Share Gallery 1/share_gal_1.zip/share_gal_1/BF/BF097.ZIP/NAIC.EXE/ARTICLES.TXT

Text File | 1990-10-20 | 12KB | 196 lines

I have started two chapters of the N.A.I.C. at The Philadelphia Area Computer
Society, PACS. The following three articles were submitted by me to the
PACS's monthly publication, The Data Bus. They are reprinted here to
provide you with some insight into the theory behind Fundamental Analysis,
the analysis method used by my program.


    -=[  COMPUTER AIDED STOCK ANALYSIS by Paul Bergsman,  9/1990 ]=-

THE NAIC

About 18 years ago I started buying stocks.  I made money, but had no
idea why.  Then, about ten years ago, I joined together with a small group
of other unknowledgeable investors to form a chapter of the National
Association of Investment Clubs, (N.A.I.C.).  At our monthly meetings, we
each chip in $25.00, analyze a group of stocks using N.A.I.C. guidelines,
and put together a model portfolio.  We all share in the workings of the
club, and all have gained an inner understanding of what makes the stock
market tick.  When you join the N.A.I.C. they send you a manual which covers
every aspect of forming and running a limited partnership investment club.
They provide a very conservative method for analyzing stocks, a method of
comparing stocks within a similar group, detailed instructions for stock
record keeping, and guidelines on when to sell a stock.

   The only other person I know who was out of the market on the 19th was
Donald Trump.  In the two months before the crash, he had pulled over one
billion dollars out of the market.  I have no idea how he knew to get out.
But, I do know why I was out.  I was using the N.A.I.C.'s conservative,
guidelines of fundamental analysis.  I understood that the market was
overvalued.  I understood why my stocks were overvalued.  I understood why
it was time to sell.

FUNDAMENTAL ANALYSIS.

   In the past several years I have been instrumental in forming two
N.A.I.C. chapters at PACS.  Both follow the N.A.I.C. guidelines for
selecting growth stocks by using Fundamental Analysis (the second more
than the first).  Fundamental Analysis says that you and I know nothing
about the inner workings of a company. The ONLY people who know what is
going on is management.  Management should know where the company is, where
it is going, and how to get there. If you look at the past performance of a
company's management, you can project their performance in the future.  The
study of stocks is usually limited to those with a 15%, or greater, annual
growth rate.  If the stock has a lower growth rate, you might as well
invest your money in a fixed interest rate bank security without the risk.

   The N.A.I.C. has developed a simple analysis form to aid in the selection
of solid, strong, growth stocks.  It takes almost an hour to complete an
Evaluation Form correctly.  Several companies have written software to
speed up the repetitive operations related to filling in an Evaluation
Form. I too have written software to mimic the N.A.I.C.'s Evaluation Form.
My program provides the same information as the Stock Evaluation Form AND
their Stock Comparison form.  It takes about 9 minuets to enter the data on
the computer.  All information is taken form the Standard & Poors data
form.  ( One of the reasons our club uses a full service broker. ) This
column will use the graphics from my program when discussing stocks.  It
provides the same information, in the same semi-log format as the N.A.I.C's
form but, in a clearer manner. Both graphs provide semi-log plots of yearly
Earnings / Share, Sales, and High/Low stock prices.  On a SEMI-LOG GRAPH,
compounded growth is a straight line.  As you will see, this is very useful.
My program determines wether the E/S or Sales has the smallest compounded
growth rate, plots that value beginning at 1 ( log plots start at 1 not 0).
It then plots the other value starting at 3.  The program then plots the
yearly High/Low stock prices beginning halfway between the other two.  To
get the plots to start where I want, I multiply each plot by a constant.
The relationship between the numbers remains. THE ACTUAL VALUES ARE NOT
IMPORTANT.  WHAT IS IMPORTANT IS THE RELATIONSHIP BETWEEN THE THREE plots.


   -=[  COMPUTER AIDED STOCK ANALYSIS by Paul Bergsman,  10/1990 ]=-

   Two days before Iraq invaded Kuwait, I bought 100 shares of Wall-Mart,
(WMT), at 29 1\8.  Two days after the invasion, WMT closed at 29.  It
is still climbing.  In the last two weeks, the market has gone down over
200 points.  Even on the days the market posted a modest gain, more stocks
declined than advanced and it was accompanied on low volume.  In that same
two week period, one of the stocks in my portfolio has dropped about 2%
while all the others have shown growth!  I am not a market guru.  I just
follow the N.A.I.C.'s conservative guidelines for investing in stocks.

   If you were watching the market VERY carefully, you could have bought
oil stocks before they posted there post invasion gains, and then sold
before they gave most of it back.  I do not gamble on the market.  The
N.A.I.C. lays out a plan for you to INVEST in companies for long term
growth.  Your investment grows as the value of the company, and thus the
stock price, increases in value. The company grows because of increased
sales, and development of new products and markets.  I have no idea what is
a good business decision for a company. However, the company's management
should know. Using N.A.I.C. guidelines of Fundamental Analysis to analyze
what a company's management has been doing for the past ten years, and then
project what it should do in the next five. I see my investments compound at
over 15% per year. Using N.A.I.C. guidelines, I have not picked a lemon in
over 10 years!

    There are no "get rich quick" short cuts to good investing.  If you want
to gamble in the market, then don't read this column, it won't help.  You
must analyze stock reports, listen to the news, and read trade papers.  By
forming an investment club, you can split up the tasks between 20 or so
people.  You will all profit from the others' knowledge, and learn about
stock market investing through the sharing.  Most clubs that fail do so
because some members sit back and expect the other guy to do all the work.

     -=[  COMPUTER AIDED STOCK ANALYSIS, by Paul Bergsman   11/1990 ]=-

Fundamental Vs. Technical Analysis

   FUNDAMENTAL ANALYSIS says that the only people who really know what a
company should be doing is the company's management.  If you evaluate the
past performance of management, you can project the company's probable
performance in the next few years.  The National Association of Investment
Clubs, (N.A.I.C.) uses Fundamental Analysis as the basis for selecting
growth stocks.

   TECHNICAL ANALYSIS includes everything else.  Technicians read charts
the way Gypsies read palms.  A pattern on your palm can predict your life
line, a pattern on a chart will predict tomorrow's stock prices.  A "W" in a
stock plot means the trend will be down.  Sure it does.  Patterns are just
that, patterns.  Possibly good for quilt designs, but little more. The
German Gypsies were so good at reading palms that they predicted their
extermination by Hitler before he addressed the "Jewish Question", right?

   Another technical tool is: "Do not buy stocks that are in favor because
they are going to drop in price".  Sure.  Institutions buy large blocks of
a stock because they want their portfolio do shrink in value.

   One of my favorite technical tools is the Elves.  Every Friday
night I watch channel twelve's Wall Street Week where the Elves market
predictions are relayed.  The Elves never saw October 19 coming.  Their
explanation; "We needed a little fine tuning, next time we will be right on
the money". Put in terms of baseball stats, there track record is worse
than most pitcher's batting average.

   I have not found one technical tool that works. Just what is it in
Barrons that the smart investors need? The books on Technical Analysis I
have read have no more validity than books on Horoscopes! For over two
years I went to the PACS Investment Club meetings, (not to be confused with
N.A.I.C. chapter meetings).  Every month they would demo a program for
Technical Investing.  That's a lot of programs.  Yet, I did not see one
that had anything to do with selecting a good stock. And where were the
technicians on Oct. 19, 1987?

   One month an N.A.I.C. Sig member, who was also in the PACS Investment Sig,
offered to do work ups of the stocks in our N.A.I.C. club's Portfolio using
his technical analysis computer service.  How could I refuse?  The next
month he came to the meeting with a pile of four page reports on our
stocks.  I asked him to explain to the group what the reports said.  His
reply; "Hell, I don't know what they mean".  The man paid over $250 for a
program, plus monthly fees, for a service which is useless in helping him
make intelligent stock selections!

   Now lets consider Fundamental Analysis.  I have no idea how to
evaluate a company's management.  But, the N.A.I.C. does.  They have
developed a two page stock evaluation form designed for the average person
to fill in with information obtained from a Standard & Poors data sheet,
(one of the reasons the club uses a full service broker). After the needed
data is entered, you use a four function calculator to do some number
crunching, make some value judgments, and finally project the company's
outlook for the next five years.

   If you do not make any mistakes, you can complete an N.A.I.C. Stock
Evaluation Form in about an hour.  Actually, it takes exactly the same time
to incorrectly fill it in since there is no way of checking for mistakes
besides just doing the whole thing over again. You can do the same stock
evaluation using computer software in about 9 minuets.  The real advantage
of the computer comes after you have completed the evaluation form.  The
company may have had one really poor year which has been explained to your
satisfaction. You can play "What If" with the computer.  What if the data
for 1987 was different. You can change the data in the grid and let the
computer recalculate the form, (about 5 seconds on an XT).  You can keep
playing with the data until you are satisfied with the results.

   Another computer advantage is accuracy.  I know that I will make at least
three errors per hour using a hand held calculator. By placing all the
needed data in a grid, a typing error usually stands out. In addition, I
find the computer generated semi-log plots more logical and easy to read.
And lastly, I can put the data for a stock on the BBS. Anyone who wants to
see my evaluation just reeds my data file into there program.

   The completed form identifies solid growth stocks, undervalued and
overvalued stocks, a stock's buy, hold, and sell range,  a YES/NO truth
table of important company characteristics, and lists about 35 company
stats for use in comparisons with other stocks in the same industry group.

   How can you judge if your stocks are doing well?  In a good market they
should outperform the Dow. In a poor market they should hold there own and
not fall as fast as the Dow.  Careful selection will even yield some stocks
that advance in a Bear market.  The N.A.I.C. suggests you try to choose
stocks with a 15%, or better, growth rate.  Otherwise, you might as well
put your money into an insured fixed instrument security.  One of your
rewards for taking risk should be a higher compounded growth rate.

   Computers can not select good stocks. Computers do repetitive number
crunching at lightning speed.  You are left to do what man does best,
evaluate the results.