This will be a sort of learn by doing exercise – any shortfalls or problems we might have we can draw on to make future book discussions better.

• Use common sense as numerous investing masters have
• Investment decision making should always be made with a long-term perspective
• The basics of successful investing are simple and we should focus on a few basic principles.
• Mr. Perry believes in looking at investing history – learn from the past and its great teachers.
• Investing isn’t necessarily easy, but if we implement a proven set of beliefs, a discipline and stick with it our change of success if greatly improved.

Mr. Perry continues in Chapter 2 with an explanation of why investing in stocks are a good building block of wealth accumulation.  He presents one of the core NAIC/SSG teachings when he says, “ Although stocks do swing widely in price at times, their trend is what counts:  in the long run, every stock’s prices just about in direct proportion to the growth of the company’s earnings and dividends.”  This refers to the adage NAIC investors often cite:  Earnings drive price over the long run. 

Stock performance is more or less governed not only by earnings growth, but rather Sustainable Earnings Growth – and that is one of the keys to selecting quality companies. A lot of companies have fast and high earnings growth – but is it sustainable over the long term?  Using the SSG we can make some decent judgments based on the historical EPS – is it over the last 5 years steady, and consistent? 

The only thing I was wondering was that Mr. Perry did not mention the importance of a company’s Cash and Cash Flow Growth – to me that is every bit as important as growing earnings.  What do you think?

Stock performance is more or less governed not only by earnings growth, but rather Sustainable Earnings Growth – and that is one of the keys to selecting quality companies. A lot of companies have fast and high earnings growth – but is it sustainable over the long term?  Using the SSG we can make some decent judgments based on the historical EPS – is it over the last 5 years steady, and consistent? 

Ev,

Regarding "Sustainable Earnings Growth," what is an acceptable rate of growth over the growth of the overall economy?  We hear of the GDP of the nation growing at 3% per year.  Can we expect an individual stock to grow earnings at 15% per year and if so, for how long?

The only thing I was wondering was that Mr. Perry did not mention the importance of a company’s Cash and Cash Flow Growth – to me that is every bit as important as growing earnings.  What do you think?

Ev,

     Do you remeber the book "All I really Need to Know I Learned in Kindergarten?"  That goes for Investing too.  "All I really Need to Know About Investing in Common Stocks I Learned Early On from NAIC". 

     Mr. Perry confirms and re-enforces what we already know.  Personally, I can never hear it enough or from enough people in enough different ways. 

     As I read his book, I find myself saying yep...yep...yep <g>.  We take these very obvious truths about investing for granted - but think back before we discovered NAIC.  It's the new found empowerment that keeps us motivated to spread the word.

Nancy Isaacs
NAIC Forum - Long term investing made simple
http://community.compuserve.com/naic

Chapter 3 - Gauging the Wind

Not all industries grow at the same rates. The overall growth rate of the 30 various industries listed from 1963 to 1998 was 10%.

These historical growth rates are not a guarantee of future growth, but do serve as a starting point.

Four industries exceeded this growth rate and four underperformed it.

Two conclusions seem important.  Few industries have been able to achieve superior long term growth rates and over the long term price closely follows earnings growth.

Understandingt this mediocre return seems to lie in understanding the business cycle of a company. See attached graphic from the ToolKit 5.0 manual.

Companies go through phases of growth. Early growth is rapid with prices increasing due not only to the earnings growth, but also P/E expansion supported by this rapid growth. Since many portfolios do not actively manage their stocks, the earnings slow through the natural business cycle and the price comes crashing down due to both the slowing earnings and P/E contraction, erroding much of their earlier gains.

Growth factors for the different industries are tied to the demand for their products and services. Several examples were cited. I took this to indicate we should look for industries offering new, need-filling products whether they be new companies or old companies bringing forth new products.

Industry growth factors are related to the "maturity" of the industry. Industries go through growth phases just like companies do.  Industries mature more quicly if they are not as adept at developing attractive new products or services.

Research & development are crucial to slow this maturation process down. Examples of how research has created growth opportunities in non growth areas are also given, but he notes these niche players are truely exceptions. Many more good investment opportunities are found where the basic growth is rapid.

If growth is the most important item to look for,  consistency in growth is a close second. Gee, that sounds familiar!

Assessing Future Growth

Past trends don't always indicate future trends, but are a good starting point. Analyzing future growth potential of an industry is important. Occasional effors are not fatal, however.

Two other considerations influencing an industry's future are the nature of its competition and its profitability.

Industries are important. Pick growth industries.Go with the flow.

Chapter 4 Picking the Best

Having found "growth" industries in which to invest, the question becomes in which of these companies should you place your money?

Charasteristics of winners include:

1. Low costs; 2. superior products or services; 3. close customer relations; 4. understanding customers needs; 5. excellent marketing; 6. highly efficient distribution..

{I think Ev has called these a "moat".}

Governing all of these characteristics is not only good management, but  a strong leader.

{I believe Phil Keating refers to these as "Visionary" leaders with "cult like" cultures in his "Invest in the Best" ComputerFest presentation.}

Sounds to me like good advice for any NAIC investor!

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It does make sense to look for industries with superior growth opportunities, but you make money on the stock not the industry. Better to own a great stock in a good industry than a good stock in a great industry?

Value Line lists timely stocks in timely industries. I think this would be a good place to start. Prospector does do industry averages so I think you could find something there. I think IClubCentral has a list of indystry characteristics too.

Sorry for these short replies, but it is a Monday and I have a lot of emergencies to handle today.

>> Do you usually first seek out a growth industry, then look for growth stocks within that industry? >>

I generally look for a growth company and then assess the industry, both from a growth standpoint and for diversification in my portfolio.  I prefer to "sail with the wind" when it comes to which industry to invest in.

Carl Fisher