EWHieeeOrg R1 Berkshire Notices InvestmentStrategyForEngineersNovember192010

Investment Strategy for
Engineers
Roger Manzolini
October 10, 2003
Money and Investing

Investment Strategy for Engineers
Roger Manzolini
November, 2010
Roger Manzolini
October 10, 2003
Disclaimer
This presentation is the creation of Roger

Manzolini and is to be used for informational use
only
Roger is not a certified financial planner nor a
financial advisor of any kind, so use of this
information is at your own risk
None of the information provided should be
considered a recommendation or solicitation to
invest in, or liquidate, a particular security or
type of security
Additional caution: My peers call me Maddog
Roger Manzolini
October 10, 2003
Portfolio Strategy Topics

Introduction
Capital Market Characteristics
Composition
Asset Classes
Performance

Risk and Return
Ideal Portfolio
Stock Selection
Financial Ratios
10 Things to Know
Roger Manzolini
October 10, 2003
Characteristics of an Engineer
Per Google search

Sales people at the local computer store cant answer any of your questions
Youve already calculated how much you make per second
You look forward to Christmas so you can put the kids toys together
You have saved every power cord from every broken appliance
You still own a slide rule and know how to use it
Youve tried to repair a $5.00 radio
You window shop at Radio Shack
At an air show, you know how fast the skydivers are falling
You see a good design, and have to change it
You take a cruise so you can go on a personal tour of the engine room
You know what http:// stands for
You spent more on your calculator than you did on your wedding ring I paid $8
You comment to your wife that her straight hair is nice and parallel
Your spouse doesnt have the foggiest idea of what you do at work
You think that people yawning around you are sleep deprived
Roger Manzolini
October 10, 2003
Characteristics of an Engineer
As observed by Roger

Like manipulating numbers

Like doing things yourself
Creatures of habit; pretty much the same routine every day
Work, work, work, no time to relax or play
Dont plan week-ends or vacations
Not able to dress themselves
Show limited interest in others, especially non-contributors
Tend to dislike managers
Tend to repeat themselves
Very interested in how things work
Very conservative
Not particularly interested in money
Dont like to spend money
Reluctantly trusting verify everything
Generally not active traders
More buy and hold type of investors
Roger Manzolini
October 10, 2003
Introduction
Fitting the strategy to the audience

Goals need to be established by each individual

I geared this presentation towards a typical conservative engineer
I assumed the most prevalent goal of:
Financial success in the stock market; that is:
Consistent, market-beating returns

Do better than the general market (10-12% annually)
Improve your return year over year

Do better each year
Keep losses (trade) small

Less than 1-2% of total portfolio
Roger Manzolini
October 10, 2003
Introduction
Compound Interest
480
480 $
6
0.055
0.004583333
174,103.96 $
0.116
0.009666667
1,037,198.97
Exactly what Einstein said (or even if he said anything at all) about
compound interest varies quite a bit from source to source. He allegedly
said that compound interest was:
the greatest invention in human history
the greatest invention of mankind
the greatest invention of all
the most significant invention of the 19th century
the most powerful force in the universe
Whatever he allegedly said, the message is clear; the power of compound

interest is strong and cannot be overlooked. E.g.
Saving $100/month for 40 years @ 5.5% grows to ~$174K
Saving $100/month for 40 years @ 11.6% grows to ~$1M
~Twice the interest ..~Six times the result

Roger Manzolini
October 10, 2003
Early Saver
Late Saver
($5k for 10 years; age 22-31)
age
Money
and
Investing
Early
Savings
Lesson
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
save
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$50,000
8.00%
interest
total
save
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$250,000
8.00%
interest
Late saver contributes 5 times as much
total
Early Saver
Late Saver
age
Money
and
Investing
Early
Savings
Lesson
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
save
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$50,000
8.00%
interest
$400
$832
$1,299
$1,802
$2,347
$2,934
$3,569
$4,255
$4,995
$5,795
$6,258
$6,759
$7,300
$7,884
$8,514
$9,195
$9,931
$10,725
$11,583
$12,510
$13,511
$14,592
$15,759
$17,020
$18,382
$19,852
$21,440
$23,155
$25,008
$27,008
$29,169
$31,503
$34,023
$36,745
$39,684
$42,859
$46,288
$49,991
$53,990
$58,309
$62,974
$68,012
$73,453
$79,329
$1,020,944
total
$5,400
$11,232
$17,531
$24,333
$31,680
$39,614
$48,183
$57,438
$67,433
$78,227
$84,486
$91,244
$98,544
$106,428
$114,942
$124,137
$134,068
$144,794
$156,377
$168,887
$182,398
$196,990
$212,749
$229,769
$248,151
$268,003
$289,443
$312,598
$337,606
$364,615
$393,784
$425,287
$459,310
$496,054
$535,739
$578,598
$624,886
$674,876
$728,867
$787,176
$850,150
$918,162
$991,615
$1,070,944
$1,070,944
15.64
8.12
5.62
4.37
3.63
3.13
2.78
2.52
2.32
2.16
2.03
1.92
1.83
1.76
1.69
1.64
1.59
1.54
1.51
1.47
1.45
1.42
1.40
1.38
1.36
save
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$250,000
8.00%
interest
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$800
$1,664
$2,597
$3,605
$4,693
$5,869
$7,138
$8,509
$9,990
$11,589
$13,316
$15,182
$17,196
$19,372
$21,722
$24,259
$27,000
$29,960
$33,157
$36,610
$40,338
$44,365
$48,715
$53,412
$58,485
$539,544
Early saver accumulates 35% more
total
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$10,800
$22,464
$35,061
$48,666
$63,359
$79,228
$96,366
$114,876
$134,866
$156,455
$179,771
$204,953
$232,149
$261,521
$293,243
$327,502
$364,502
$404,463
$447,620
$494,229
$544,568
$598,933
$657,648
$721,059
$789,544
$789,544
Introduction
Start Early
What about at different interest rates?
Return
2%
4%
6%
8%
10%
12%
Early Saver
invested $50k
$109,491
$236,886
$506,544
$1,070,944
$2,239,402
$4,632,883
Late Saver
invested $250k
$326,709
$433,117
$581,564
$789,544
$1,081,818
$1,593,339
Difference
in accounts
($217,218)
($196,231)
($75,020)
$281,400
$1,157,584
$3,039,544
Clue: Time and Rate of Return is critical.

Small bits of return can make a huge difference
Roger Manzolini
October 10, 2003
11
Introduction
High Level Strategic View
Portion of money
to be managed
10% but not more
than $30K
Options used to generate money

High risk/high return (30% or more)
Investment
Portfolio
Stocks / Bonds used to grow money

Moderate risk/moderate return (8-12%)
Savings Portfolio
CDs / Treasury Bills used to

preserve / protect money (1-5%)
75-50%
15-40%
Money
Engine
Roger Manzolini
October 10, 2003
12
Introduction
Savings Portfolio
Dividend as of
11/17/2010
Savings Portfolio Strategy

Establish a ladder of CDs
and Treasury Bills
Generally longer term
certificates or T-Bills pay
higher premiums.
Give up some liquidity for
2.5 times the premium
Roger Manzolini
1.04%
1.54%
1.88%
2.23%
2.57%
1.5
1.8
2.1
2.5
1-yr CD
2-yr CD
3-yr CD
4-yr CD
5-yr CD
multiplier
year 1
Buy 1-yr, 2-yr,

3-yr, 4-yr, and
5-yr CDs
year 2
Roll 1yr CD
into 5yr CD
year 3
Roll 2yr CD
into 5yr CD
year 4
Roll 3yr CD
into 5yr CD
year 5
Roll 4yr CD
into 5yr CD
year 6
and all
subsequent
years
Roll 5yr CD
into 5yr CD
October 10, 2003
13

Market Composition
Stock Market
12 Sectors
Basic Materials, Capital Goods, Conglomerates, Consumer Cyclical,

Consumer/Non-Cyclical, Energy, Financial, Healthcare, Services,
Technology, Transportation, Utilities
Each sector is comprised of a number of industries
102 industries
E.g. the Technology sector is comprised of 11 industries
Communications Equipment, Computer Hardware, Computer
Networks, Computer Peripherals, Computer Services, Computer
Storage Devices, Electronic Instr. & Controls, Office Equipment,
Scientific & Technical Instr., Semiconductors, Software &
Programming
Each industry is comprised of a number of stocks
~14,000 stocks
E.g. the Computer Hardware industry is comprised of 34 stocks
Roger Manzolini
October 10, 2003
14
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
# Stocks in each Industry
207
105
26
62
23
23
1,045
48
384
81
92
41
37
84
42
159
197
11
Roger Manzolini
90
Services
Technology
Transportation
Utilities
4
1,054
10
3,674
4
1,243
25
2,296
11
1,990
6
226
3
262
Non-Cyclicals
Consumer
12
479
Healthcare
1
90
Cyclicals
Consumer
Conglomerates
Goods
7
635
Financial
11
2,032
Energy
102 Industries
14,387
Stocks
Capital
Sectors
Basic
12
Materials

Market Composition
8
406
70
37
57
122
708
78
224
11
164
28
45
44
91
25
43
15
12
83
15
8
49
27
15
175
12
79
12
83
712
202
23
52
22
127
183
2,252
43
649
201
158
33
344
101
369
76
296
38
66
49
75
19
345
57
41
102
65
46
33
26
50
11
119
16
62
57
99
34
38
49
347
28
266
17
129
272
586
43
48
20
38
66
71
27
October 10, 2003
15

Market Composition
12 Sectors
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
102 Industries
Basic Materials
Capital Goods
Conglomerates
Consumer Cyclical
Consumer/Non-Cyclical
Energy
Financial
Healthcare
Services
Technology
Transportation
Utilities
Roger Manzolini
11
7
1
12
8
4
10
4
25
11
6
3
14,387 Stocks
2,032
635
90
479
406
1,054
3,674
1,243
2,296
1,990
226
262
October 10, 2003
16

Market Composition
The 34 stocks in the Computer Hardware industry

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
Apple Inc.
Agilysys, Inc.
Asiarim Corp
Boundless Corp
Softchoice Corp.
Canadian Energy Exploration
Inc (Tier2)
Intensity Company Inc
Concurrent Computer
Corporation
Cray Inc
Dell Inc.
Digi International Inc.
Global E-Point Inc
Gtsi Corp.
Hewlett-Packard Co
Ingram Micro Inc.
Intermec Inc
Lenovo Group Ltd S/Adr
Roger Manzolini
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
Metro One Dev Inc New

Insight Enterprises, Inc.
Radisys Corporation
Socket Mobile, Inc.
Steelcloud Inc
Sed Intl Holdings Inc
Secure Netwerks Inc
Silicon Graphics International
Corp
Silicon Mtn Holdings Inc
Super Micro Computer, Inc.
Softnet Tech Corp
Speaking Roses Intl Inc
Tech Data Corporation
Televideo Inc
Transnet Corp
Voltaire Ltd.
Wareforce .Com Inc
October 10, 2003
17

Key points
Asset Allocation (e.g., large-cap, small-cap, bonds, )

Asset class diversification will have the largest positive
impact on your portfolio return
The trade-off between Return and Risk

Performance and risk are positively intertwined
Small changes in these percentages have huge
consequences
Long term
Long term investing is pertinent to both total return and risk
reduction
Investment style (e.g., growth, income, )

Investment style diversification positively impacts your
portfolio return
Roger Manzolini
October 10, 2003
18

Asset Classes
Investment choices fall into three main categories

called asset classes
Short-term investments or money market funds
Also referred to as Cash & cash equivalent assets
Fixed Income
Loosely referred to as Bond or Fixed income assets
Equity
Loosely referred to as Stock or Equity assets
Roger Manzolini
October 10, 2003
19

More on Asset Classes

Cash & cash equivalents

Fixed income
Taxable bonds
Tax-exempt bonds
Equity
Balanced
Large-cap Value
Large-cap Growth
Mid-cap
Small-cap
Diversified
Global
International
Roger Manzolini
October 10, 2003
20

Cash & Cash Equivalents
Any short term liquid asset

Cash
Savings & checking accounts
Certificates of deposit
Money markets funds (e.g.stable value fund)
Not included in most long term portfolios

The idea of investing is to exceed the market risk rate
of return, the short term treasury rate of return
generally considered to be ~ 5%
Exceeds typical C&CE returns
Roger Manzolini
October 10, 2003
21

Fixed Income
Taxable bonds
Short term bonds
Long term bonds
Bond funds
Tax-exempt bonds
Municipal bonds
.
Roger Manzolini
October 10, 2003
22

Balanced Equity
A type of fund that pursues a hybrid investing strategy in

order to offer investors both capital appreciation and
income generation. Balanced funds contain a mix of:
Stocks,
Bonds
other types of securities.
My take is to avoid these types of

funds:
-You dont control mix
-Typically excessive fee
Roger Manzolini
October 10, 2003
23

Large-Cap, Mid-Cap, Small-Cap
Large-Cap - Stocks of companies with a market

capitalization >$5B
Traded mostly on the NYSE
Lowest risk; lowest return (potential)
Mid-Cap - Stocks of companies with market capitalization
between $500M and $5B
Traded on both the NYSE and NASDAQ
moderate risk; moderate return (potential)
Small-Cap - Stocks of companies with a market
capitalization < $500M
Traded mostly on the NASDAQ
highest risk; highest return (potential)
Roger Manzolini
October 10, 2003
24

Large-Cap Value
Stocks of companies with a market capitalization greater

than $5 billion that:
Trade at discounts to book value or tangible book value
Have high dividend yields
Have low price-to-earning multiples or
Have low price-to-book ratios
My take is to avoid specific value funds

but to use an index fund instead:
-Spreads risk (diversification)
-Reduces fee
Roger Manzolini
October 10, 2003
25

Book value and tangible book value

Book value is often synonymous with the net value

Book value = Assets Liabilities, where:
Assets include
Tangible assets
Owned property, product inventory, cash reserves, receivables and
investments
Intangible assets
Patents, trademarks, copyrights, and future earnings potential or
expected returns
Tangible book value

Book value where assets include only tangible assets
Always less than book value
A more conservative estimate of net value
Roger Manzolini
October 10, 2003
26

Large-Cap Growth
Stocks of companies with a market capitalization greater

than $5 billion that:
Have historically achieved measurable growth traits,
particularly characterized by:

Strong earnings growth and
High profitability ratios. .
My take is to avoid specific growth funds

but to use an index fund instead:
-Reduces fee
Roger Manzolini
October 10, 2003
27

Diversified
An investment fund that contains a wide array of

securities to reduce the amount of risk in the fund
A diversified fund contrasts with specialized or focused
funds, such as sector funds, which focus on stocks in
specific sectors such as biotechnology, pharmaceuticals
or utilities, or in particular regions such as Asia or
Europe
Maintaining diversification
Prevents events that affect one sector from affecting
an entire portfolio
Makes large losses less likely
Roger Manzolini
October 10, 2003
28

Global, International
Global - A fund (typically a mutual fund) that invests in

companies located:
Anywhere in the world
International - A fund (typically a mutual fund) that invests

in companies located:
Anywhere outside of its investors' country of residence
My take is to avoid specific Global or

International funds but to use a Global or
International ETF (index) instead:
-Reduces fee
Roger Manzolini
October 10, 2003
29

Performance Expectations
Returns based on historical results are

useful for learning and demonstrating
strategy
Historically, each asset class has produced
different returns and risks associated with
those returns
Each class can be loosely tied to a particular
investment objective
Roger Manzolini
October 10, 2003
30

Performance Data Example
Asset Class
U.S. large growth stocks
U.S. large value stocks
U.S. small growth stocks
U.S. small value stocks
Roger Manzolini
Return
1927-1969
9.3%
11.1
10.9
13.4
Return
1970-2002
10.7%
13.9
11.7
15.5
October 10, 2003
31
One-month T-Bills
Six-month Rolling T-Bills
One-Year Rolling T-Bills
Five-Year T-Notes
20-Year Govt. Bonds

Return vs. Risk
Return
6.2
7.0
7.2
7.8
7.7
Volatility
1.3
1.7
2.3
6.4
11.1
Annual Return
Fixed Income Assets 1964-2002

18
16
14
12
10
8
6
4
2
0
Note: Risk can be

managed by
avoiding longer term
fixed assets
0
10
15
20
25
Volatility (Standard Deviation)
Roger Manzolini
October 10, 2003
32
Return
3.9
5.6
11.0

Return vs. Risk
US Treasury Bills
Long Term US Bonds
Large-Cap Stocks
Volatility
3.3
9.3
19.3
Annual Return
Risk and Return over 70 Years (1931-2000)

18
16
14
12
10
8
6
4
2
0
0
10
15
20
25
Roger Manzolini
October 10, 2003
33
Return
7.0
10.1
13.6
15.3
16.2
US Treasury Bills
Long Term US Bonds
International Stocks
Large-Cap Stocks
Small-Cap Stocks

Return vs. Risk
Volatility
2.9
10.8
19.1
17.2
24.1
Annual Return
Risk and Return over 25 Years (1976-2000)

18
16
14
12
10
8
6
4
2
0
Note: Higher returns

only come at the
cost of increased
risk
0
10
15
20
25
Roger Manzolini
October 10, 2003
34

Return and Risk relationship
Risk is an important factor in determining how to effectively manage a

portfolio of investments. Risk:
Determines the variation in returns on the asset and/or portfolio
Provides investors a mathematical basis for investment decisions
(known as mean-variance optimization).
The overall concept of risk is:
That as it increases, the expected return on the asset will increase
as a result of the risk premium earned i.e.,
investors should expect a higher return on an investment when
that investment carries a higher level of risk, or uncertainty of that
return
When evaluating investments, investors should estimate both:
The expected return and
The uncertainty of future returns (Standard Deviation)
Roger Manzolini
October 10, 2003
35

Risk (Standard Deviation)
Standard deviation () is a representation of the risk

associated with a given security (cash and cash
equivalents, fixed income, equity or a combination
(portfolio) portfolio of these
Recall:
Expected result = Distribution Average +/- n

~67% probability that future return = Re +/- 1

~95% probability that future return = Re +/- 2
~99.7% probability that future return = Re +/- 3
So knowing the historical rates of return on given asset

classes and the historical volatility (), one can
reasonably assess (analyze) expected future returns
Roger Manzolini
October 10, 2003
36

Return vs. Probability
risk
return
3.3
19.3
24.1
40
low
3.9 Short Term Bonds3.9
Short Term Bonds3.9
Short Term Bonds3.9
11 Large-Cap Stocks 11
Large-Cap Stocks 11
Large-Cap Stocks 11
16.2 Small-Cap Stocks16.2
Small-Cap Stocks16.2
68%
3.9
7.2
0.6
11
30.3
-8.3
16.2
40.3
-7.9
95%
3.9
10.5
-2.7
11
49.6
-27.6
16.2
64.4
-32
99%
3.9
13.8
-6
11
68.9
-46.9
16.2
88.5
-56.1
100
Return
50
80
Short Term Bonds
60
Short Term Bonds
40
Short Term Bonds

Large-Cap Stocks
20
Large-Cap Stocks
Small-Cap Stocks
-40
Small-Cap Stocks
-60
Small-Cap Stocks
-80
low
68%
95%
20
68%
3.9
7.2
0.6
11
30.3
-8.3
16.2
40.3
-7.9
Short Term Bonds
50
Short Term Bonds
40
Short Term Bonds

30
Short Term Bonds
20
Large-Cap Stocks
10
Large-Cap Stocks
Small-Cap Stocks
-10
10
low
Large-Cap Stocks
68%
Probability
12
-10
11
low
10 portfolio 1
portfolio 1
portfolio 1
11 portfolio 2
portfolio 2
portfolio 2
11.5 portfolio 6
portfolio 6
portfolio 6
10
10
10
11
11
11
11.5
11.5
11.5
68%
10
19
1
11
23
-1
11.5
22.5
0.5
95%
10
28
-8
11
35
-13
11.5
33.5
-10.5
99%
10
37
-17
11
47
-25
11.5
44.5
-21.5
Small-Cap Stocks
60
Return
return
9
Large-Cap Stocks
Small-Cap Stocks
-20
risk
Large-Cap Stocks
Large-Cap Stocks
Small-Cap Stocks
Short Term Bonds
99%
Probability
low
Short Term Bonds3.9
Short Term Bonds3.9
Short Term Bonds3.9
Large-Cap Stocks 11
Large-Cap Stocks 11
Large-Cap Stocks 11
Return
Return
30
Short Term Bonds
Large-Cap Stocks
-20
50
portfolio 1
40
portfolio 1
30
portfolio 1
portfolio 2
20
portfolio 2
-20
Small-Cap Stocks
portfolio 2
10
portfolio 6
-10
portfolio 6
-20
portfolio 6
Small-Cap Stocks
-30
low
68%
95%
99%
Probability
portfolio 1
portfolio 1
portfolio 1
portfolio 2
portfolio 2
portfolio 2
portfolio 6
portfolio 6
portfolio 6
10
10
10
11
11
11
11.5
11.5
11.5
68%
10
19
1
11
23
-1
11.5
22.5
0.5
25
20
Probability
15
Return
low
low
10
portfolio 1
portfolio 1
portfolio 1
portfolio 2
portfolio 2
portfolio 2
Roger Manzolini
68%
portfolio 6
October 10, 2003
37

Return vs. Probability
return
3.3
100
19.3
24.1
80
low
3.9 Short Term Bonds3.9
Short Term Bonds3.9
Short Term Bonds3.9
11 Large-Cap Stocks 11
Large-Cap Stocks 11
Large-Cap Stocks 11
16.2 Small-Cap Stocks
16.2
Small-Cap Stocks
16.2
Small-Cap Stocks
16.2
68%
3.9
7.2
0.6
11
30.3
-8.3
16.2
40.3
-7.9
95%
3.9
10.5
-2.7
11
49.6
-27.6
16.2
64.4
-32
99%
3.9
13.8
-6
11
68.9
-46.9
16.2
88.5
-56.1
100
Return
risk
80
Short Term Bonds
60
Short Term Bonds
40
Short Term Bonds

Large-Cap Stocks
20
Large-Cap Stocks
Large-Cap Stocks
-20
Small-Cap Stocks
-60
60
Small-Cap Stocks
-80
low
68%
95%
99%
Short Term Bonds
Probability
20
68%
3.9
7.2
0.6
11
30.3
-8.3
16.2
40.3
-7.9
Short Term Bonds
50
Short Term Bonds
40
Short Term Bonds
Return
low
Short Term Bonds3.9
Short Term Bonds3.9
Short Term Bonds3.9
Large-Cap Stocks 11
Large-Cap Stocks 11
Large-Cap Stocks 11
Small-Cap Stocks
16.2
Small-Cap Stocks
16.2
Small-Cap Stocks
16.2
40
Return
Short Term Bonds
Small-Cap Stocks
-40
30
Short Term Bonds
20
Large-Cap Stocks
Large-Cap Stocks
Small-Cap Stocks
Small-Cap Stocks
Large-Cap Stocks
Large-Cap Stocks
10
-10
Small-Cap Stocks
Large-Cap Stocks
-20
low
Large-Cap Stocks
68%
Probability
-20
-40
return
9
12
-60
11
low
10 portfolio
portfolio
portfolio
11 portfolio
portfolio
portfolio
11.5 portfolio
portfolio
portfolio
1
1
1
2
2
2
6
6
6
10
10
10
11
11
11
11.5
11.5
11.5
68%
10
19
1
11
23
-1
11.5
22.5
0.5
95%
10
28
-8
11
35
-13
11.5
33.5
-10.5
Small-Cap Stocks
99%
10
37
-17
11
47
-25
11.5
44.5
-21.5
60
Return
risk
50
portfolio 1
40
portfolio 1
30
portfolio 1
portfolio 2
20
portfolio 2
-80
Small-Cap Stocks
portfolio 2
10
portfolio 6
-10
portfolio 6
-20
portfolio 6
Small-Cap Stocks
-30
low
68%
95%
99%
Probability
68%
portfolio
portfolio
portfolio
portfolio
portfolio
portfolio
portfolio
portfolio
portfolio
1
1
1
2
2
2
6
6
6
10
10
10
11
11
11
11.5
11.5
11.5
68%
10
19
1
11
23
-1
11.5
22.5
0.5
95%
Probability
99%
25
20
15
Return
low
low
portfolio 1
portfolio 1
portfolio 1
portfolio 2
10
portfolio 2
portfolio 2
portfolio 6
Clue: Risk must be managed

Roger Manzolini
October 10, 2003
38

Performance Data - Example
Historical (1931 2001) Class Performance
Asset Class
Average
Annual Return
Best Return,
Year
Worst Return,
Year
Short Term
Investments
3.9%
14.7%, 1981
-0.02%, 1938
Bonds
6.0%
42.6%, 1982
-8.1%, 1969
Stocks
13.5%
54%, 1933
-35%, 1937
Roger Manzolini
October 10, 2003
39

Performance
Performance expectation should be established based on

needs and risk tolerance
Long term and short term needs and expectations may
differ
Therefore involve different investment strategies
When you diversify, spread your investment over a variety
of investment classes, you can smooth both
Your expected return and
Variance (standard deviation) on your investment
portfolio
Roger Manzolini
October 10, 2003
40

Performance Benchmarks
Investment funds are measured against

benchmarks called market indexes
A market index is a collection of securities
of a similar type (class) accepted by the
financial services industry as being
broadly representative of a particular
market segment; e.g.
Dow Jones Industrial Average (the Dow)
Standard & Poors 500 Index (S&P 500)
Roger Manzolini
October 10, 2003
41

Some Performance Benchmarks
Index
Composition, Use
Dow
Made up of 30 major industrial companies. Barometer for the entire US

stock market. Benchmark for Funds that invest in blue-chip companies
(price weighted index)
S&P 500
Made up of 500 leading US companies diversified across 90 different

industries. Benchmark for large company US stocks. (market-valueweighted index)
Lehman Brothers Aggregate Bond
Benchmark for the overall US bond market, including corporate,

government and mortgage bonds
Wilshire 5000
Contains over 7,000 stocks and attempts to capture the behavior of the
overall stock market
Russell 1000
A benchmark for large-company US stocks. More broadly diversified

than the S&P 500 index. It has separate growth and value versions
Russell 2000
The most common index for tracking small company US stocks. It has
separate growth and value versions
NASDAQ Composite
Made up ,of mare than 5,000 US stocks, most of them small

companies. (market-value-weighted index)
Morgan Stanley Capital International,

Europe, Australia, Far East (MSCI EAFE)
Benchmark for developed foreign stock markets
Roger Manzolini
October 10, 2003
42

Performance Benchmarks
Use indices to help evaluate fund

performance; but
Use the appropriate index
Dont treat them as gospel
Most are market-value-weighted and are

strongly influenced by a small handful of
companies
Roger Manzolini
October 10, 2003
43

Performance Data Another Example
Roger Manzolini
October 10, 2003
44

Performance Drivers
Portfolio performance drivers (contribution

to return) have been determined to be:
Asset allocation
91.5%
Investment selection
4.6%
Market timing
1.8%
Other
2.1%
Asset Allocation is Key

Roger Manzolini
October 10, 2003
45
Roger Manzolini
October 10, 2003
46
Portfolio Strategy for Engineers

Classical Stock / Bond Portfolio
Classical Stock / Bond
Portfolio

Stocks
60%
S&P 500 Index

Bonds
40%
Short Term
Return
10.0%
Risk
11.2%
Diversification is your only
67% Expectation
-1.2%
21.2%
95% Expectation
-12.4%
32.4%
99% Expectation
-23.6%
43.6%
Roger Manzolini
10.0% Annualized Return

11.2% Annualized Risk
(Standard Deviation) often
referred to as volatility
Back tested Jan 1973 through
December 2002
Can we do better?
Hint
free lunch Jim Cramer
October 10, 2003
47

Diversified by Capitalization
Portfolio
Diversify Large Cap /

Small Cap
30%
US Micro Cap
Stocks

60%
S&P 500 Index

30%
S&P 500 Index

Bonds
40%
Short Term
40%
Short Term
Return
10.0%
11.3%
Risk
11.2%
12.4%
67% Expectation
-1.2%
21.2%
-1.1%
23.7%
95% Expectation
-12.4%
32.4%
-13.5%
36.1%
99% Expectation
-23.6%
43.6%
-25.9%
48.5%
Roger Manzolini
Maybe
Improved Return
But more Risk
Can we do
better?
Hint
Diversify
October 10, 2003
48

Further Diversified by Growth / Value
Portfolio

Small Cap
Diversify Growth / Value

15%
US Micro Cap
30%
US Micro Cap
Stocks
60%
S&P 500 Index
30%
S&P 500 Index
15%
US Small Cap Value
15%
S&P 500 Index
15%
US Large Cap Value
Bonds
40%
Short Term
40%
Short Term
40%
Short Term
Return
10.0%
11.3%
12.2%
Risk
11.2%
12.4%
12.0%
67% Expectation
-1.2%
21.2%
-1.1%
23.7%
0.2%
24.2%
95% Expectation
-12.4%
32.4%
-13.5%
36.1%
-11.8%
36.2%
99% Expectation
-23.6%
43.6%
-25.9%
48.5%
-23.8%
48.2%
Roger Manzolini
Yes
Improved
Return
Less
Risk
Can we
do
better?
Hint
Same
October 10, 2003
49

Further Diversified by US / International
Portfolio

Small Cap
30%
US Micro Cap
Stocks
60%
S&P 500 Index
Diversify Growth / Value
Diversify US / International
15%
US Micro Cap
7.5% US Micro Cap

6.0% Int'l Small Cap
7.5% US Small Cap Value
15%
US Small Cap Value
6.0% Int'l Small Cap Value

6.0% Emerging Markets
30%
S&P 500 Index
15%
S&P 500 Index
7.5% S&P 500 Index
15%
US Large Cap Value
7.5% US Large Cap Value

6.0% Int'l Large Cap Value
6.0% Int'l Large Cap
Bonds
40%
Short Term
40%
Short Term
40%
Short Term
40%
Short Term
Return
10.0%
11.3%
12.2%
12.4%
Risk
11.2%
12.4%
12.0%
11.7%
67% Expectation
-1.2%
21.2%
-1.1%
23.7%
0.2%
24.2%
0.7%
24.1%
95% Expectation
-12.4%
32.4%
-13.5%
36.1%
-11.8%
36.2%
-11.0%
35.8%
99% Expectation
-23.6%
43.6%
-25.9%
48.5%
-23.8%
48.2%
-22.7%
47.5%
Roger Manzolini
October 10, 2003
50

The ideal buy and hold portfolio
Allocation
7.5% US Micro Cap

60%
Stocks

7.5% S&P 500 Index

40%
Bonds
40%
Short Term
Return
12.4%
Risk
11.7%
67% Expectation
0.7%
24.1%
95% Expectation
-11.0%
35.8%
99% Expectation
-22.7%
47.5%
Roger Manzolini
The ideal buy and hold

portfolio
Re-balance periodically
6 months or Annually
October 10, 2003
51

The ideal buy and hold portfolio
60
Allocation
50
7.5% US Micro Cap
40
Return
30
20
60%
Stocks

7.5% S&P 500 Index
-20
10
-10

The ideal buy and hold

portfolio
Re-balance periodically
low
40%
Short Term
Return
12.4%
Risk
11.7%
67% Expectation
0.7%
24.1%
95% Expectation
-11.0%
35.8%
99% Expectation
-22.7%
47.5%
Roger Manzolini
Basic
Basic
Ideal
Ideal
Ideal
6 months or Annually
-30
40%
Bonds
Basic
68%
95%
99%
Probability
October 10, 2003
52
Introduction
Start Early
Remember this?
Return
2%
4%
6%
8%
10%
12%
Early Saver
invested $50k
$109,491
$236,886
$506,544
$1,070,944
$2,239,402
$4,632,883
Late Saver
invested $250k
$326,709
$433,117
$581,564
$789,544
$1,081,818
$1,593,339
Difference
in accounts
($217,218)
($196,231)
($75,020)
$281,400
$1,157,584
$3,039,544
Yes, it can be done

Roger Manzolini
October 10, 2003
53
Money and Investing

Performance Expectations

For those who have different risk tolerance

Other stock / bond allocations
Allocation
% equity
% bonds
Annualized Return
Std. Deviation
30 yr. Growth of $10k
Roger Manzolini
All Bonds
0
100
8.8
4.9
$125,653
30/70
30
70
10.8
6.9
$214,170
50/50
50
50
11.9
10
$291,452
60/40
60
40
12.4
11.7
$335,284
70/30 All Equities

70
100
30
0
12.9
14.2
13.4
18.8
$382,153 $535,075
October 10, 2003
54
Money and Investing

Equity allocation diversification
Suggested Holdings for various allocations
Allocation
Short-term bonds
S&P 500 Index
U. S. large-cap value
U.S. Micro Cap
U.S. small-cap value
International large-cap
International large-cap value
International small-cap
International small-cap value
Emerging markets
Roger Manzolini
All bonds
100
0
0
0
0
0
0
0
0
0
30/70
70
3.75
3.75
3.75
3.75
3
3
3
3
3
50/50
50
6.25
6.25
6.25
6.25
5
5
5
5
5
60/40
40
7.5
7.5
7.5
7.5
6
6
6
6
6
70/30
30
8.75
8.75
8.75
8.75
7
7
7
7
7
All equities
0
12.5
12.5
12.5
12.5
10
10
10
10
10
October 10, 2003
55
Roger Manzolini
October 10, 2003
56
Money and Investing

Stock Selection
Roger Manzolini
November 4, 2003
Roger Manzolini
October 10, 2003
57
Stock Selection
Topics

Whats stock?
Understand what youre buying
Companies
Company fundamentals
What to look for general
What to look for specifically
Where to look general
Where to look specifically
Roger Manzolini
October 10, 2003
58
Stock Selection
Whats stock?
A certificate of ownership in a portion of a

company
Stock certificate
A document representing the number of shares of
a corporation owned by a shareholder

Issued by the company as a means to raise

money
Roger Manzolini
October 10, 2003
59
Stock Selection
Understand what youre buying
Youre buying a stake in the company. So whats it worth?

From an accounting viewpoint, a company is worth its
net worth; that is, shareholders equity (SE)
Recall; A = L + SE; therefore, a company stock share is worth

SE / # of outstanding shares
From a technical point of view, a company share is
worth its intrinsic value

((PV of future earnings)-(PV of debt)) / # of outstanding shares
From a market point of view, a company share is worth
what it trades for on the open market

These measures of worth are seldom equal. Hint; buy and
hold shares where the market price for those shares is less
October 10, 2003
60
Roger
Manzolini
than the
shares intrinsic value
Stock Selection
Recognizing value
A guy sees a sign in front of a house: "Talking Dog for Sale." He rings the bell and
the owner tells him the dog is in the back yard. The guy goes into the back yard and
sees a black mutt just sitting there. "You talk?" he asks. "Yep," the mutt replies.
"So, what's your story?"
The mutt looks up and says, "Well, I discovered this gift pretty young and I wanted
to help the government, so I told the CIA about my gift, and in no time they had me
jetting from country to country, sitting in rooms with spies and world leaders,
because no one figured a dog would be eavesdropping. I was one of their most
valuable spies eight years running. The jetting around really tired me out, and I
knew I wasn't getting any younger and wanted to settle down. So I signed up for a
job at the airport to do some undercover security work, mostly wandering near
suspicious characters and listening in. I uncovered some incredible dealings there
and was awarded a batch of medals. Had a wife, a mess of puppies, and now I'm
just retired."
The guy is amazed. He goes back in and asks the owner what he wants for the dog.
The owner says, "Ten dollars." The guy says, Good God man, this dog is amazing.
Why on earth are you selling him, so cheap?" The owner replies, "He's such a lying
SOB; he didn't do any of that stuff!"
Roger Manzolini
October 10, 2003
61
Stock Selection
Companies
Young, not yet established (highest risk; highest return potential)

Companies that may emerge as future market leaders
Traded over the counter OTC) and best left for the most
experienced traders with high risk tolerance

Small-cap (moderate risk; moderate to very high return potential)

Companies with market capitalization < $500M
Traded mostly on the NASDAQ
Large-cap (lowest risk; lowest return potential)

Companies with market capitalization > $5B
Traded mostly on the NYSE
Mid-cap -- you guessed it, Cos between $500M and $5B
Hint; your focus could be on Mid-cap and Small-cap

October 10, 2003
Roger
Manzolini
companies
and managing risk
62
Stock Selection
What is market capitalization?
Market Capitalization is a measure of corporate

size
The total dollar value of all outstanding shares
Computed as:
Total number of shares times current market price
Shown on trading screens along with trading
range, volume,P/E, earnings,
Roger Manzolini
October 10, 2003
63
Stock Selection
Company fundamentals
Business structure
Is it simple or is it very complex?
Ownership
Insiders, institutions, common shareholders
Management
Visionary leaders or passive caretakers
All the numbers; financial and otherwise
Performance
Growth
Value
Roger Manzolini
October 10, 2003
64
Stock Selection
What to look for - general

Simple, well defined, easy to understand businesses

Companies with insider and institutional ownership
Companies with visionary leaders, or leaders with a
demonstrated, recognized and respected performance
record
Improving trends in all numbers
Growth trends
Financial health
Management performance
Market multiples
Intrinsic value
Roger Manzolini
October 10, 2003
65
Stock Selection
Growth trends
Examine
revenues (sales),
net income (earnings), and
cash flow
To see how well a company is translating revenues into
earnings
necessary for growth
Look for companies whose revenues, net income, and
cash flow are
Rising steadily, or
At faster rates than their competitors
Roger Manzolini
October 10, 2003
66
Stock Selection
Financial health
Long-term and total debt/equity

compare the company's debt to its assets minus its
liabilities
Reveals how much debt is cutting into the bottom line
The higher the debt, the more important it is to have
positive earnings and steady cash flow
At some point, the company must pay off the debt, or
interest payments will sap its finances
Some industries have more debt, so
compare the company's debt to the industry average
and competitors' debt
Roger Manzolini
October 10, 2003
67
Stock Selection
Management performance
Return on Equity, Return on Assets, and Return

on Invested Capital
Used to measure a company's profitability
Reveals how successful managers are converting
shareholders' equity, assets, and invested capital

into net earnings
Compare to the industry average and competitors
to gauge the company's success
Roger Manzolini
October 10, 2003
68
Stock Selection
Market multiples
Price/earnings, price/sales, and PEG ratios

Measure how the market values a stock
compared to its earnings, sales, and estimated

earnings growth
A low P/E ratio (in comparison to the industry)

indicates the market is undervaluing a stock
The P/S ratio is especially important when the
company has no reported earnings (and thus no
P/E)
A lower PEG ratio is better because the market is
paying a lower price for future earnings
Roger Manzolini
October 10, 2003
69
Stock Selection
PEG ratio
An indicator of whether a stock is undervalued or

overvalued.
The PEG ratio is the stock's price/earnings ratio (P/E)
divided by its forecasted earnings growth rate
A fairly valued stock would have a PEG ratio of 1; its
current P/E and future earnings growth rate being
equal
A ratio of less than 1.0 can be an indication that the
stock is undervalued, and poised to grow.
The usefulness of this calculation depends on the
accuracy of the stock's earnings estimates, which you
can find at Quotes Plus.
Roger Manzolini
October 10, 2003
70
Stock Selection
Intrinsic value
An intrinsic value/share is a hypothetical value that is

based on the
Company's future earnings (assessment)
Company's current debt, and the
Number of outstanding shares
This value can be compared to a stock's current price to
help determine if a stock is overvalued or undervalued.
Warren Buffet looks for stocks that are selling for a
discount (Ps < Intrinsic value / 3)
Good to look at to reduce risk
Roger Manzolini
October 10, 2003
71
Stock Selection
What else should you look for - general
More ratios:
Dividend
yield, growth rate, payout ratio
Profit margin
Gross, EBITD, operating, pre-tax, net profit, effective tax rate
Other efficiencies

Per employee: revenue, net income

Turnover:
receivables, inventory, asset
Float: common shares / # shares outstanding

Generally, insiders and institutions arent actively trading;
therefore, float is indicative of supply. Low float, high volatility

Earnings relative to market cap: >10X
Roger Manzolini
October 10, 2003
72
Stock Selection
SWOT
Analysis of a companys
Strengths and
Weaknesses
Used to establish strategies and plans to exploit

and address
Opportunities and
Threats
Roger Manzolini
October 10, 2003
73
Stock Selection
SEPTEmber moDel
An analysis that assesses impacts to a companys future

due to various environmental factors
S-E-P-T-E-D Analysis
The model divides the external environment of business
into six segments for analysis

Sociocultural
Economic
Political/Legal
Technological
Ecological
Demographic
Roger Manzolini
October 10, 2003
74
Stock Selection
Porters five forces
Porters 5 Force Analysis

The intensity of industry competition and an
industrys profit potential are a function of five

competitive forces

Threats Posed by New Entrants

Power of the Suppliers
Power of the Buyers
Threat of Substitutes
Rivalry Among Competitors
Roger Manzolini
October 10, 2003
75
Stock Selection
What else should you look for - general
Look for change(s)

Market changes
Whats new (hot), whats not,

E.g. nylons in an egg, disposable razors, VCRs, PCs, cell
phones, viagra, , nano-technology, biometrics,
Environmental changes
Societal, legal, political, weather, , whatever

E.g. terrorism, fire/storm catastrophes, war,
Technology changes
Medical, financial, technical,
Notice macro changes too

Debt growth, aging society, world developments, ,business

changes. E.g. GE evolution away from production to service
Roger Manzolini
October 10, 2003
76
Stock Selection
What to look for point specific
From How to Make Money in Stocks; A Winning System

in Good Times or Bad by William J. ONeal, founder of
the Investors Daily
CANSLIM
Current quarterly earnings per share (EPS)
Annual earnings increases
New products, new management, new highs
Supply and demand
Leader or laggard
Institutional ownership
Market direction
Roger Manzolini
October 10, 2003
77
Stock Selection
Current quarterly EPS
How much is enough?

More than 20% over same quarter last year
Watch out for misleading reports
Omit one time extraordinary gains
Accelerating quarterly earnings growth
rate of change of earnings
The change and improvement from the prior rate of
earnings increases
Two quarters of earnings deceleration may mean

trouble!
Roger Manzolini
October 10, 2003
78
Stock Selection
Annual earnings increases
Look for meaningful growth

Annual earnings growth rate of 15 to 50%
Stable five-year record
Insist on both annual and current quarter

earnings being excellent
Earnings are the most critical fundamental factor available

for selecting potential winning stocks
Roger Manzolini
October 10, 2003
79
Stock Selection
New products, management, highs
Buying at the right time

The value created by new products are easy to
understand
E.g. Tupperware, Polaroid, oral contraceptives, fast food franchising,

wholesale warehouse membership stores,
New management; similarly easy to understand

Potential current opportunity?.TYCO
New highs.hum? Is this a paradox?

Many independent studies have shown that stocks listed on the new
highs list tend to go higher; contrary to most popular thinking buy
low, sell high, consider buy high, sell higher
Stocks listed on the new lows list tend to go lower; avoid them
Always look for new whatever and who owns the
patent
Opportunities: Nano-technology, biometrics, oral insulin, AIDS,
Roger Manzolini
October 10, 2003
80
Stock Selection
Supply and demand
Small capitalization plus volume demand

The law of supply and demand is more important
than all the analyst opinion on Wall Street

Big is not better

Most meaningful growth (opportunity) has already
occurred
Look for companies buying their own stock

Reduces common stock shares (supply);
therefore, tends to drive the stock price higher

Roger Manzolini
October 10, 2003
81
Stock Selection
Leader or laggard
Which is the company (stock) being considered?

Buy among the best 2 or 3 stocks in a group (same
industry)
We all know the winners, but who came in next?

For example, who here knows the name of the cyclist (yes,
it was the same person) who came in second in all five of

Lance Armstrongs consecutive Tour de-France wins?
Always sell laggards first, hold leaders until your in
good profit, or until the reasons you bought no longer

apply
It seldom pays to invest in laggard performing stocks even if
they are invitingly cheap. Look for and buy market leaders
Roger Manzolini
October 10, 2003
82
Stock Selection
Institutional ownership
A little can go a long way

Its like sponsorship in the form of mutual funds, corporate
pension funds, insurance companies, .. You get the idea

If a stock has no sponsors, it is likely that its performance
is run-of-the-mill, and chances are that many institutional
investors looked at the stock and passed it over in favor of
another
Look at institutional ownership quarterly trend. Decreases
can be a red flag
Look at the quality of ownership
Buy stocks that have at least a few institutional sponsors

with a recent better than average performance record
Roger Manzolini
October 10, 2003
83
Stock Selection
Market direction
Which way is it going? How to determine it?

In order to get a reasonable handle on the
answer to these questions, one must be strongly

connected to the market.
At a minimum one must read the financial papers
(Investors Daily, Wall Street Journal, )
Id suggest that investors get the Investors Daily
and also rely on an expert in the field
Be guided with the help of an expert to get a handle on
Market direction
Roger Manzolini
October 10, 2003
84
Stock Selection
Where to look general
Everywhere around you

At home, at work, and when you are out and
about
Notice what is hot with teenagers, techies, and the

elderly (all large consumer groups)
Financial news
Papers, magazines, newsletters
Internet
Yahoo Finance, MS money, cnnmoney
Quicken
Barchart
Roger Manzolini
October 10, 2003
85
Stock Selection
Where to look specific
*http://www.moneycentral.com
Lots of good info links here
Click Investing
Click Screener, more
To create your own customized searches
Click power searches

To get a selection of searches based on
Technical analysis or
Fundamental analysis
factors of the underlying companies
Roger Manzolini
October 10, 2003
86
Stock Selection
*http://www.corporateinformation.com/
Lots of good info links here too
Click United States to get several categorized links

Comparison to other firms

Delayed quotes and graphs
Earnings estimates and analysts reports
General information
Historical data
Ownership information
*Screening
Other useful information
Roger Manzolini
October 10, 2003
87
Stock Selection
*www.quicken.com
Click stock evaluator to

Appraise the health and performance of a company

Get intrinsic value
Click one-click stock analysis to get perspective from
four different investing strategists

These are useful stops to reduce risk
*http://quotes.barchart.com/texpert.asp?sym=gd
Good reference to get opinion (Buy / hold / sell), and
classical technical indicators
Another useful stop to reduce risk
Roger Manzolini
October 10, 2003
88
Stock Selection
Quicken Strategists
Motley Fool's Foolish 8 Strategy

The Motley Fool helps you identify fast-growing small-cap
companies using the Foolish 8 strategy

*Strong interest stocks
Robert Hagstrom's The Warren Buffett Way

Fund manager Robert Hagstrom, author of the New York
Times best-seller The Warren Buffett Way, demonstrates

how one of history's all-time great investors identifies his
favorite buys. Hagstrom shows you how Buffett judges a
company's management, financials and price
Roger Manzolini
October 10, 2003
89
Stock Selection
Quicken Strategists
NAIC's Established Growth Strategy

The National Association of Investors Corporation (NAIC) shares
their time-tested growth stock strategy with Quicken.com users.

Since 1951, the NAIC has helped investment clubs and
individuals identify blue-chip stocks likely to double in 5 years
Geraldine Weiss' Blue-Chip Value Strategy

Experts have ranked Geraldine and Gregory Weiss' newsletter,
Investment Quality Trends, among the top ten percent in the field
over the last 15 years. The Weiss' show you how they find highquality, high-yielding income stocks selling at attractive prices
Roger Manzolini
October 10, 2003
90
Stock Selection
Screening
Stock Screener - From Hoover's. This is really a good

site if you want to screen stocks based on many different
criteria, including price/book, P/E, growth rates, size,
ratios, etc. One of the best sites for screening. Also,
when you get the list of companies, one click gives you
the profiles provided by Hoover's. You can also restrict
your search to a particular industry (which might be
useful).
Research Mag - Has a stock screening criteria which is
fairly similar to that offered by stock screener. Also
allows you to graph several stocks on the same graph so
you can see how they've performed in relation to the
other.
Roger Manzolini
October 10, 2003
91
Stock Selection
Screening (cont.)
Market Player - Allows screening on many variables,

including expected future earnings. Has a very powerful
screening engine, but it looks like it'll take some practice
to become comfortable with it. But they also have a
simple screening which is more user friendly, but not as
powerful. This site requires registration, but it's free.
*Stock Selector - Allows general or industry-specific
screening on price/book, analyst recommendations, P/E,
PEG, dividend yield, five year estimate Earnings growth
rate and five year historic growth rate.
Roger Manzolini
October 10, 2003
92
Stock Selection
Screening (cont.)
Wall Street Research Network - Allows screening on

P/E, Price/Sales, Price/Book, Price, yield, beta, EPS
change, sales, market cap and index membership.
StockTools - From this site, you can choose stocks
based on criteria, including the industry. Other criteria
are P/E, volatility, Yield, shares outstanding, market cap,
price, change in price, and others.
Roger Manzolini
October 10, 2003
93
Stock Selection
What I use

Finance.yahoo.com
Scottrade.com
Investools.com
Uses Fundamental Analysis to determine what stocks
to own
Scores 13 key fundamentals

Volume Ratio 5/30 Day, P/E Ratio, P/E Relative Ratio, Projected EPS 1M Chg CFY,
EPS Growth 5 Yr, Company Growth Ratio, Acc. Dist Current, Cash Flow Growth 5
Yr, Debt/Equity Ratio, Insider Trading, EPS Rank, 5 Price Rank, Group Rank
Uses Technical Analysis to determine when to buy,
hold, and sell

Scores 3 key charts used conjuntively

30 day rolling average
MACD(8,17,9) a simple momentum indicator (trend following & momentum)
STO (14,5,0) a timing indicator
Roger Manzolini
October 10, 2003
94
Roger Manzolini
October 10, 2003
95
Buy
Roger Manzolini
October 10, 2003
96
Sell
Roger Manzolini
October 10, 2003
97
Start
buy @
sell @
buy @
sell @
buy @
sell @
Roger Manzolini
$
$
$
$
$
$
$
67.50
75.10
61.25
61.20
60.00
65.20
$
$
$
$
10,000.00
11,125.93
11,116.84
12,080.30
Stock shares
148.15
181.65
185.28
-
October 10, 2003
98
Roger Manzolini
October 10, 2003
99
Money and Investing

Financial Ratios
Roger Manzolini
October 20, 2003
Roger Manzolini
October 10, 2003
100
Money and Investing

Financial Ratios
First
recall income statement:

Sales
- CGS
- Depreciation
EBIT (earnings before interest and taxes)
- Interest
Taxable Income
- Taxes
Net Income (also called earnings)
Net Income = Earnings
Available for payouts (dividends), and
Plowback (retained earnings and reinvestment in
company)
Roger Manzolini
October 10, 2003
101
Money and Investing

Financial Ratios
Leverage Ratios
Total
debt ratio =
Total Debt
Total Assets
A measure of how much of the companies assets are financed by debt

Typically want this to be less than 1; otherwise be concerned
Debt
equity ratio =
Total Debt
Total Equity
Typically want this to be less than 1; otherwise be concerned

Times
interest earned =
EBIT
Interest Payments
Typically want this to be greater than 1; otherwise be concerned
Roger Manzolini
October 10, 2003
102
Money and Investing

Financial Ratios
Liquidity Ratios
Current
ratio =
Current assets
Current liabilities
A measure of the companys ability to pay its debt;

i.e. to stay a viable company.
Typically want this to be greater than 2
Lower values are a sign of trouble
Roger Manzolini
October 10, 2003
103
Money and Investing

Financial Ratios
Efficiency Ratios
Inventory
turnover ratio =
CGS
Inventory
The higher the better

Typically greater than 20 is considered good
Receivables
Turnover (RT) =
Sales
AR
The lower the better

Typically less than 4 is considered good
Days
sales in receivables =
365
RT
The lower the better

Days inventory is on hand. Typically less than 4 is considered good
Roger Manzolini
October 10, 2003
104
Money and Investing

Financial Ratios
Profitability Ratios
Profit
margin =
Net income
sales

Typically greater than 15% is considered good
Return
on assets (ROA) =
Net income
Total assets

Return
on equity (ROE) =
Net income
Total equity

Roger Manzolini
October 10, 2003
105
Money and Investing

Financial Ratios
The Dupont System

ROA
sales
assets
asset
turnover
ROE
assets
equity
leverage
ratio
Roger Manzolini
Net income
sales
profit
margin
sales
assets
asset
turnover
Net income
sales
profit
margin
October 10, 2003
106
Money and Investing

Financial Ratios
Profitability Ratios
payout
ratio =
dividends
earnings
How much of the companies earnings are returned to the shareholder

Typically GE payout ratio has been ~ 12%
Earnings - dividends
plowback ratio =
earnings
=
1 payout ratio
Roger Manzolini
October 10, 2003
107
Money and Investing

Financial Ratios
Market Value Ratios

Earnings
per share =
Net income
# of shares outstanding

Typically GE EPS has been ~ 12%
Price
earnings (PE) =
Stock price
Earnings per share
The lower the better; less risk to investor; not over-priced

Typically GE PE has ranged from ~ 9 to ~ 18
Typically the market PE has ranged from ~ 15 to ~ 30
Roger Manzolini
October 10, 2003
108
Money and Investing

Financial Ratios
Market Value Ratios

Dividend
yield =
Dividend per share

Stock price

Greater than 4% is considered good
Market
to book ratio =
Stock price
Book value per share

Varies between industries
Roger Manzolini
October 10, 2003
109
Roger Manzolini
October 10, 2003
110
Money and Investing

Top 10 Things to Know
Roger Manzolini
November 25, 2003
Roger Manzolini
October 10, 2003
111
Money and Investing

Top 10 Things To Know (CNN and MONEY magazine)
1. Over the long term, stocks have historically
outperformed all other investments.

From 1926 to 2001, the stock market returned

an average annual 10.7 percent gain.
The next best performing asset class, bonds,
returned 5.3 percent.
Roger Manzolini
October 10, 2003
112
Money and Investing

Top 10 Things To Know
2. Over the short term, stocks can be hazardous to
your financial health.

On Oct. 28,1997, the Dow dropped 554-points

(7.2%).
10 years earlier, on Oct. 19, 1987 -- the worst
one-day drop in stock market history -- the Dow
dropped 508-points (22.6%).
In March 2000, if you had invested in a Nasdaq
index fund around the time of the market's peak,
you would have lost three-fourths of your money
over the next three years.
Roger Manzolini
October 10, 2003
113
Money and Investing

3. Risky investments generally pay more than safe
ones (except when they fail).
Investors demand a higher rate of return for
taking greater risks.

That's one reason that stocks, which are
perceived as riskier than bonds, tend to return
more than bonds.
It also explains why long-term bonds pay more
than short-term bonds.
The longer investors have to wait for their final

payoff on the bond, the greater the chance that
something will intervene to erode the investment's
value.
Roger Manzolini
October 10, 2003
114
Money and Investing

4. The biggest single determiner of stock prices is
earnings.
Over the short term, stock prices fluctuate based
on everything from

interest rates, to
investor sentiment, to
the weather; you name it,
But over the long term, what matters are
earnings.
If a stock's earnings rise substantially over the

course of 10 years, so will its share price.
Roger Manzolini
October 10, 2003
115
Money and Investing

5. A bad year for bonds isnt really all that bad
compared to a bad year for stocks.
In 1994, the worst year for bonds in recent
history, intermediate-term Treasury securities fell

1.8%, and the following year they bounced back
14.4%.
By comparison, in the 1973-74 crash, the Dow
Jones industrial average fell 44%. It didn't return
to its old highs for more than three years or push
significantly above the old highs for more than 10
years.
Roger Manzolini
October 10, 2003
116
Money and Investing

6. Rising interest rates are bad for bonds.
When interest rates go up, bond prices fall.
Why? Because bond buyers won't pay as much
for an existing bond with a fixed interest rate of 5
percent as they will for a new one that is paying,
say, 6 percent or more.
Conversely, when interest rates fall, bond prices
go up in lockstep fashion.
And the effect is strongest on bonds with the

longest term, or time to maturity. That is, long-term
bonds get hit harder than short-term bonds when
rates climb, and gain the most when rates fall.
Roger Manzolini
October 10, 2003
117
Money and Investing

7. Inflation may be the biggest threat to your longterm investments.
While a stock market crash can knock the
stuffing out of your stock investments, so far, the

market has always bounced back and eventually
gone on to new highs.
However; inflation, which has historically stripped
3.2 percent a year off the value of your money,
rarely gives back what it takes away.
That's why it's important to put your retirement

investments where they'll earn the highest longterm returns.
Roger Manzolini
October 10, 2003
118
Money and Investing

8. U.S. Treasury bonds are as close to a sure thing
as an investor can get.
The conventional wisdom is that the U.S. Government is
unlikely ever to default on its bonds.

partly because the American economy has historically been

fairly strong and,
partly because the government can always print more
money to pay them off if need be.
As a result, the interest rate of Treasuries is considered a
risk-free rate, and the yield of every other kind of fixedincome investment is higher in proportion to how much
more risky that investment is perceived to be.
Of course, your return on Treasuries will suffer if interest
rates rise, just like all other kinds of bonds.
Roger Manzolini
October 10, 2003
119
Money and Investing

9. A diversified portfolio is less risky than a
portfolio that is concentrated in one or a few
investments.
Diversifying (spreading your money among a
number of different types of investments) lessens

your risk;
because even if some of your holdings go down,

others may go up (or at least not go down as
much).
On the flip side, a diversified portfolio is unlikely
to outperform the market by a big margin for

exactly the same reason.
Roger Manzolini
October 10, 2003
120
Money and Investing

10. Index mutual funds often outperform actively
managed funds.
In an index fund, the manager sets up his
portfolio to mirror a market index-- such as

Standard & Poor's 500-stock index -- rather than
actively picking which stocks to purchase.
This is often good enough to beat the majority of
competitors among actively managed funds.
One reason
Few actively managed funds can consistently

outperform the market by enough to cover the cost
of their generally higher trading fees.
Roger Manzolini
October 10, 2003
121
Roger Manzolini
October 10, 2003
122
Money and Investing

Parting thoughts
What does it take?

Willingness to accept some risk
The risk-free rate of return (ror) is 4-5% with low volatility
To beat this risk-free ror risk must be taken
The moderate allocation portfolio ror is 8-10% with
moderate volatility
The market ror is 10-12% with high volatility
Time to educate yourself
Markets
Fundamental analysis (FA)
Technical analysis (TA)
Trading
Stocks, bonds, options
Roger Manzolini
October 10, 2003
123
Money and Investing

Parting thoughts
What does it take? (continued)

Time to manage your portfolio
Positive attitude
Belief in yourself that you can do it
Separation of emotion from trading decisions
FA and TA decisions vs. emotional decisions
Knowledge vs. guessing
Learning from your mistakes
Tenacity to continue
Roger Manzolini
October 10, 2003
124
Money and Investing

Parting thoughts
Warren Buffet
When everyone is greedy, be scared;
When everyone is scared, be greedy

Peter Lynch
(In response to: To what do you attribute your success?)
I always sold too soon

William Simons
(When he was the secretary of the US Treasury and

being questioned about the National Budget)
What do you expect; for us to account for
every million
Roger Manzolini
October 10, 2003
125

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Investment Strategy for

October 10, 2003

Money and Investing

Investment Strategy for Engineers

October 10, 2003

This presentation is the creation of Roger

October 10, 2003

Portfolio Strategy Topics

Risk and Return

October 10, 2003

October 10, 2003

Like manipulating numbers

October 10, 2003

Goals need to be established by each individual

Consistent, market-beating returns

Improve your return year over year

Keep losses (trade) small

October 10, 2003

Whatever he allegedly said, the message is clear; the power of compound

~Twice the interest ..~Six times the result

October 10, 2003

($5k for 10 years; age 22-31)

($10k for 25 years; age 41-65)

Late saver contributes 5 times as much

($5k for 10 years; age 22-31)

($10k for 25 years; age 41-65)

Early saver accumulates 35% more

Clue: Time and Rate of Return is critical.

October 10, 2003

Options used to generate money

Stocks / Bonds used to grow money

CDs / Treasury Bills used to

October 10, 2003

Savings Portfolio Strategy

Buy 1-yr, 2-yr,

October 10, 2003

Capital Market Characteristics

Basic Materials, Capital Goods, Conglomerates, Consumer Cyclical,

October 10, 2003

# Stocks in each Industry

Capital Market Characteristics

October 10, 2003

Capital Market Characteristics

Capital Market Characteristics

The 34 stocks in the Computer Hardware industry

Metro One Dev Inc New

October 10, 2003

Capital Market Characteristics

Asset Allocation (e.g., large-cap, small-cap, bonds, )

impact on your portfolio return

The trade-off between Return and Risk

Investment style (e.g., growth, income, )

October 10, 2003

Capital Market Characteristics

Investment choices fall into three main categories

Also referred to as Cash & cash equivalent assets

Loosely referred to as Bond or Fixed income assets

Loosely referred to as Stock or Equity assets

October 10, 2003

Capital Market Characteristics

Cash & cash equivalents

October 10, 2003

Capital Market Characteristics

Any short term liquid asset