THE 4 PILLARS OF INVESTING Fundamentals: Module 1

[Pages:18]THE 4 PILLARS OF INVESTING

Fundamentals: Module 1

TRANSCRIPTION

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The 4 Pillars of Investing

A transcription of

FUNDAMENTALS

MODULE 1 2 3 4

Hello and welcome to Basic Fundamental Analysis. It is so good to be with you. As you know, my name's Andy and you and I are gonna have a fantastic time in this field of study. There's so much to learn and we're gonna bite off a big chunk of it today, I'll tell you what. This thing is packed with information, and we're gonna learn so many new words, so many different vocabulary. You will see the world differently after this training is complete, I'll tell you that. So, relax, kick back. I know we sent you a pdf, like a manual, you can kinda follow fill in some blanks, things like that. But I'll tell you what, you'll have access to this more than once. Just kick back, you know you can retake this and fill in your notes later. My advice to people is to just soak it in the first time, and repetition's great. You can do it over and over and over again.

So what are we gonna cover? Well, a lot. Among a lot of things, we're gonna talk about how to value something. Price is what you pay, value's what you get. So when you pay for stock, what do you get? Why do some people pay $300 a share for one, and others only want to buy a penny stock? What are you getting in return for this? How do you even know what a good deal is and how to find them? So, we're gonna go through valuation for sure. We're also gonna analyze stocks. In fact, if you have some stocks currently, we can show you how to analyze them. If you don't, we get some practices ones. And we're gonna show you how to do a fundamental analysis on your stocks. Very cool, very fun. We're going to use the computer to search for strong companies.

Arthur Levitt, former Chairman of the SEC, pretty good guy. He said this, "Our generation should be the most informed generation in the history of the capital markets." And the ease of this technology shouldn't be an excuse to do less. It's an opportunity; it's a mandate to do more, learn more, achieve more as individuals, as a country. I think that's pretty close to what he said. So, we're gonna do what he said. We're gonna use the computer and leverage that. And, boy, if you don't know how to use the computer, well then ask your kids. They'll walk you through it, right? Nah, it's gonna be easy, it's gonna be fun. So we use the computer to search for strong companies. Vocabulary; I encourage everyone to get an accountant, an attorney, financial advisors, planners,

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brokers, you know all these...easy to make lots of money when I got a team around me, right? So, we're gonna build a team, and it was amazing how much easier it was to communicate with this team, as I worked on my vocabulary. Same's true for you. It'll be easier to see things like the Wall Street Journal, easier to watch CNBC, because there's so much terminology thrown around in the world of wealth and finance, that the more vocabulary you and I learn, the better off we are. We wanna know what we're talking about, so we're gonna do that for sure.

You and I, we're gonna discover how fundamentals relate to things like debt. You know, we'll look at a balance sheet and a liability column, that's a debt. Expenses, sometimes there's a payment on debt. And we invest all over the world, so we gotta know about currency a little bit. Inflation's gonna be a concern. We're gonna spend actually a great deal early on on this topic. I think it's pertinent to our day; not a lot of people understand how it works, so you and I, we're gonna understand how it works, that's for sure. Also, gotta find out how to set up criteria. Now, let me tell you, when I first started, set out and made the decision, "I'm gonna learn how to invest, gonna get some training"; I thought when I was finished with my training, I'd have this sixth sense, a gut feeling, and I'd be able to just have a feel for investing. Doesn't work that way; it's actually much better. All investing is, is setting criteria and finding investments that fit that criteria, and then you manage risk as you go along. That's all it is. Learn how to buy stuff, get some cash, lot of fun.

So tons tons more. I don't have room on just one outline slide to do all we're gonna do. But, before we do anything, gotta keep it legal. I know you want to be protected, so do I. So let's protect ourselves and do the legal thing. Important legal disclaimer; when you invest in securities, stocks, options, all the stuff we talk about, that involves risk. Did you know that? I think you did. And so look, here's how we'll do it. If you decide to invest in some stuff, that's your choice. If I invest in stuff, that'll be my choice. I might own some of the stuff that we talk about, okay, maybe maybe not. But I don't want you to construe that as like a recommendation for a specific security, or even a vehicle, or even a style. What I am doing here, what I think is best for you and I in this medium, is let's just focus on our education, learning new words, learning criteria; and let's not construe this into advice, consulting, and stuff like that. Hey, I think you get the message. Investing is risky. This is for grownups; whole reason we want to get some education so we can mitigate some of the risk that's out there. I think you get it. It's for grownups, right? You got it.

So let's begin by talking about your journey. And I'm gonna take you through this journey, and I love doing it. My goal, when I set this out, is I wanted a program that could take people and show them the way to go from A to Z, and I love being a part of that, especially at the beginning. So, I see a lot of people, what I call in Phase Zero. This is my continuum; you might have gone through this, if not, this will be important. If you have, it's great for review. So, there are so many that invest

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blindly, and so they have to trust someone else with everything. They're kinda hands-off; they're stuck in this 401K that's not going anywhere, these mutual funds that they just say, "Hey advisor, you drive the ship." And they don't ever have any involvement in those conversations. They don't ever have any ability to hold those guys as accountable as they might, because they don't know how to talk to them. They're kind of at their mercy. And I see people with little or no financial education in investing. Now, that doesn't make sense to me. Does that make sense to you? Do we want to invest in things we don't understand? That might be a good rule to learn right now. Should we invest in things that we don't understand? Boy, that doesn't sound like that's very smart, because then I have to rely on others. I'm taking a risk. Do they know what they're doing? Maybe, maybe not.

So, let's make sure we know what we're doing and hop into Phase One. The first phase is awareness. There might be people, they might not know there's an airplane, or that an airplane exists. So the first thing we have to do is say, "Yeah, there is an airplane. It does exist." And so we start to learn the strategies here, and we start working on that vocabulary. I'm really gonna hit that hard. And we're gonna learn about context; how do you think? How do you approach this stuff? So, to learn that there is something you can do differently is the first step, to kind of be aware of what you don't know yet. There's things you don't know and things you do, and we need to know there's some things we haven't learned about yet. So, we're gonna do four classes. The first four classes, we're gonna help you get more and more aware of what could be done. Of course, if you find out there is a plane, you might want to fly that plane. You gotta be competent, and that's where you start learning very very specific stuff. A lot more involved at the competence level. And the classes we'll do there are much more advanced. Matter of fact, that's when the rules get specific and the details.

You also get to select your style. Maybe you want to trade the Forex; maybe you want to be like me and trade options and things like that. So you're gonna select your style at this stage, and really get it down. So you take the written test as a pilot, and now you know how to fly a plane, right? Wrong. You gotta take some time in the plane and practice. You've gotta be proficient. And that's the final phase; no money's made unless you were good at what you did, and you can't just pass the written test to be a pilot. You've gotta get in the car and actually show that you can fly and land and deal with weather and under pressure and all that cool stuff. So, the education continuum takes people from awareness, competence, proficiency. If you will just go at a nice steady pace; don't go too slow, takes too much time. But, do a nice steady pace, and go through your basic classes, enroll in your advanced classes, get your men on your market labs in, where you're doing it for real in the market labs. Hey, I'll tell you what, next thing you know you're trading stock, man. You've got a passive income that you feel pretty confident in. So, that's the education continuum.

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We're gonna start with awareness phase. This is your first class. And there are four things we're going to study. This is not like college where you've gotta study history, and you've got an economics class, and a geology class, and a chemistry class, math class, literature class, and all these other classes. No, no, no, there's four areas that you're gonna study. Everything that's done fits in just four simple areas. I call them the `four pillars of investing', and they will support you. If you have support from an education with these four pillars, you'll be strong. So the first one, that's today's topic, fundamental analysis, strength in an entity. How strong is this entity? We're talking about risk. Is there risk involved? Are they weak, are they strong? Are they valuable? Great way to assess whether it's valuable, fundamental analysis.

Technical analysis, strength of the market. It's different; we'll talk about that next time though, don't want to take up all our time talking about technicals. We're gonna do fundamentals. You can't control fundamentals and technicals, but you can choose your cash flow strategy. That's why you're able to make money every month, right? That's why you're able to do it. And things change, so you've gotta manage the risk. And if you nail those four, you work hard on those four, you dedicate yourself to those four, boy you're gonna have a strong education supporting you.

So, fundamental analysis, what is it? Well, let's get the pen out, start writing stuff down here. The income statement, well, let's talk about that. That's the first half of things. The income statement is pretty much money coming in to money going out, just like you do in your life with the checkbook. Write a check, that's money out. Make a deposit, that's money in. If we take the income and we subtract the expenses, we get what's called a cash flow. And some cash flows are positive and some cash flows are negative. And we would like to have a positive cash flow, wouldn't we? So basically, you take your income, subtract your expenses, see if that number's positive or negative. Next thing we want to do is wanna look at our asset column. And assets is stuff that you own. And liabilities are things that you owe other people. Same math though; take your assets, add `em up, subtract your liabilities, and that's gonna give you equity. And once again, you'll either have a positive number, or you'll have a hate negative number. And some people call that net worth. You know, you say, "Hey, I've got a negative net worth. Better come to Andy and get some help." You've got a positive net worth, great, better come to Andy; let's make it grow. So, those are six numbers, aren't they? There's actually seven that I'm gonna have you use, but with those four even, you can get anything you need. If you have income, expenses, assets, liabilities, you can learn all kinds of things about this entity. It truly is the heart of a fundamental analysis. It's the financial statement. So that's awesome.

Now, let's talk about different types of entities. I said this was the strength of an entity, well, you're an entity, I'm an entity, we have personal finances. I know you have income and assets and

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liabilities and expenses. Corporations are just the same; they spend money and they bring money in through revenue. They buy things that are assets, they borrow money, they have liabilities, promises they make. And guess what? The country that you're living in; I've got my country here, the United States, but whatever country you live in, they have assets, liabilities, income, expenses. So look, we can see the strength. We can see the value. We can see elements of risk by looking at financial statements from these three types of entities. Now, what are we trying to do? Well, the thing that's a bear about investing, we're always trying to tell the future, aren't we? So we're gonna learn a little bit, you know, boy I don't have a crystal ball, and boy, it's tough to predict the future. So how do we do it?

Well, the word I like to use instead of predicting the future, I say, "What's most likely?" It can't be 100%, but what's most likely? Hey, I'd rather do what's most likely than what's least likely, that's for sure. So here's one thought on what's most likely. The velocity of a body remains constant unless the body is acted upon by an external force. That sounds like, that's confusing to me, that sounds like Newton or something like that. So what does that really mean? Well, if something's staying the same, it's gotta get smacked somehow to move it. And if something's moved, it's gotta get smacked to change it. And so, that's called a force. One of the things that changes how a financial statement looks is, and there's a lot of things that can change it, but the one we're gonna work on the most today is something called policy. Now, I said there were three types of statements here. You know, we got personal, we got corporate. Let's do this, let's start and let's study sovereign fundamental analysis. And you'll see why I'm gonna work with sovereign right here, `cause sovereign's gonna be a big deal, okay, so sovereign.

So, what is the policy, right? What is the policy that affects sovereign fundamentals? Well, let's take a look at it here. There are two types of policy in sovereign fundamentals. Let's use the United States for an example. The first one we got here is something called fiscal policy, and the second one is called monetary policy. Now, fiscal sounds like money and monetary sounds like money, so we must be somewhere in the right area, okay? So let's take a look at fiscal and monetary policy. Fiscal policy is set by Congress. So let's say, let me just draw this here, this might be cool if I can do it; we'll draw it in white or whatever color we want. So let's say that we have an income statement and a balance sheet right here, and yeah I'm using my mouse to draw so don't give me any grief if I'm not a perfect artist. We have assets, we have liabilities, here we have income, and we have best I can do, expenses. So let's see, what fiscal policy does.

Fiscal policy, right here, we'll just circle that in red. Fiscal policy does this; it does taxes and spending. Well, taxes would go here, right? And spending would go here. And if they have a deficit, if these two aren't equal, the deficit would go out here. That's all fiscal policy. They gotta

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borrow money, the debt goes up, that's here. So these guys are in charge of what? They're in charge of income, and they're in charge of expenses, taxes and spending. And I'll tell you, that's a lot of power. As soon as you start letting people tax you, they're messing with your property rights. No taxation without representation. Hey, I'm not gonna get political on you, but I will say this; as far as the US goes, we're spending a lot of money on stuff now that our kids are gonna have to pay taxes on. Who's representing those guys? That's taxation without representation. Okay, enough politics; that's all I'll say about that.

But monetary policy, let's use how about green for that, monetary policy, well they have it in their idea that they can actually affect something called GDP. We'll put a G in there, and a D, and a P. We'll talk about that here in a minute. And they control what's called the money supply. So that's the part that they try to impact right here. And they could do two things with this money supply. Let's say they lower interest rates, that's how much banks...you know, where did banks get money from? Well, they get it here. And let's say that banks wanna borrow money, well how much are they gonna pay for it? So they control the cost of money. They control how much money costs to borrow and how much it costs to get, and that's interest rate. The other thing they can do which is interesting; they can buy treasuries. And that's a pretty cool power.

Now, a little bit about the Fed, little bit about the Federal Reserve, just so you know, that stuff right here, that's gonna affect this right here, that's for sure. So, little bit about the Federal Reserve here, real quick. You know what Congress is, that was set up, you learned about that in your Civics class, but in school they don't teach the Fed. The Fed is not federal and it's not a bank and it's not a reserve, so they call it the Federal Reserve Bank. Well, I guess that's to fake us out or something, I don't know. If you go to the Federal Reserve website, they'll say that they are independent operating within the government, which is, what does that mean? They have a whole bunch of central banks, and they're comprised with twelve around the country, and they have something called the Federal Open Market Committee, and the Chairman of this place is called Ben Bernanke, and before that it was Federal Reserve. So they have a Federal Head, and Congress has oversight over these guys, but they're private. And you know what, they don't get to, The President of the United States can't even tell them what to do. They get to decide whether or not they're gonna buy treasuries, and they get to decide whether or not to do the interest rate. There's nothing Congress or the President can do about it. So a lot of power on the board, huh? Taxes, how much of your stuff can they take, and then two, you have this kind of quasi-private entity that decides how much money costs. And we don't audit the Fed, that's kinda scary. And we also have a bunch of investors and shareholders who we really don't know who they are, who ultimately own it. And they get to buy these treasuries, interesting stuff.

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If you want to read about it beyond this, read Ed Griffin's book, Ed Griffin, called The Creature from Jekyll Island. Now that sounds like a monster movie, well it's not. Jekyll Island is a little island off the coast of Georgia, and in 1913 Senator Aldrich who was related of course to the Rockefellers, he decided that they better start this central bank for all their buddies. So they went down, secret meeting, code words, secret stuff, code names; they go down and they figure out this Federal Reserve and they snuck it through Congress. And you think it sounds conspiracy, sounds like it to me too. So read The Creature from Jekyll Island. But anyway, how does this affect fundamental analysis?

It's a huge deal. It impacts the money supply and also the GDP, and we're gonna make this more clear as we go along. Now, let's do the financial statement of the United States. We'll do it real easy. Now here's the thing, I'm not trying to get an Accounting degree, and I don't think you are either, and so what we want to do here is, we want to get the concepts down. Now, my good friends Robert and Kim Kiyosaki, they say an asset is something that you buy that puts money in your pocket, and a liability pulls money out. And everyone started to get upset with them, `cause they would say, "Well if that's the truth, then your house is a liability, `cause it costs you money. It doesn't make you money." And they say, "Your house is not an asset." So, traditional accountants, they don't always see things the way we see them. But I'm gonna say this, I'd say I think the biggest asset of the United States is that GDP.

Now what is that? Vocabulary word: Gross Domestic Product, what does that equal? That equals all of the money that was produced. That equals all the corporate profit. That equals all the salaries, all the commissions, all the wages, all the money that's made by both people as individuals and corporations, is GDP. Now why does the United States like GDP? Let's pretend, let's just draw this over here for fun; let's pretend that the GDP is a pizza. And what happens is, is they get to take a slice out of that pizza called taxes. That's right. And so they have taxes coming out of GDP. Now, there's a challenge with this here. There's a challenge with this. What if the GDP starts getting smaller? That's called a recession. In other words, if the pie starts shrinking, it starts going down in size, let's draw a smaller pie here; let's say the pie, and we'll put it in the blue here, let's say the pie gets smaller like this. Now, there's just this little tiny piece of pie and that means they don't have as much in taxes. And so Congress has a problem because they didn't make enough money, they didn't have as big a income, but guess what stays the same? Oh yes, we have to fight wars; those cost money. We got Social Security and Medicare; that costs money, debt service. Roads, infrastructure, all the money that the United States spends, that doesn't change.

So this is called what? Fiscal policy, do you remember that? Fiscal policy, taxes and spending. How much money are we gonna take out of that pie? How big of a piece of this pie? Well if it's small,

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