| ICLUB Insider |
September 6, 2006 |
THE LATEST NEWS ON
INVESTING SOFTWARE BUILT BY ICLUBCENTRAL INC.
Summary
Starting on September 7, the ICLUBcentral team will be on
the ground in full force for the BetterInvesting National
Convention in Columbus, Ohio. From Thursday through Sunday,
we'll be joining hundreds of BI chapter members, club
officers, and individual fundamental investors for a long
weekend of stock analysis, portfolio management, and
investing education.
Although our new Quality Assurance Engineer John McHugh is a
late scratch to our lineup, you can still look forward to
seeing some of your favorite iGuys and iGals at BINC. If you've got Club Accounting
questions, Peg Keleher will help you figure out where that
extra 10 cents came from. Per Ostman, the bright young kid
from CompuFest, will be making the trip to Columbus as well -
- not only can he walk you through our software, but he'll
also be available to break down Ohio State vs. Texas on
Saturday night. And Doug Gerlach has already phoned ahead to
the hotel and arranged for a slow-drip caffiene IV, so he
should be all set to teach the 27 or so classes he'll be
covering this weekend.
Whether you've got questions about programs like Investor's
Toolkit or you just want to take the new Club Accounting
version 3.1 out for a spin, stop by the computer lab and
pick the brains of our experts. And don't miss BINC@Nite
for some twilight laptop talk.
So come on down to Columbus and say hi to Doug, Irving,
Ellis, Peg, Per and the rest of the iGuys and iGals. Be sure
to check the next issue of ICLUB Insider for a full recap of
what's sure to be the best BINC ever (unless Texas wins and
the entire Ohio State campus erupts in flames).
Ralph Seger co-founded Seger-Elvekrog Inc. in
1981 and is now Chairman Emeritus of the firm. He was also a
founder of the Investor Advisory Service, now published by
ICLUBcentral Inc. In this issue of ICLUB Insider, we are pleased to offer the
next installment of a multi-part series called "Investment Wisdom" that will
offer our readers access to Ralph's wealth of
financial knowledge. Be sure to watch this space for future
tips from Ralph.
Last time, Ralph introduced the concept of diversification and outlined the tendencies of various business sectors. In Part II, Ralph tackles Total Return and bonds.
For the investor, the concept of total return is fairly easy
to explain. It is the appreciation over time of a portfolio
from a combination of changes in prices of securities plus
income generated. Both realized and unrealized capital gains
are part of the equation. The calculation is not simple, and
involves fractional exponents. Fortunately, mutual fund
references such as Morningstar can make these calculations
for you.
Understanding Total Return involves the knowledge of several market factors:
Dividends and interest paid by the securities Appreciation of the securities Taxes due on normal income compared to capital gains taxes The rate of cash flow in excess of that of inflation in order to maintain living standards
If you don't understand inflation, compare the twelve cents
cost of a loaf of bread at the end of World War II to the
current price. Even better,compare the cost of owning an
automobile -- paying 15 times the WWII cost of a car would
be considered a steal in 2006.
Politicians have used inflation since before the Roman
Empire; they stay in power by dispensing "goodies" to the
citizens and figuring out how to pay for them later. What
they do is issue debt in the form of bonds and redeem them
with currency that has depreciated in purchasing power.
Those who invest in fixed income securities such as bonds,
preferred stock, certificates of deposit (CDs), and the like
see the real value of their principal and income disappear
down the rat hole of inflation..
Some investment advisors recommend that the older you get,
the greater percentage of your portfolio should be comprised
of bonds. For instance,subtract your age from 100 -- the
result is the percentage recommended for stocks. If you are
30, 70% in stocks is recommended. If you are 70, the
recommended percentage falls to 30%. However, this
philosophy ignores the effect of inflation. If you have 70%
of your portfolio in fixed income securities, the 30% left
in stocks will not protect you from the ravages of
inflation. It's a perfect formula to end up in poverty.
So, what is an investor who is dependant on his portfolio
for income to do? First, try some simple logic. A
corporation that borrows money has to earn a greater rate of
return on the borrowing than it pays in interest -- that's
the philosophy of ownership. The borrower must earn more on
the money borrowed than required to pay out in interest.
Otherwise, it's Chapter 11 bankruptcy.
Therefore, the investor must be in the position of an owner,
not a lender. If you invest in fixed-income securities, you
are lending money to the borrower whether it is the
government, a bank, or a corporation. Instead, try to be a
part owner of a business. This is what a common stock
represents. Common stock is not just a piece of paper to be
traded for profit and loss, it's a piece of the company.
As a part owner of a business, you are entitled to share in
the after-tax profits of the company. There are several ways
of participating in profits. The most obvious way is to
receive cash dividends. Management has several options as to
what to do with the net profits:
Pay dividends Repay debt Invest in the company to modernize and expand Make acquisitions of other companies Accumulate funds and lend to others Buy back stock
A capable management will strike a suitable balance between
these options, depending on the opportunities and investment
climate. Investment in the company to finance modernization
and expansion should result in capacity for increased sales
and profits. If the profits increase, the price of the stock
will rise. If the price of the stock rises, part of the
holdings can be sold for a realized capital gain. If the
portfolio owner is in a marginal tax bracket above 20%, it
is more tax-efficient to generate the required income
through long-term capital gains than through interest or
dividends received. If you invest in well-managed growth
companies at a reasonable price using the ICLUBcentral
screening tools, you should be able to approach the long-
term total rate of return from stocks.
From 1926 to 2000, the total return on common stocks was
from 10% to 12%. This is twice as much as from bonds and
more than twice as much as from money market funds, U.S.
Treasury Bills, and saving accounts. Therefore, if you
withdraw up to five or six percent annually from your
portfolio, the remaining five to six percent should continue
to grow to offset inflation. The risk is that the stock
market does not provide a total return of 10% to 12% each
and every year, but if you're investing at all, you
understand such risks, further reinforcing the mantra of
long-term fundamental investing.
As we mentioned in the August 9 issue of ICLUB Insider,
ICLUBcentral will be ending support for Club Accounting 1
and 2 on October 16, 2006. Many users of the outdated
versions of Club Accounting have upgraded since, but we
don't want any of our customers to be left hanging come tax
season.
Make the quick and easy transition to Club Accounting 3 now, and make sure that you finish out fiscal year 2006 as organized and prepared as possible to tackle your club's taxes. Preparing the taxes for an investment club partership can be intimidating, especially if it's your first time as treasurer.
Club Accounting 3 improves upon the Club Accounting 2 tax
process with new features like automated auditing functions
and time-saving wizards that will walk you through closing
your books for the year. Plus, if you use Club Accounting 3,
you'll be able to simplify things even further by using our
state tax printer software. However, tax printers will be
unavailable for Club Accounting 1 and 2, yet another reason
to upgrade from Club Accounting 2 to Club Accounting 3.
If you act quickly, you can take advantage of Club Accounting 3's expiring low price of $174 ($124 for BI members), which will end with support on October 16. If you decided to wait, you'll pay the full new-user price of $219 -- so don't wait! Upgrade to Club Accounting 3 now.
If you have any questions about the Club Accounting 1 and 2 end-of-support, please give our support team a call at 617-661-2582.
If you're a new subscriber to the Investor Advisory Service,
you should be sure to check out some of the additional
features that are available in the online edition of the
newsletter. Did you know that even if you've only subscribed
to the print edition, you get access to the online version
absolutely free?
The online issue of the Investor Advisory Service includes
the same content as the print edition, but adds a few extra
tools. All subscribers, both to the online and to the print
edition, have access to the IAS web site for and can search
current and archived issues of the IAS.
Once you log in to the IAS web site, you can download
an entire issue in a single PDF file from the site, or read
each section separately. Just click on the links in the left
column once for each issue.
Another neat online feature is the ability to download an
SSG file for any of the three recommended companies featured
in an issue, and then load it directly into your Investor's
Toolkit or other SSG software. This makes it easy for you to
make adjustments to the analysis (if you wish) or save the
SSG to monitor using Toolkit's portfolio management
features.
If you're a hardcore "numbers" person, you might like the
ability to load each issue's Company Sorts data into
Microsoft Excel. Each online issue includes an Excel
spreadsheet of the same data that makes up the Company
Sorts, allowing you to sort by any column or derive any
other calculations that might be useful to you in your own
investing. Click the "XLS" link in the left column to
download the spreadsheet for each issue.
Finally, don't forget that the archives of all IAS issues
since April 2002 are available for subscribers on the web
site. This makes it easy to check up on the initial
recommendation of a stock or catch up on news about a
particular company.
If you haven't yet checked out the Investor Advisory
Service, what are you waiting for? The IAS has been continually ranked among the top performers
of all stock-picking newsletters, with a long-term track
record that other newsletter publishers envy! You can learn
more details or download a sample copy at by visiting our
IAS website.
Read past newsletters, subscribe, or unsubscribe at:
http://www.iclub.com/newsletters/
© Copyright 2006 ICLUBcentral Inc. All rights reserved.
Some ICLUBcentral products use the investing methodologies of BetterInvesting, a national nonprofit organization dedicated to investor education. BetterInvesting assumes no liability or obligations with respect to the investment education information or other content presented in the ICLUB Insider. For more information on BetterInvesting, please visit http://www.betterinvesting.org.
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