TCIC Investment Guidelines 2015-2016 Max Bohall

max.bohall@trincoll.edu In the interest of time, email me questions. We will be benchmarking our performance this year against the S&P 500. This will begin sometime next week. We cannot own any weapons manufacturers.

What makes an equity’s price go up? A stock goes up when there are more people buying the stock than selling the stock. Likewise, the price will fall if more people are selling the stock than buying. So when an individual thinks that a stock will greatly increase in price, they are making a bet that more people will decide to own the stock than sell the stock in the future.

An example: A common market example used in macro classes here tells us about a newspaper that had a beauty contest. In the contest, the paper showed 15 different photos of young women. In order to win the contest readers had to guess who they thought would be the most voted for woman. It did not matter who each reader thought was the most attractive, but rather which woman each reader thought all of the other readers would think all of the other readers would vote for.

Our Ultimate Objective Choosing Stocks: Our objective is to choose the stocks that we believe are the most appealing to the institutional investor. The institutional investor buys, sells, and holds hundreds of millions if not billions of dollars in stocks and thus weighs in significantly on market forces. The following investment system is designed to identify stocks that institutional investors will purchase before they purchase them.

CANSLIM Set of rules designed to take emotion and guesswork out of investing. Simple, easy to follow, essentially a checklist. Designed so that you can pick losing stocks 7 times out of 10 and still end up breaking even.

C- Current Quarterly Earnings Per Share The higher the better. This is the most important metric. Calculated YoY. Biggest winners over the past 50 years often had EPS increases of over 100% two or more quarters in a row! Ex: Cisco Systems EPS gains of 150% and 155% in the two quarters ending October 1990. AFTER these earnings gains, the stock price went up 1497% over the next 3 yrs. Ex: Accustaff showed a 300% EPS increase in January 1995. AFTER these earnings gains, 1486% increase in stock price over the next 16 months. Of the 600 best performing stocks between 1952 and 2001, 3 out of 4 of the stocks averaged at or above 70% EPS growth the quarter before they began their major advances.

A-Annual Earnings Increases Institutional investors will not be confident investing in a company that lacks consistent and stable earnings. This is one of the reasons Tesla’s stock price took so long to take off. Imagine being a portfolio manager at a large fund, you are not going to want to be a partial owner of a business unless the organization has proven that it can effectively make money. Acceleration is ideal. Look for annual earnings increases for at least 3 years in a row.

N- New Products, New Management, New Highs Institutional investors often look for a catalyst, something that will give other investors a reason to buy. The less public knowledge about it, the better. New products are the most important. Ex: iPhone. New management is generally less important, but can be a catalyst if combined with earnings growth. 95% of the top 600 stocks between 1952 and 2001 grew higher after making new highs. Do not buy on lows.

S- Supply and Demand A stock’s daily volume tells us how many shares of that stock exchanged hands that day. On days or other increments of time where the stock grows and there is high volume this can indicate positive demand and vice versa. Companies buying back their own stock is a good sign. Does the company have a lot of debt? This can leave them vulnerable to interest rate spikes.

L-Leader or Laggard All big winners are the #1 companies in their industry almost without exception. What is even more important as a credential is that no stock you ever purchase is a laggard. Simply put, no institutional investor is ever going to put all of their capital into a company that is lackluster.

I-Institutional Sponsorship Check funds’ performance ratings and determine which are the best funds. Can be done by referring to the WSJ, IBD, etc… Basically just be aware of any institutional activity involving your holdings. If multiple funds are starting to reduce holdings, this may be a sign that your capital may be better placed elsewhere. This is more of an investment maintenance practice than a stock-picking requirement.

Market Direction One really easy way to not lose money in the stock market is to liquidate as a downtrend is starting. Typically in bear markets, stocks open up strong and close weak. Typically in bull markets, stocks open weak and close strong. Fighting the market means that you are expecting institutional investors to be buying stocks when most of them are liquidating, which is what causes the market direction.

Common Investor Mistakes Buying on the way down in price. Buy a stock when it is stable and not while it is subject to negative market acceleration. With few exceptions a stock’s price is high or low for good reasons. Never increase a position that has been declining. Example: If you buy a stock at 50 and then buy more at 30, your costs average at 40 and you are following your losers and putting capital to waste. Instead, average up, following your winners. Pick a % loss to take across the board and sell an equity as soon as it hits that level with no exceptions.

Common Investor Mistakes (cont.) Don’t buy just based on high dividends or low price earnings ratios. These metrics are not nearly as important as earnings per share growth yet get tossed around more frequently in the media. Continue holding positions at signs of high volume selling. Many investors over-diversify. Best results are achieved by putting your eggs in a few baskets that you know very well. This is one of the reasons that there will be greater observational responsibility among sector heads this year.

Questions? E-mail me : max.bohall@trincoll.edu