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Addendum A: Investment Clubs, BetterInvesting.org, and the Stock Selection Guide

  • Page ID
    86740
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    Okay, now what?” may be what you are thinking at this point. Some of you may be ready to start identifying, investigating, researching, choosing, and subsequently monitoring individual prudent, long-term stock purchases on your own. Others may have already decided long ago that they will stick with time-tested mutual funds with managers that have shown they can produce healthy returns in both good times and bad. However, many of you are torn. You want to invest but you are hesitant, confused, maybe even terrified. Ah, Dear Readers, you are not alone. And we have just the solution to your dilemma, BetterInvesting.org.

    BetterInvesting.org, the new name for the National Association of Investors Corporation, has been around since 1951. For over 70 years, they have been helping individuals “learn while they earn.” BetterInvesting.org sponsors investment clubs. An investment club is a group of individuals who work together to educate themselves about investing. However, the members of the investment club are also pooling together their resources and building a portfolio of investments, most commonly individual stocks. Members typically contribute anywhere from $25 to $100 each month and the resulting pool of resources is used to buy investments. You can think of the investment club as a small mutual fund. (Legally, most investment clubs are general partnerships, although some may decide to use a different legal entity. No matter what, we gotta’ keep the IRS happy! Take BUS-120, Introduction to Business, or BUS-140, Business Law, at Southwestern Community College to learn more about business structures.)

    If you are interested in possibly joining an investment club in your area, please go to BetterInvesting.org and look for the chapter in your area. The chapter for those of us in the San Diego area is the Golden West chapter. Our chapter covers Los Angeles, Orange, Riverside, San Bernardino, San Diego, and Imperial Counties, as well as the greater Las Vegas area. All chapters have online Model Clubs where potential new members are invited each month to sit in on their meetings and watch and learn how an investment club works. Since the Covid pandemic, many chapters are now meeting online and inviting members from anywhere. We strongly urge you to consider joining an investment club.

    Over the 70 years of BetterInvesting,org’s existence, they have developed an investment model that is very robust. It is called the Stock Selection Guide, SSG for short. One of the attractive features of the SSG is that it is very visual, unlike the models that we covered in our text. Also unlike our models, the SSG is geared toward growth stocks and dividends are a secondary concern. Oh, by the way, BetterInvesting.org suggests that we should be reaching for a 15% annual return on our investments. What do you think about that?

    You can become a member of BetterInvesting.org if you want to experiment with the SSG without joining an investment club. BetterInvesting.org offers a thirty-day free trial membership. (Psst. Get the Individual Plus membership. It’s worth the extra $18 per year because you get to use the SSGPlus described below.) More than anything else, though, BetterInvesting.org is dedicated to investor education. Whether you are a member or not, you can use their Learn About Investing web pages to continue your investment educational journey. They offer hundreds of articles and videos. Check ‘em out!

    In the meantime, let’s take a very quick tour of the Stock Selection Guide. We are only going to look at just a small fraction of the many capabilities of this powerful tool. There are now two versions of the SSG, the SSGPlus and the CoreSSG. We will use the SSGPlus as it is a bit more powerful and easier to use. Once you have logged into BetterInvesting.org, you choose a new stock using the [Online Tools] dialog box or open one of your previous stocks using the [My Studies] option. Since the SSG is better suited to growth stocks, we will choose a fast-growing small-cap stock, Medifast, Inc., symbol MED. Similar to other online systems, you can use the ticker symbol or just type the name of the company and the system will do its best to find the correct stock for you. If you have the Individual Plus membership, the system automatically brings you to the SSGPlus screen.

    The BetterInvesting.org home screen. Here is where we enter the name or ticker symbol of the stock we are interested in researching.

    Once we have chosen the stock we want to study, we are brought to the [Analyze Growth and Quality] page of the SSGPlus.

    The Stock Selection Guide [Analyze Growth and Quality] page. Notice the [Research] tab in the upper-right hand corner.

    Here it is! Another sip from the financial firehose! Relax. Similar to The Value Line, the SSG is a rich and complex tool. You can start using just a handful of its capabilities and add more and more of its features as time goes by and you become more familiar with its tools.

    The first feature we want to highlight is the [Research] tab in the upper right-hand corner. Notice that from within the SSG, you can tap into a wealth of resources and research about the company. The [Research] tab pulls data from sources such as Reuters, Yahoo Finance, Google Finance, Marketwatch.com, CNN Money, The Motley Fool, Seeking Alpha, MSN Money, Finviz, BigCharts, StockCharts, and Zack’s. You also have access to the company’s website and the SEC EDGAR yearly 10K and quarterly 10Q filings. In my humble opinion, one of the most valuable features is the Member Sentiment. BetterInvesting.org members and investment clubs are encouraged to give their opinion on the values of companies. Anyone who has read Thinking Fast and Slow (and you should be one of them!) will recognize the importance and usefulness of the guidance of a large group of people when making uncertain decisions.

    The graph, however, is the most prominent and desired feature of the SSG. The three lines, from top to bottom, are the yearly sales (green), the pre-tax profit (magenta), and the earnings (blue). The BetterInvesting.org mantra is, “up, straight, and parallel.” Notice that the SSG uses our old friend, the logarithmic scale. When the lines are moving upward on a logarithmic scale, this signifies that the numbers are growing exponentially. BetterInvesting.org also wants the lines to be straight. This signals that the company’s growth has been study. Last, if the lines are parallel, this infers that all three, sales, pre-tax profit, and earnings, are growing steadily together. (For example, the company is not sacrificing pre-tax profit and earnings at the expense of growing their sales. Or they are not using accounting trickery to amplify their pre-tax profit and earnings while the sales are languishing.)

    Look at the graph for Medifast. From 2013 through to 2016, the lines are trending downward. However, since 2016, all three lines are “up, straight, and parallel.” This is BetterInvesting.org’s Holy Grail. Hence, the SSG says that this is a stock that is worthy of our study. Time to read everything we can find about the company, download their annual and quarterly reports, and consult The Value Line and other resources. Calculate their financial ratios. Do a Discounted Cash Flow Model analysis. Study their competitors. You know the drill!

    But wait, there are many other tricks up the SSG’s sleeve. We are now going to use the SSG to forecast sales and earnings growth and predict a high and low price for the next five years. Refer to the highlighted red box in the lower-left hand corner. Notice that the SSG has calculated the historical growth rates for sales, earnings, and pre-tax profit. Our job is to use our judgment to enter the growth rates for sales and earnings going forward. There are several tools that will help us. We can do our calculations or choose the predictions from several sources such as The Value Line. Ignoring the analysts’ optimistic predictions and erring on the side of caution, we chose 12% for both the sales growth and earnings growth. The SSG calculates the future sales and earnings based on our predictions and updates the graph.

    After entering our predictions for sales and earnings growth, the SSG updates the graph to show what sales and earnings will be over the next five years.

    The SSG is now showing what the sales and earnings will be for the next five years if our prediction of 12% growth comes to fruition. It is less dramatic than the previous five years. And that’s just fine with Your Humble Author. You may use 15% growth or more depending upon the courage of your conviction with respect to Medifast. That’s why there is chocolate and vanilla … and some people like strawberry!

    Now comes to best part! Using the tabs along the top of the graph, we now move from the [Analyze Growth and Quality] page to the next page, the [Valuation and Return] page.

    Here is the [Valuation and Return] page before we enter our predicted high price and low price over the next years.

    The SSG displays “INVALID” on the right-hand side of the [Valuation and Return] page. The SSG is saying that it can’t make a recommendation yet about the stock because we have not predicted a high price and a low price over the next five years. The [Valuation and Return] page has several tools to help you predict the high price and low price over the next five years. As with any complex tool, time and practice and judgment will dictate which tools you prefer. For now, we will use some trickery to enter a high price of just above $494 and a low price of just above $80. Once we have entered the high price and the low price, the SSG gives us a Buy, Sell, or Hold recommendation. The resulting SSG [Valuation and Return] page follows.

    After entering our predicted high price and low price, the [Valuation and Return] page gives us a Buy, Hold, or Sell recommendation. Very cool!

    The INVALID is gone and the [Evaluating Risk At a Glance] box gives us the SSG’s recommendation. Based on our predictions, the SSG is saying that the stock is in the Buy Zone. We will skip the reasoning behind how the Buy, Hold, and Sell zones are calculated and how recommendations are made. We refer you to the vast educational resources available on the BetterInvesting.org website to learn more. As mentioned, our goal was to simply give you a sip from the Stock Selection Guide firehose and whet your appetite to join an investment club.

    One common criticism of the SSG is that you can, “torture it to give you the recommendation you want.” Depending upon your judgments and predictions, the SSG will tell you that the stock is a Buy, a Hold, or a Sell. No tool is perfect. Similar to the valuation tools we learned in class, once you have done all your calculations and predictions, we strongly urge you to throw them all away, ignore the SSG recommendation, and ask yourself that simple question, “Do I want to own this company for the long term?”

    In any event, we hope this brief overview of BetterInvesting.org and their powerful Stock Selection Guide will motivate you to explore and possibly join their world. In my humble opinion, the absolute best benefit from BetterInvesting.org is simply networking and fellowshipping with individuals who have the same love of researching and investing as you do.