233 How to Review Your Portfolio – Part 2 Puget Sound Chapter Mike Torbenson

Disclaimer The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting™ National Association of Investors Corporation (“BI”) or its Puget Sound Chapter (“PSC”) or volunteers. The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvesting™ or PSC. Investors should conduct their own review and analysis of any company of interest before making an investment decision. Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any BetterInvesting programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the President of BetterInvesting or the Manager of Volunteer Relations. 2

Course Objectives Use the knowledge, skills and resources needed to actively manage a portfolio of quality stocks to achieve a 5-year annualized return of 15% or better

Agenda What, Why & How Resources PART 1 Diversity Quality PART 2 Value Purpose & Resources Guidance (Metrics & Goals) How-to Steps Quality PART 2 Value Performance Toolkit 6 PERT Defense Sector/Industry Club Accounting Valuation Performance Capital Gains & Losses Review Spreadsheet Review Form

Portfolio Review Form Part 1 Part 2 Diversity Quality Value The last page removed from the handouts is this form. Students may want to keep the form handy to follow your progress down the form in class. Part 2 Value Performance

Portfolio Review Spreadsheet Growth Diversity Sector Diversity Valuation Quality Value

Portfolio Review Spreadsheet Return Summary Return Calculations Capital Gains

Buy/Sell History Under-valued Today Over-valued Today Value

Value Purpose – Find potential buys and sells demonstrating appropriate Potential Total Return P/E Expansion Risk Resources PERT

Buy Guidance Manage reward by buying only when potential return is greater than your portfolio potential return Manage P/E expansion by buying when the stock is historically underpriced, ideally at or near the bottom of your estimated business cycle (4B P/E) Manage risk by buying when Projected Relative Value and PEG are below 5-year averages and U/D is high (>3)

1. Qualified to Buy Low? What is “low”?

1. Qualified to Buy Low? Toolkit PERT Right side provides valuation ratios % Total Return shows potential reward U/D and RV manage downside risk PEG manages growth risk Proj P/E vs. Proj 5yr High and Low manage P/E expansion potential

1. Qualified to Buy Low? Manage reward by buying only when potential return is greater than your portfolio potential return

1. Qualified to Buy Low? Toolkit PERT Sort by Total Return (high to low) Total Return > 14.1%

1. Qualified to Buy Low? Manage for Risk RV < 100 and PEG < 150 and U/D 3-10

1. Qualified to Buy Low? Manage for P/E Expansion Near Bottom (5yr Lo P/E)

1. Qualified to Buy Low? Only QCOM and LKQ meets all criteria to BUY LOW!

Sell Guidance Manage reward by selling only when potential return is less than your portfolio potential return Manage P/E expansion by selling when the stock is historically overpriced, ideally at or near the top of your estimated business cycle (4A P/E) Manage risk by selling when Projected Relative Value and PEG are above 5-year averages and U/D is low (<3)

2. Qualified to Sell High? Tech = 38% Which stocks are “high”?

2. Qualified to Sell High? Toolkit PERT Sort by Total Return (high to low) Total Return < 14.1%

2. Qualified to Sell High? Manage for risk RV > 100 and PEG > 150 and U/D < 3

2. Qualified to Sell High? Manage for P/E expansion P/E near Hi P/E

2. Qualified to Sell High? GMCR & COST meet all criteria to SELL HIGH!

Value Summary What is our strategy to optimize portfolio return? Buy near the bottom; Sell near the top of the business cycle What are we managing for buy and sell? Total Return, P/E expansion and risk of loss and growth

Practice Recommendations?

Questions?

Potential Risk Potential Return Historical Return (AIRR) PERFORMANCE

Performance Purpose – measure your performance over time to determine if you are improving and/or achieving your goals Resources Capital Gains Report Excel Spreadsheet Potential Return Report Card Investment Performance Reports

Performance Guidance Backward with Realized Gains Capital Gains vs. Rule of 5 Forward with Potential Return 15% or better? Realized + Unrealized with AIRR Improving? 15% or better Compared to market?

1. History (Realized Gains) Are we making money when we sell?

1. History (Realized Gains) For the last 12 months: What percent of sells (by block) > 0% What percent of sells (by block) > 15% CAR

1. History (Realized Gains) Are we making money when we sell? Yes, 67% are positive! (above 0) 14.8% made more that 15%!

2. Potential Return Is our portfolio positioned to continue making money?

2. Potential Return Toolkit Portfolio Report Card provides … [Potential %] Total Return = 14.1% Projected Average Return = 8.9% Upside/Downside Ratio = 2.8

2. Potential Return Is our portfolio positions to continue making money? YES! POTENTIAL Total Return of 14.1%

3. Realized + Unrealized (AIRR) Is our Realized + Unrealized performance improving over time?

3. Realized + Unrealized (AIRR)

3. Realized + Unrealized (AIRR) Is our Realized + Unrealized performance improving over time? YES! -0.1% since inception 13% for last 5 years 16.7% for last twelve months

Performance Summary What is the purpose of tracking your performance? Determine if you are achieving goals and/or improving. What is the difference between realized and unrealized gains? Realized is history. Unrealized is potential if sold today. What is AIRR? Realized or Unrealized Annualized Internal Rate of Return. Both real and unrealized. Balance at start date, all real cash in and out during period. Assumes selling all assets at end date.

Practice Future Past Year Past + Current

Review Summary Manage diversity to minimize risk and optimize growth Monitor quality and adjust expectations in accordance with each company’s business cycle Monitor value as anticipated by business cycle – buy low for potential Sell high to achieve performance goals

Questions?

Make A Difference In Someone’s Life If you have benefited from BETTERINVESTING, please pick up some BETTERINVESTING materials and introduce others to this opportunity.

Questions? mike@torbenson.org

appendix

Size Small <= $500 million Large >= $5 billion Medium = between >=15% growth Large >= $5 billion >= 7% growth Medium = between >= 10% growth

Tools Illustrated Toolkit 6 Bivio Club Accounting Excel and Word PERT (slide 12, Value) Portfolio Report Card (slide 13, Value) Bivio Club Accounting Capital Gains (slide 7) Performance Benchmark (slide 37, Performance) Excel and Word Portfolio Review Spreadsheet (slides 6,7) Portfolio Review Form (slide 5)