APRIL 2006

BI Youth Member Pens Winning Scholarship Entry

In 2004, I took a personal finance course in high school. The stock market interested me and I requested to keep the textbook over the summer. This textbook, Investing in Your Future, was written by BetterInvesting (and published by South-Western Educational Publishing). It promotes the concept of long-term investing and this idea appeals to me. I bought a youth membership to BetterInvesting last spring. This membership includes a newsletter, Young Money Matters. Both the textbook and the newsletter stress the importance of investing on a regular basis over a long period of time, reinvesting all earnings, investing in good quality growth companies, and diversifying your portfolio to reduce risk. I used these four principles when putting my portfolio together.

Tylee with Irving Faught, administrator of the Oklahoma Securities Commission, at the Invest Ed^TM Awards Ceremony. Photo by Robert H. Taylor.

Searching for Companies

The first thing I did when choosing my stocks was to start with companies I liked and felt were going to have good sales growth for the next five to ten years. I also went to www.betterinvesting.org. There, I looked at the top ten most active stocks bought recently by investment clubs that report to the website. Their criteria to buy a stock are the same as mine, so I thought this would be a good source for some stocks to study. I learned how to fill out a Stock Selection Guide or SSG, because it helps me "find companies with a record of consistent growth and determine a reasonable price to pay for the stock of such a company." This systematic approach helps me evaluate a company's sales, earnings, and profit margin trends and price/earnings ratios. It also allows comparison between companies on management, past performance and evaluates risk vs. reward for the next five years. I used the Stock Comparison Guide to compare Apple Computer, IBM, Dell, and Hewlett Packard.

Measuring Risk

According to my risk assessment, I have an above-average tolerance for risk. The risk assessment tool that I used was found at http://www.rcre.rutgers.edu/. Most of the companies I chose to invest in were blue-chip companies. I did this to receive a moderate gain without taking major risks. The riskiest issue I feel I bought was Krispy Kreme Doughnuts, Inc. because it is going through some tough times. But, I really feel that there will be a Krispy Kreme Doughnut company left when the dust clears. The price of $5.93 was below the current book value so I felt there was not much more downside before it would begin to go up. I also held $10,000 in cash so that if the market had a huge drop for some reason during the contest I would have the ability to "buy on sale." I did not want to take major risks. I focused not on quick gains, but on stocks that had long-term growth potential.

One company that I felt had a lot of growth potential was Carnival Corporation. Therefore, I decided to buy 1,000 shares after reading an article on the company. The article stated that they were starting to tap into the 85 percent of the U.S. population that has not ever taken a cruise. The average age of people taking cruises has also dropped from 60 to 50 years. I studied the history of the company in the October 2005 issue of BetterInvesting Magazine and found that they are the industry leader in cruise ships with the largest fleet.

In 1972, Ted Arison entered a partnership that was to evolve into Carnival Corporation. The company first issued common stock in 1987. I looked at the Stock Selection Guide in the October issue of BetterInvesting. Carnival Corporation was presented as the Stock to Study for October. Since Carnival's start, its trend line for sales and earnings has steadily risen. Fuel costs were a concern for me until I realized that they only account for 6 percent of Carnival's total costs. High gas prices have not affected them because they counter that by raising cruise fare prices. In 2003, Carnival paid $5.4 billion to acquire the United Kingdom's P&O Princess Cruises. That combination put Carnival ahead of its chief competitor, Royal Caribbean Cruises Ltd. Carnival also has a very low tax rate of 2.5 percent.

Exploring Mutual Funds

Although I did not sell any stock during the project, I did purchase a mutual fund. I held a cash position in the amount of $100,000 while I completed a classroom series about mutual fund investing on Morningstar.com. I did this to learn more about mutual funds and their prices and fees. I did not want to rush into a decision without knowing how mutual funds work. The reason I wanted to purchase shares in a mutual fund was to further diversify my portfolio. Vanguard Life Strategy Conservative Growth (VSCGX) in the Vanguard family of funds is what I decided on because it was 24 percent invested in bonds.

Beating the Dow

My main goal was to have investment returns at or higher than the Dow Jones Average return. On November 3, 2005, my portfolio was showing a gain of $25,352.71. My finance teacher, Mrs. Seifried, showed me how to calculate my annual rate of return, which would be 44.91 percent. This beats the Dow Jones average, which meant I have met my investment goal. An important future investment goal of mine is to always pay myself first. This is a concept that was first introduced to me when I read chapter one of Business and Personal Finance. The knowledge I have gained from this project will help me become a long term investor. It has already helped me in the short term. To help my college fund grow faster, I have taken money out of savings and purchased CDs.

By watching Anatomy of a Fraud, I learned that I should always know how my money is being used and why I am getting the return that I am. I learned that a reasonable long term rate of return on stocks is 10-12 percent a year and that I should be wary of anything higher. It is also wise to check any investment deal that I am unsure about with the Oklahoma Securities Commission.

By using the SSG's, I have learned how important value investing is. Investing is only successful if I am aware of the companies' strategies and know that I am not paying too high a price for a stock. Learning about investment fraud, mutual funds, and value investing has given me a chance to talk with my parents, my uncle, and my teachers about money and investing.

An Investment Tool

I now view the stock market as an investment tool. I understand that my investments need to outpace the inflation rate. I now know that pulling out every time the price falls is not the answer. I am not afraid to discover why it is falling, and let it set while the price rises again. I also understand that time is the most important factor in compounding interest. This gained knowledge is the beginning of becoming a long-term investor. $