The Retirement Corporation of America

What Can All This Information Do For You?

THERE ARE WONDERFUL things about the information age of investing—and some not-so-wonderful things. On the wonderful side, you can now get just about any question about any investment answered.

•  Wait long enough and you're bound to read about it in one of the many investment publications.

•  If you want your answer more quickly, call the telephone representatives of the mutual funds you are invested in.

•  If you want it immediately, it will almost certainly be available immediately from somewhere on the Internet. If you hear or read about a promising stock, you don't have to wait for the company to send you its color brochures and financial statements in the mail. You can turn on your computer and at the touch of a few keys, you've got your answer.

Learning How to Cull the Best From the Rest

So, the purpose of this lesson is two-fold:

1. You'll learn how to do investment research by taking advantage of the wonderful qualities of information-driven investing. We'll direct you to some of the most useful sources of investment information: in print and on the Internet.
2. You'll learn how to drill down through all the investment information that passes your way, to find exactly what you need to know, from among that ocean of information that is out there.

That's the point this lesson will drive home—that there is a ton of investment wisdom available to you, if you just take the effort to look for it. But, until you learn how to process all that wisdom, it can slow and not hasten your progress along the path to financial success. To sum up, the lesson will stress:

1. How to keep yourself well-informed about the overall financial markets as well as your own portfolio—in a quick and efficient way.
2. Where to find the most authoritative and timely information about stocks.
3. Where to go for the information you need on any of the countless thousands of mutual funds—quickly and efficiently.
4. How to harness the informational power of the Internet—to build your portfolio, monitor your investments, manage and execute transactions and save on fees and commissions.
5. Where to get information that isn't staring you in the face—in other words, off-the-beaten-track sources of information that most people don't bother to dig for, but that can give you a big advantage.

The 10 Most Important Things to Learn From Company Reports

1. Net sales. That's how much of the company's products or services were sold in the latest year. Don't just look at sales for the most recent year, or quarter. Look at growth in sales over as many periods as the company reports. What you want is a pattern of steadily rising sales—which means the company is growing. Be concerned if sales show a saw-tooth pattern: up one year and down the next. Be very concerned if sales start to fall over several years.

2. Costs and expenses. That's how much it costs the company to do business. Again, don't look at one year's figures. You want to follow the pattern. When costs go up faster than sales, the company is heading for trouble.

3. Interest costs. That's how much it costs the company each year to pay off its debt. Companies have to borrow to keep the business growing. But a big jump in interest costs would be a danger sign.

4. Net income. That's how much the company earned in the latest year or the latest quarter. All things being equal, the more profitable the company is, the better for you—since you are a part owner of the business. True, lots of high-tech companies don't make any profit at all. If you want to take a flyer in such companies, do it through a mutual fund. When you invest directly in a stock, make it a company that is earning money.

5. Net income per share. That's net income divided by the number of shares outstanding. That's how much income the company earned for each of its shares outstanding. Stock market analysts tend to focus on per-share earnings—and so should you.

6. Profit margin. That's sales divided by net income: how much profit the company is turning from each $1 of sales. Some companies report this, while others make you calculate it yourself. It's easy—again, divide sales by net income. The higher the profit margin, the better the company is doing at turning sales into profits.

7. What business the company is in. Presumably you bought the stock because you liked what the company did—the products or services it offered. Maybe the company makes a product you buy yourself, or maybe it is a big supplier to a growth industry. As part owner of the company, you want to know what the company does before you buy—and you want to keep watch on what it is doing after you buy. Are the company's products still strong in the marketplace? Are newer products or services coming along that threaten the future of the company? You want to own stock in companies with brands that lead in their markets, and with strong growth prospects.

8. Changes in the company's business. Company reports aren't all cold facts and figures. The company also talks about itself: how the business is doing, what's new in terms of products or services or lines of business. The company will use the reports to discuss any new businesses it has acquired, or businesses it has sold off. What plans does the company offer for the future? Is the general tone upbeat or downbeat? Red flags would be statements like: "This was a difficult year for the company, but we are certain the future will be better."

9. What management has to say. Annual reports will almost always include a statement from top management. Do you feel management is talking straight from the shoulder, or are there a lot of fancy phrases that don't mean much? You'll probably never get to meet the top management of companies whose stock you own. The annual report is the one place where you get a look at management. What's your gut feel about management after reading the report?

10. The small print. Look carefully through the report for potential problems the company may be trying to soft-pedal—maybe a big lawsuit or a government investigation. The company won't put such signs of trouble on the cover of the annual report. But it does have to tell you everything that is important about the business. You'll find such items in the footnotes on the financial statements. Read the report cover to cover, to round out your knowledge of the business and to find the hidden traps the company doesn't want to publicize.

More than likely you also own mutual funds—which also must distribute quarterly and annual reports. You give each report the same careful once-over you would the annual report of a business. But you are looking for different things:

The 10 Most Important Things to Learn From Mutual Fund Reports

1. Total return for the latest year, versus a benchmark. That's how much the fund delivered to shareholders in income and market appreciation. You bought the fund because you wanted to see your money grow. Total return measures how much your money did grow in the latest year. Comparing it with a benchmark—something that shows how comparable investments did—tells you whether your fund did better or worse that the competition.

2. Total return over time, versus a benchmark. How well has your fund done over the years? Funds report 10-year data, if they have been around for that long—or data for as long as they have been around. One really good year or one really bad year shouldn't cause you to dump your shares or rush out to buy more. Whatever happens in one year could have been a fluke. Consider increasing your stake—or cutting it out of your portfolio—if performance is out of line over two or three years.

3. Total fund assets. The long bull stock market flooded mutual funds with money—making some of the most popular funds just too big to be managed with any flair. Size isn't a problem for a bond fund, but it can be a major problem for a stock fund—since the manager may have trouble finding good investments for all the cash. Size is deadly for small-cap and aggressive growth funds, since the amount of stock available for any given issue is small. Aggressive growth funds that get too big almost certainly will soon start showing deteriorating performance.

4. A decline in fund assets. That could simply mean that the fund's investment style has gone temporarily out of favor, and investors are shifting to other types of funds. If you're happy with the fund, stick around. But a decline in assets for no obvious reason could mean that other investors have spotted trouble, and are bailing out. At the least, fund expenses will be spread among fewer investors—meaning the bite out of your assets to pay expenses is likelyto increase.

5. The fund's portfolio. The report will include the fund's top 10 holdings, plus a detailed list of all of its holdings. Take a quick glimpse at the top 10 to see where the manager is concentrating his or her assets. Are they stocks you would like to own yourself, or do you feel the manager has gone off in the wrong direction? Take a leisurely look at the whole portfolio. Are the manager's choices of sectors consistent with the fund's style? In other words, if you thought you were buying a very conservative fund and the portfolio is littered with Internet stocks, you have cause for concern.

6. Fund expenses. Remember, the operating costs of the fund are deducted from fund assets, meaning a certain share of your assets goes to pay fund expenses. As you'll remember from other lessons, the lower the expenses the better. The expenses should be well under 1% a year for a bond fund, under 1 1/2% a year for a domestic stock fund and under 2 1/2% a year for a for-eign stock fund. Expenses for an index fund should be well under 1/2 of 1% percent a year. Be particularly alert to any substantial increase in expenses.

7. The fund's turnover rate. That shows how often the fund manager is changing the portfolio during the year. A high turnover rate can cause problems on two counts. First, all that trading is likely to increase fund expenses. Second, each trade exposes you to a potential capital gain—on which you will owe taxes immediately. One of the biggest drawbacks to mutual funds is that the fund manager, and not you, decides when to sell a stock—and when you will take a tax hit.

8. The fund's cash position. Too much cash means the manager isn't being very aggressive, which could mean sluggish returns for you. Too little cash means the manager would have to do some panicked selling if the market tumbled and investors began taking their money out of the fund. Anything more than 15% cash will hurt performance. Anything under 5% cash could leave the fund vulnerable if investors began to cash out.

9. Beta and R-squared. They may sound arcane, but they are important numbers. Beta measures how volatile your fund is compared with a benchmark. A beta of 1.25 means your fund is 25% more volatile than the S&P 500. That's fine if you understood the risks you were taking when you bought the fund—worrisome if it is proving more volatile than you expected. R-squared measures how closely your fund tracks with a benchmark—usually the S&P 500. You wouldn't have much diversification if the R-squared of all your funds were around 100 because each fund would tend to match the performance of the S&P 500. You want a mix of R-squareds to give you a really diversified portfolio.

10. Any major change in the fund. It could be a new manager or maybe a new investment style. Don't sell just because there is a new manager on the scene. Give the new manager a year to prove himself. Only then decide if you want to stay, or move to another fund. Be concerned if somewhere in the report, there's an indication the fund is going to change its style—say, by going more deeply into small technology companies. You'd have to decide if the new style is what you want—or whether you should move your money elsewhere.