Messages: What Members Are Asking On-Line

Interpreting Symbols

CI Editor Responds: Phil Town’s “Rule #1” investment strategy revolves around finding companies with strong growth and solid balance sheets at attractive prices. The value component of his approach centers on a stock’s “sticker price” or “fair value.” In order to arrive the sticker price, Town first determines the company’s future growth rate and then uses it to forecast future earnings. He then calculates a future price-earnings ratio and multiples it by the expected future earnings to arrive at a future stock price.

The sticker price is the future price discounted back 10 years at 15% (Town’s minimum annual rate of return). The calculation is: Sticker price = Future market price ÷ [1 + (Minimum required annual return on investment ÷ 100)] ^ 10.

The “^” symbol in the calculation indicates that the expression [1 + (Minimum required annual return on investment ÷ 100)] is being raised to the 10th power (multiplied by itself 10 times). As a simple example, we can rewrite the expression 10 ^ 10 (10 multiplied by itself 10 times) as 10 × 10 × 10 × 10 × 10 × 10 × 10 × 10 × 10 × 10.

Shadow Stock Portfolio

CI Editor Responds: Once a month, we run the Shadow Stock screen and post the Passing Companies list at the Shadow Stock Portfolio area of AAII.com.

AAII’s Chairman, James Cloonan, manages the “real money” portfolio AAII uses to report performance. However, he only makes changes to the actual Shadow Stock Portfolio on a quarterly basis to correspond with the reporting schedule of most companies.

Dr. Cloonan’s latest buys and sells were made on December 7, 2007, based on data available at that point in time. Therefore, the stocks passing the Shadow Stock screen at the time of his buys will probably differ from the current “passing companies” listed at the Web site.

To stay on top of changes made to the Shadow Stock Portfolio, AAII members may subscribe to an RSS feed through which they will receive alerts whenever changes are made to the portfolio. For information on the Shadow Stock Portfolio, visit the Shadow Stock Portfolio area of AAII.com. For information on AAII’s RSS feeds, visit www.aaii.com/rss.

AAII Mutual Fund Portfolio

CI Editor Responds: In simple terms, brokers only offer those mutual funds that are the most profitable to sell to customers. Full-service brokers often do not sell no-load funds because they are not compensated for selling them. Instead, they focus on “loaded” funds, where the mutual fund company pays the broker a commission for selling their funds.

Since all of the mutual funds in the AAII Mutual Fund Portfolio are no-load funds, you are more likely to find them offered by discount brokers. However, there is no guarantee that all the funds in the portfolio will be traded by one broker. AAII uses both Charles Schwab and E*Trade to manage the Model Fund Portfolio.

Also, keep in mind that any of the funds can be purchased directly from the fund companies.

Converting From Captools

CI Editor Responds: In the July/August 2007 comparison, Cara Scatizzi highlighted software packages claiming to offer some level of data importing from Captools. If you have made the switch from Captools to one of these other programs, we are curious to hear about your experience. Feel free to E-mail us at ci@aaii.com.

Criteria for AAII Stock Screens

CI Editor Responds: At the “All Screens” page of the AAII Stock Screens area on AAII.com, (www.aaii.com/stockscreens/allscreens.cfm), you will find a list of all the stock screening methodologies we track. For each approach, there is a link to the Screen Overview, which offers an in-depth review of the methodology. In addition, to links to the latest Passing Companies and Performance Chart, there is a link to the Screening Criteria. There you will find the criteria, in plain English, underlying each approach.