WHY INVEST IN STOCKS? - · PDF fileCourse of Study for Beginning Investors Why Invest in...

Course of Study for Beginning Investors

Why Invest in Stocks

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WHY INVEST IN STOCKS?

Ann Cuneaz

Education Program Manager

BetterInvesting

Ken Kavula

President

Mid-Michigan Chapter



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Disclaimer:

All stock references are meant to be used for

educational purposes. No recommendation for

purchase or sale is intended or implied.

This presentation is being recorded

for future use!



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Goals for Tonight’s Class

Understand the

importance of making

financial goals and

plans.

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Tonight’s Goals…

Become familiar with

the concept of

compounding.

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Our Goals (cont.)…

Understand why a

long-term view of

investing minimizes

risk.

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Our Final Goal…

Understand why the

BetterInvesting

method is preferred

for people that want

to manage their own

money.

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FINANCIAL FREEDOM

• What does it mean?

• Some examples

– Travel anywhere, anytime

– Help the grandkids

– Eat steak and sip good martinis

– Not worry about emergencies

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WANTS AND NEEDS

• Travel

• Dining out

• New car every three

years

• Charitable

contributions

• Plastic surgery

• Gasoline

• Health insurance

• Pay bills on time

• Property insurance

• Prescription drugs

• Food

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HOW WILL YOU REACH YOUR GOALS?

• Fully fund your 401K

• Move to Jamaica

• Create and fund an IRA

• Win the Powerball lottery

• Invest small sums regularly in stocks

• Stuff $100 in your mattress every payday

• Marry a wealthy widow(er)

• Buy US Savings Bonds

• Buy a bigger house

• Expand a collection

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ARE YOU IN CONTROL?

• Lottery

• IRA

• 401K

• Inheritance

• Passbook Savings Account

• Savings/Corporate/Municipal Bonds

• Stock Portfolio

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DO YOU HAVE A PLAN?• An Oil Well

• A Written Budget

• Collectibles

• A Pension

• The Winning Numbers

• Investments

• Social Security

• Annuities

• A Combination of Strategies

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WHATEVER YOUR PLAN,

PAY YOURSELF FIRST!

INVEST IN YOUR

FUTURE!



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THE POWER OF COMPOUNDING

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Which would you take?

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A million dollars or one cent

doubled each day for 30 days?



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COMPOUNDING

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Day 1 $.01

Day 2 $.02

Day 3 $.04

Day 4 $.08

Day 5 $.16

Continue this pattern for 30 days……



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…… Day 29 $2,684,355

Day 30 $5,368,709

What was the growth rate?

100% compounded daily

What kind of growth might be

reasonable?

How about doubling your money

in five years?



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Fifteen percent yearly growth over five years

doubles your money!

Take your calculators and start with $100.

Multiply by 1.15 to see the value after one

year at 15% annual compounded growth.

Do this four more times to see the value at the

end of five years!

Interest $100 * .15 = $ 15

Principle $100

TOTAL $115



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$100 x 1.15 = $115 at end of Year 1

$115 x 1.15 = $132 at end of Year 2

$132 x 1.15 = $152 at end of Year 3

$152 x 1.15 = $175 at end of Year 4

$175 x 1.15 = $201 at end of Year 5

HERE ARE THE NUMBERS!



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WHAT ARE THE BEST INVESTMENTS?

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WHAT GENERATES THE BEST RETURNS?

• Savings Account or CDs

• Bonds (Government, Corporate, etc.)

• Common Stocks

• Real Estate

• Gold

• Collectibles



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Here’s how some of

the financial asset

classes stack up.

All asset classes

begin in 1925 with a

value of $1.00.

Source: Morningstar



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If common stock is the best

investment over the long

term, what is the potential

risk?



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Yearly Returns (S&P 500) Since 1941

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2012 2009

2010 2003

2006 1999

2004 1998

2011 1993 1996

2007 1988 1983

2000 2005 1986 1982

1990 1994 1979 1976 1997

1981 1992 1971 1972 1995

1977 1987 1968 1967 1991

1969 1984 1965 1963 1989

1962 1978 1964 1961 1985

2001 1960 1970 1959 1955 1980

1973 1957 1956 1952 1951 1975

2002 1966 1953 1948 1949 1943 1950

2008 1974 1946 1941 1947 1944 1942 1945 1958 1954

-40 to -30 -30 to -20 -20 to -10 -10 to 0 0 to 10 10 to 20 20 to 30 30 to 40 40 to 50 50 to 60

POSITIVE

RETURNNEGATIVE

RETURN

Data source: http://www.moneychimp.com/features/market_cagr.htm



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Five-Year Blocks of Time

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Since 1945, the majority

of 5-year annualized

returns have been

between 0% and 20%.

History suggests that we

can expect better returns

from a long-term

perspective.

2007

2001

1993

1990

1985

1984

1982 2000

1980 1996

1979 1995

2012 2006 1968 1992

2010 1994 1967 1991

2009 1981 1965 1988 1998

2011 2005 1972 1964 1987 1997

2008 1978 1971 1962 1983 1989

2004 1976 1966 1961 1953 1986

2003 1975 1963 1959 1952 1958

2002 1973 1960 1957 1951 1956

1977 1970 1950 1948 1946 1955

1974 1969 1949 1947 1945 1954 1999

-10 to -5 -5 to 0 0 to 5 5 to 10 10 to 15 15 to 20 20 to 25 25 to 30

POSITIVE

RETURNNEGATIVE

RETURN



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10-Year

Blocks of

Time

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There are only two

negative numbers on

this chart!

2000

1999

1998

1997

1996

2012 1995

2007 1993

2006 2004 1992

2005 2003 1991

2002 2001 1989

1982 1994 1988

1981 1990 1987

1980 1986 1963

1979 1985 1961

1976 1984 1960

1973 1983 1959

2011 1972 1967 1957

2010 1971 1965 1956

1978 1970 1964 1955

1977 1969 1962 1954

2009 1975 1968 1953 1952

2008 1974 1966 1950 1951 1958

-10 to -5 -5 to 0 0 to 5 5 to 10 10 to 15 15 to 20 20 to 25 25 to 30

POSITIVE

RETURN

NEGATIVE

RETURN



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INVESTING METHODS AND THE

BETTERINVESTING WAY

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CONVINCED?

If stocks show the best return over

time, then becoming an INVESTOR is

key to your financial freedom.

What kind of INVESTOR will you

become?



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INVESTING METHODS

• Fundamental

• Technical

• Speculative

People make money using all of these

methods!



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INVESTING ORIENTATION

• Value

• Income

• Growth

People make money using all of these

orientations!

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KEYS TO SUCCESS

• Pick a method and an orientation

• Learn the discipline

• Practice

• Practice

• Practice

• Maintain the discipline

• Do not jump from style to style to style

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BetterInvesting

• Educating investors since 1951

• Fundamental Investing

– Buy high quality growth stocks at a fair price

• Goal oriented

– Aim to double your money every five years

• Long-term focus

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BetterInvesting Method

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• Sleep-at-Night Investing

• Long-term

– Generally, aim to hold a stock at least five years or as long as it’s a good investment

• Conservative

– Purchase companies with consistent history of growth and quality



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Measuring Success

• BetterInvesting 100 Index

– Created in January, 2008

– Index made up of top 100 holdings of

investment clubs

– Rebalanced at the beginning of every year

– BIXX

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BetterInvesting Methods Work!

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BI Top 100 has outperformed the S&P 500, the Dow Jones

Industrial Average and the Russell 2000 over the past 5 years!



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PRINCIPLES OF BETTERINVESTING

• Invest Regularly

• Reinvest All Earnings

• Diversify

• Invest in Quality Growth

Companies

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BetterInvesting

• The BetterInvesting Stock Selection Guide (SSG) is our key to evaluating and purchasing stocks

– Provides a method to evaluate the quality of a stock

– Uses your judgment to determine whether the stock is a BUY at today’s price

– Calculates potential compounded annual return for next five years

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BetterInvesting Believes in

Investment Clubs

• Meet and invest together

on a regular basis

• Share the responsibility

for stock studies

• Provide support and

education for investors at

all levels of experience

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KEEP LEARNING

Next Steps

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Learn How with BetterInvesting

• Open House: Sample Classes and Tools

– www.BetterInvesting.org/OpenHouse

• Online Tools and Tutorials

• Online Stock Selection Guide Trial Version

– Try it free!

tools.BetterInvesting.org/StockAnalysis

• Chapter Classes

• National and Regional Conferences

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The Next Introductory Session

Understanding the Jargon (free)

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Introducing basic vocabulary and

investing concepts

This is a recommended prerequisite to the

Introduction to the Stock Selection Guide series.

Learn more at www.betterinvesting.org/IntroSSG



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Introduction to the Stock Selection Guide (SSG)A Series of Five Classes

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Learn more at www.betterinvesting.org/IntroSSG

1• Selecting the Best Companies

2• Determining a Fair Price

3• Estimating Future Growth

4• Estimating Future P/Es

5 • Review and Practice



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WHY INVEST IN STOCKS? - · PDF fileCourse of Study for Beginning Investors Why Invest in...

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