Investing for the Long Run

1
Investing for the Long Run

• Chad Brand
• Founder/President
• Peridot Capital Management LLC
• July 7, 2005

2
Todays Agenda

• Background on Peridot Capital
• Getting Started Early
• Investment Choices
• Investment Strategies
• Questions Answers

3
An Overview of Peridot

• Some people want to invest but dont have the
  time, inclination, or both, to get too involved
  themselves
• Investors who know what types of financial goals
  they have, but are unsure how best to reach them,
  can turn to Peridot for help
• Customized Investment Portfolios
• Based on clients goals, time horizon, and risk
  tolerance
• Fee Structure
• Not commission-based, so trades are placed only
  if there is a need
• Clients pay a percentage of assets, between 1
  and 2 per year
• This successfully aligns the interests of both
  manager and client

4
The Earlier You Start, The Better
Someone invests 3,000 annually and earns an
average return of 10 per year
Start at age 25
Start at age 35
Start at age 45
5
How To Get Started

• Open an account with an online brokerage firm
• ETrade Financial (www.etrade.com)
• Types of investment accounts
• Roth IRA
• After-tax money is used to fund the account (no
  tax deduction for contributing)
• Withdrawals of contributions are tax-free
  anytime, profits can be withdrawn tax-free
  beginning at age 59 ½
• Traditional IRA
• Pre-tax money is used to fund the account
  (contributions are tax deductible)
• Income taxes are owed on all withdrawals
  beginning at age 59 1/2
• Individual Taxable Account
• Any investment income is taxed at rates between
  15 and 35
• Dividends and profit on stocks held for more than
  1 year (15)
• Profit on stocks held for less than 1 year (taxed
  as ordinary income)

6
Tax Savings with Traditional and Roth IRAs
Example Invest 3,000 per year for 40 years
beginning at age 25, retire at age 65 Assume a
33 income tax rate and a 10 annual investment
return
7
Five Investment Choices

• Brokers (Morgan Stanley, Merrill Lynch, Edward
  Jones, etc)
• Brokers act as salespeople for certain
  investment options
• Compensation is mostly commission-based
• Mutual Funds (Fidelity, T. Rowe Price, Putnam,
  etc)
• Thousands of investors money are pooled
  together
• A portfolio manager manages the portfolio and
  all investors earn the same return
• Index Funds (SP 500 Index, etc)
• Computer automated portfolio management owns
  hundreds of different stocks
• Meant to simulate the performance of the entire
  market as a whole
• Investment Advisor (Peridot Capital Management)
• Portfolio manager creates individualized
  portfolios for each client
• Compensated with a percentage of assets fee
• Do-It-Yourself
• Individuals open their own brokerage accounts
  and choose investments themselves

8
The Arguments for Each

• Brokers
• The broker can work with you personally, unlike
  mutual funds
• They have an entire research department at
  their disposal
• Mutual Funds
• A professional portfolio manager (not a
  saleman) manages a single portfolio in order to
  maximize profit
• Index Funds
• Extreme diversification, hundreds of stocks
  owned
• Lack of active management keeps fees down
• Investment Advisors
• Same service as brokers but they have
  investment backgrounds
• Are incentivized to make you money, not solely
  to generate commissions
• Do-It-Yourself
• Why pay someone to do a job you can do yourself?

9
The Pitfalls of Each

• Brokers
• Conflicts of interest due to investment
  bank/mutual fund company relationships
• High commissions to brokers promotes trading,
  not profit
• Studies have shown little or no value in their
  investment recommendations
• Mutual Funds
• No investor personalization
• 84 of fund managers cant match the markets
  return (high fees/over-diversification)
• Index Funds
• No chance of making more, or losing less, than
  the markets return
• Investment Advisor
• ???
• Do-It-Yourself
• Might not have the time, knowledge, or
  inclination to do the job

10
Why Not Just Buy An Index Fund?

• Most stock brokers and mutual funds lag the
  overall markets performance and few individuals
  have the time and/or knowledge to beat the market
• Long-term stock market returns can be cyclical
• Average returns of 10 are based on mean returns
  of the entire market since the 1800s, assuming
  you bought on day one and held your stocks up
  until the current time
• The picture can change dramatically based on the
  time period
• The market peaked in 1929 and did not reach that
  level again for 25 years in 1954
• In 1976, stocks had averaged a return of only
  3.5 per year for the prior 50 years
• Buying an index fund leaves you with very little
  control
• You are at the mercy of the market, which might
  be very problematic if your timing is poor, such
  as was the case in the previous examples

11
Why Not Just Buy An Index Fund?
12
Building a Portfolio

• Choose an asset allocation of stocks, bonds, and
  cash
• Historical averages for the 75-year period
  between 1925 and 2000
• Stocks 11.0
• Bonds 5.3
• Cash 3.8
• Inflation 3.1
• There has never been a 20-year period where
  stocks have not been the best-performing asset
• So, if you have a long-term time horizon, you
  should focus on stocks rather than assets like
  bonds, money market accounts, or bank CDs

13
Diversify Your Portfolio

• Diversification is crucial to minimize volatility
  and avoid heavy losses
• All sectors should be represented in any
  portfolio, avoid putting all your eggs in one
  basket
• Companies in similar businesses track each other
  even if they arent direct competitors

14
Not All Stocks Are Created Equal

• The past is the best predictor of future stock
  market fluctuations
• Smaller, cheaper stocks have outperformed larger,
  more expensive stocks
• Between 1954-1994, small companies returned 11.6
  per year versus just 9.9 per year for large
  companies

15
Be a Good Shopper for Investments

• Value Investing Contrarian Style
• Remember the goal is to buy low and sell high
• Must be contrarian to get the best price
• Think of smart shopping habits
• Sports Illustrated Covers

16
Careful Stock Selection

• Index funds are down over the last 5 years (SP
  500 down about 20), but good companies in
  growing industries have made a lot of money
  during that time

17
Careful Stock Selection

• Determine an area of the economy that stands to
  do well
• Student Loan Corp (STU) is one of the nations
  largest education lenders
• The stock is up more than 400 over the last 5
  years

18
Track Insider Transactions

• Track legal insider trading
• Unlike Martha Stewart, most company insiders do
  follow the rules
• Company executives are required to disclose when
  they buy or sell company stock
• The SEC collects this information and makes it
  public for investors
• Insider Selling
• Investors should gleam very little from these
  transactions
• Insiders can have many possible undisclosed
  reasons for selling stock
• Insider Buying
• Unlike selling, there are very few reasons
  already rich insiders would buy more stock
• Investors should always take note of these less
  common transactions

19
In Closing

• About 85 of mutual funds and most brokers fail
  to beat the market
• Contrary to many opinions, index funds are NOT
  investors best option
• Successful strategies can beat the market
  consistently over time
• Peridots average annual returns versus the SP
  500

20
Questions?

• My Contact Info
• Email - chad_at_peridotcapital.com
• Phone - 314.922.7782
• Web - www.peridotcapital.com
• Blog - www.peridotcapital.blogspot.com
• Feel free to call or email anytime!