assume they’re each able to save $200 per month, will retire at 65, and will earn a 10% return on their investments.

By the time they each reach the age of 65 here are the results:

Started at 23: $1,561,776

Started at 33: $561,667

Those 10 years cost the latter individual over $1,000,000.  OUCH!

Lesson: Don’t be discouraged by market fluctuations, sign up for your companies 401K and forget about it!

Phil Fisher’s “Common Stocks and Uncommon Profits”

Common Stocks and Uncommon Profits is considered to be Phil Fisher’s signature book on investing. This investment classic was originally published in 1958 but the content is timeless.

In this book Fisher describes his unique investment criteria which is more growth oriented than the value approach that I have been more interested in as of late. However, despite the difference in investment objective Fisher has plenty of valuable insights to share about his research approach which is much more qualitative in nature than Graham’s & Dreman’s.

I was initially introduced to Phil Fisher by reading The Warren Buffet Way by Robert Hagstrom, Jr. In Hagstrom’s book he describes Warren Buffet’s investment philosophy as a synthesis between the Benjamin Graham & Phil Fisher.

In my quest to learn everything I can about Warren Buffet and his investment approach I naturally had to read this investment classic.

Lesson’s/ Note’s from Common Stock and Uncommon Profits:

* You can get an idea of how Fisher views “stockbrokers” in his humorous description- “men who know the price of everything and the value of nothing.”

* On patience- “…it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens.”

* On buying companies and sticking with them- “ ….finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear.”

* On stocks vs. bonds- “Bonds have become undesirable investments for the strictly long-term holdings of the average individual investor.”

* On causes of inflation- “It seems to me that if this whole inflation mechanism is studied carefully it becomes clear that major inflationary spurts arise out of wholesale expansions of credit, which in turn result from large government deficits greatly enlarging the monetary base of the credit system.”

* “Scuttlebutt”- This is the word Phil Fisher uses to describe his method of interviewing various people with ties to a specific company to learn more about the firm’s prospects. These individuals may include competitors, suppliers, customers, “scientists” (research and development), industry analysts, etc.

* Fisher’s 15 points- These 15 points represent the criteria that a company must meet in order to be an attractive investment. Fisher admits that a company may not need to meet ALL 15 of these criteria but certainly should meet most of them.

* Point 1- Does a company have products or services with growth potential?

→ Measuring growth- “….growth should not be judged on an annual basis but, say, by taking units of several years each.”

→ “These companies which decade by decade have consistently shown spectacular growth might be divided into two groups….I will call one group…fortunate and able and the other group….fortunate because they are able.” Good investments are those that are fortunate because they are able.

→ On management- “…the investor must be alert to whether the management is and continues to be of the highest order of ability; without this, the sales growth will not continue.”

* Point 2- Does management have a determination to continue to develop products or processes that will further increase sales after existing products and processes have been exploited?

→ Google?- “The investor usually obtains the best results in companies whose engineering or research is to a considerable extent devoted to products having some business relationship to those already within the scope of company activities.”

* Point 3- How effective are the company’s R & D efforts in relation to its size?

* Point 4- Does the company have an above-average sales organization?

* Point 5- Does the company have a worthwhile profit margin?

→ a comparison of profit margins should be made “for a series of years.”

→ boom years vs. slow years- During boom years in an industry the marginal companies will grow profits at a quicker pace than more favorable companies. This is because in less prosperous times the marginal companies are not as profitable. Be aware of this when comparing profit margins.

* Point 6- What is the company doing to maintain or improve profit margins?

* Point 7- Does the company have outstanding labor relations?

* Point 8- Does the company have outstanding executive relations?

* Point 9- Does the company have depth in its management?

* Point 10- How good are the company’s cost/ accounting controls?

* Point 11- Are there aspects of the business which make the company outstanding to its competition?

→ I think of this as the concept of a “moat” which Buffet often looks for in a company.

* Point 12- Does the company have a short-range or long-range outlook in regard to profits?

* Point 13- In the foreseeable future will the growth of the company require sufficient equity financing that will cause dilution which will ultimately cancel out current stockholders benefit?

* Point 14- Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles occur?

→ This is another are where I think Fisher had great influence on Buffet.

* Point 15- Does the company have management of unquestionable integrity?

* On growth vs. value- “The reason why the growth stocks do so much better is that they seem to show gains in value in the hundreds of per cent each decade. In contrast, it is an unusual bargain that is as much as 50 per cent undervalued.”

* A stock should be purchased when, “a worthwhile improvement in earnings is coming in the right sort of company, but that this particular increase in earning has yet produced upward move in the price of that company’s shares. I believe that whenever this situation occurs the right sort of investment may be considered to be in a buying range.”

* On when to sell- “This is when a mistake has been made in the original purchase and it becomes increasingly clear that the factual background of the particular company is… less favorable than originally believed.”

* On emotion- do not let ego enter into investing decisions. When an investment goes bad admit you were wrong and take your medicine (sell).

* On learning from mistakes- Fisher encourages investors to learn from their mistakes.

* Never sell a stock simply because it has significant outstanding gains. Fisher provides an analogy about a class of students. As an investor you are able to “buy” the future income stream of one of the students. As an investor you buy the student who had the brightest prospects. If this student goes onto law and school and becomes a highly paid lawyer you wouldn’t necessarily sell the stock in this student after they had made a lot of money in their career because it is likely that this person still has the highest income potential.

* On dividends- Fisher, like Buffet, concerns himself more with return on capital than on dividends paid.

* On diversification- Like Buffet, Graham, and many other value investors Fisher believes that investors should concern themselves with investing in good companies more than in many companies.

* On diversification- “Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.”

* Buying best firms in un-favor industries- Although Fisher is not considered to be your classic value investor he does recognize that trends and fads do appear in the financial markets. Because of that he advocates for buying best firms in out-of-favor industries.

* On finding investment ideas- For Fisher, the most valuable source of investment ideas was in talking with other investment professionals whose opinions and knowledge he respected.

* In order to be a successful investor one must have “great effort combined with ability and enriched by both judgment and vision.”

Roth 401K: Tax Me Now

Our company recently changed 401K providers which offered me the opportunity to evaluate not only the standard 401K but also the Roth 401K.  I had read about the Roth 401K back in December of 2007 and was pleased to see that these options were beginning to work their way into employers’ offerings. 

It also created a new decision that I had not encountered before.  Do I invest my 401K contributions into a standard 401K and take the immediate benefit of the income tax deduction? or do I allocate my contributions into Roth 401K where I pay income tax on my contributions but am able to access the money tax-free in retirement? 

After talking with my investment advisor (who I highly recommend- let me know if you’d like his information by emailing me) he convinced me to put a portion of my monthly contribution into each so that I would have two buckets to play with when I hit retirement. 

If you’re coming across a similar decision in the future I’d encourage you to read this article which explains the 401k & the Roth provision as well as talk with your financial advisor.