William Raymond Project 6 (Philosophy) FINC 4331 with Ron Sweet Dec 15, 09

Project 6

Philosophy in stock portfolio management

Overview- I dont have much experience in buying stock. Much of the information comes from my stock broker that I meet about once a year. I do have around $1000 in stocks and another $4000 in bonds. Someday I want the numbers inversely change to $4000 in stocks. I have done research and with my account at Smith and Barney via Capital One. I have a Legg Mason aggressive fund. My philosophy will be based off of funds objectives by, CFA instituted theory, BUZZLE.COM, GLOBAL VALUE INVESTING, money talk, USAA, and Merril Lynch that are doing the best job at portfolio management in my opinion.

Philosophy- I believe in accordance with the Legg Mason that common stock that are experiencing or will experience long term growth exceeding the average rate of earnings growth of the companies which consist of the S&P 500 index. I have found alternate sources of wisdom on USAA website about how diversify their portfolio.

Long-term earnings growth Solid, sustainable business models Strong financial statements and a combination of attractive growth prospects and reasonable valuations Source USAA

I have the belief that value investing refers to a philosophy or practice of buying stocks that are fundamentally sound. Fundamentals by meaning of ,dividends, earnings growth, cash flow, and book value are more critical than market forces on the stocks price. On Buzzle.com they list some valuation techniques such as the following.

William Raymond Project 6 (Philosophy) FINC 4331 with Ron Sweet Dec 15, 09

How do Value Investors find a potential investment? - price to earnings ratio is in the bottom 10 percentile for its sector - debt to equity ratio is less than 1 - price to book value ratio is less than 1 - PEG value of less than 1 - Stock value is trading at 60-70% of its intrinsic value

Risk- The CFA institutes assess risk tolerance Risk is often defined as portfolio volatility,
or the fluctuation in the value of your assets over time. They also go to mention that your tolerance for risk is a very personal characteristic that may be difficult to determine and may change over time. They specifically state age and risk have a strong correlation. One being that when one is older he/she that makes aggressive funds that fail have less time to make up with the poor investments, whereas a younger person can make more aggressive deals. However, if one has enough to fault on such bad deals and has more than one egg in the basket, maybe which might not be such a bad deal at all. The older one gets also the circumstances and wealth will probably change.

Selection process- I have insight on useful information found on Global Value Investing.
Their criterion that seems somewhat similar to our teacher Ron was perching about. Four-Step Common Stock Selection Process 1 Search for investment ideas within circle of competence. 2 Evaluate the company using discounted cash flow model. 3 Study the company and its competitors exhaustively. 4 Decide whether to buy with margin of safety, sell or hold. Source http://www.numeraire.com/fourstep.htm With these four objectives in mind lets dig the rabbit hole a bit deeper. 1 The search methods are a mechanical filtering and rank ordering of databases. As our teacher Ron has showed us a good process of elimination of stocks by sector and then by if the stocks were high quality or not. The valuation model is used most often for minority interests in individual common stocks. The circle of competence is a specific application of the general principle of differential knowledge.

William Raymond Project 6 (Philosophy) FINC 4331 with Ron Sweet Dec 15, 09

2 Determine margin of safety. Using margin of safety, one should buy a stock when it is worth more than its price on the market. Warren Buffet I have heard buys stocks at 50% off the discount actual price. Pricing models include the use of technical analysis charts for trend and momentum. We have done this in our last project and it helped me a lot determine on my company the 50 day moving average a bit. As our teacher is in agreement to this we were not allowed to use yahoos beta coefficient for our companies. We had to figure that out for ourselves. Also beware of hybrid models that incorporate both valuation and pricing such as the use of beta coefficients or so-called volatilities.

3 Study the company, its competitors, and its industry exhaustively if the margin of safety is sufficiently compelling to justify further interest. This was apparent throughout our project. I was constantly comparing MSFT with AAPL. I found this very helpful in determining how well MSFT was doing compared to its competitors and industry.

4 Time to choose whether or not there is sufficient safety margin to execute a market order to open a long position to buy the stock.

Catalysts to consider I have found some themes off of Merril Lynch web site.

William Raymond Project 6 (Philosophy) FINC 4331 with Ron Sweet Dec 15, 09

These were included in 08 top internet themes that could create trading opportunities in the group. Some of the themes included are Increasing focus on mobile market initiatives and A bump Online media spending.

These are some macro factors to consider.

1. Demographic problems are currently concentrated in the developed nations. . 2. Public policy refers to global imbalances, managed exchange rates and inflation. It is widely believed that managed exchange rate policies cannot be maintained indefinitely and therefore wonder whether, on a 10-year view, there is a case for favoring Asian equities over US equities. 3. The key Geopolitical question is the impact of a shift from East versus West ideological differences to differences in religious ideologies and the related impact on the peace dividend. 4. By Chindia we refer to the rise of populous economies that (a) are highly competitive producers of goods and services and (b) have a large and growing middle class that could be a

William Raymond Project 6 (Philosophy) FINC 4331 with Ron Sweet Dec 15, 09

meaningful source of global demand. There could be the rise of a significant middle class should reduce reliance on the US consumer and is positive for world growth, and hence global equity returns. 5. The Energy factor addresses the confirmed growth in demand for energy. The supply of and demand for oil is inelastic in the short run, and any imbalances between the two will generate Considerable price volatility. The view that energy prices could be considerably higher than expected over the next 10 years with potential negative consequences for equity returns. 6. It is possible that the Environment factor will become meaningful over the next 10 years. There might be a significant increase in costs to business which cannot be passed on to consumers, hence dampening corporate profits and equity returns.

7. In a world where it is possible for investors to make misjudgments, the main cause of market volatility is the dynamic beliefs of investors as they struggle to interpret news. The shift in the average state of beliefs between optimism (bullish) and pessimism (bearish) and back generates investment regimes. (source from http://www.watsonwyatt.com/asiapacific/pubs/perspective/docs/WW_MoneyTalk_06May.pdf)