gb study notes – chapter 1

Chapter 1: The Five Rules for Successful Investing

1. Do Your Homework
• “… sitting down and reading the annual report cover to cover, checking out industry competitors, and going through past financial statements [pg 2]”
• why? because you have the possibility of losing your money, you should know about your investment
• why? because you can’t always trust or rely upon opinions of others
2. Find Economic Moats
• moat – A deep wide ditch, usually filled with water, typically surrounding a fortified medieval town, fortress, or castle as a protection against assault [Answers.com]
• economic moat – the ability of a company to keep “competitors from attacking a firm’s profits”, to protect its profits from the assault of competitors
• the term economic moat was popularized by Warren Buffett
• An Important Concept: Typically in a free market, a profitable company will attract competition that will eventually erode the company’s profits.
• The Key Question: “How does a company manage to keep competitors at bay and earn consistently fat profits? [pg 3]”
• Related Websites:
1. A Look at Economic Moats – Investopedia
2. Digging an Economic Moat – Morningstar (Pat Dorsey)
3. How Morningstar Measures Motes – Morningstar
4. Companies with Wide Economic Moats – Street Authority
5. An Introduction to Economic Moats – Yahoo (Pat Dorsey)
3. Have a Margin of Safety
4. Hold for the Long Haul
5. Know When to Sale

gb study notes

Prior to my trip back to Tucson, I purchased a book to read during the flight. I chose a book by Pat Dorsey at Morningstar entitled The Five Rules for Successful Stock Investing. To be honest, I hadn’t really heard much about this book but I figured it was worth checking out since it was from Morningstar – my favorite investing website. I got halfway through the book yesterday and was really impressed – so much so that I thought I should put more effort into the book to try to extract and memorize all the important concepts. I’ve found in my many years of school (albeit in science, math, and engineering) that writing a series of note sheets clarifies the material. It also helps in the memorization of key points.

Consequently, I am going to back up and start writing my study notes for the book. I hope these notes will be helpful to others although they may be compressed significantly from the material covered in the book. Helpful or not, this is a great investing book and I definitely recommend it for both beginning and intermediate investors (I still consider myself a rookie). I know these notes are going to be benificial for me but hopefully they will be helpful to someone else as well.

mcafee’s knob

Today, Jade and I hiked McAfee’s knob. This hike was just over 7-miles. Although this is a relatively short hike, the trail had a significant elevation change. With the elevation and yesterday’s adventure, I was struggling on this hike. I believe it would be an easy-to-moderate hike had I not walked eleven miles yesterday. But since my muscles were pretty sore before beginning, this hike was more of at a moderate-to-difficult level for myself today.

Despite all my whining, Jade and I did make it to the signature overlook of McAfee’s knob. A picture is shown below. I think it is an ugly picture but at least you can get a sense of the overlook. I find Virginia not to be photogenic during the winter – especially when there is no snow around. All the trees have lost their leaves and the brown skeletons of those deciduous trees are not appealing to the eye. Surprisingly, we don’t have many evergreen trees. They do exist but the deciduous out-number the evergreens by far.

So this concludes my 2nd hike of 30. The official tally is…

Num	Date	Name of Hike	Miles
1	12-29-05	Huckleberry Trail, VA	11.7
2	12-30-05	McAfee’s Knob, VA	7.2
Total			18.9

a little walk

Today, Jade and I went on a 11.7-mile walk on the Huckleberry trail. This is a paved trail that goes from the New River Valley Mall in Christiansburg to the Blacksburg Library. I attempted to jog in some areas but would quickly slow to a walk after a few strides. My plan is to start running for exercise as long as my joints hold up. Anyhow, it was nice walk although there were a few patches of ice on the trail.

This serves as my first hike for my New Year’s resolution to complete 30 hikes in the next year. I am not putting too much emphasis on a strict start date, that is, even though it is still 2005, this hike will count towards my goal.

Num	Date	Name of Hike	Miles
1	12-29-05	Huckleberry Trail, VA	11.7

new year’s resolutions

So it’s that time of year again to play the new year’s resolution game. I have lost 20 years in a row (I am not counting the first six years since I was too young to play). But I feel confident that this may be the year that I can actually accomplish one of my goals. I am older and mature-r – yeah, that’s it!

But anyhow, right now, I can think of three primary goals…

1. HikingOne of my favorite outdoor activities is hiking. Tucson is a great hiking area, providing great hikes throughout the year. In the summer, you hike up in the mountains in moderate temperatures. And in the winter, you hike down in the desert, again to moderate temperatures. I also have a hiking companion now – my dog Jade. The only complication with the dog is avoiding the cacti and wildlife (i.e. snakes). But either way, I know a lot of my friends enjoy hiking. Plus it is a good form of exercise and a great opportunity to practice another hobby – photography.

So my resolution is to do 30 hikes in 2006. This corresponds to approximately a hike every other week. I am not going to set any constraints on length or time – as long as I am out of the house and exercising – it counts as a hike in my book.

2. The DentistThis resolution I really hate. I can hear the dentist drill as I write. But it has been way too long since I have been to the dentist. In all the student insurance I have had, I never get dental coverage so I have avoided going to the dentist for just that reason (plus the fact that I just generally hate the dentist). Unfortunately, I can’t wait till I get a full time job – I might not have any teeth by that point. So my second resolution is to find a dentist in Tucson, get a checkup, and then have my multiple cavities filled. Oh man! This is going to cost me a fortune
3. PhotographyI have always enjoyed photography but seldom practice it. Right now, I have a point-and-shoot digital camera (Canon, 5MP). I am always tempted to spend a lot of money on a nice digital SLR. Before I purchase such a camera, I need to prove to myself that I can put in the effort to get out of the house and explore interesting, photogenic areas with my simple point-and-shoot. Consequently, my resolution is to take 50 photographs that I deem acceptable during 2006. As a reward, I can buy a Nikon digital SLR.

financial stuff

Despite being a poor graduate student, two of my favorite interests are personal finance and investing. My interest in the stock market began during my senior year of high school mainly due to discussions with my dad. Shortly after graduating from high school, I bought my first shares of stocks. These included some large-cap stocks like 3M, Kodak, and GM. I have been slowly building up my portfolio ever since with the limited income I have received as a college and graduate student. Even though I only deal with a little money, I think it was great for me to jump in early. One of the key ideas I discovered very early on was the sooner you start investing, the better due to the compounding nature of investments.

Anyhow, I started searching for interesting websites related to investing – particularly those with an emphasis on long-term, buy-and-hold investments. Here are a few results from today’s search.

• I Will Teach You to be Rich
  This is a personal blog by Ramit Sethi – a recent graduate of Stanford. This blog has been mentioned the Wall Street Journal and offers a lot of information and techniques that I agree with. He also provides links to other reputable websites.
• Road To Rich
  This is a personal blog of a 22 year old working at a NYC investment bank. He/she appears to be well educated and knows a lot about investing. I plan to be a dedicated reader of this particular blog. Here is an example post about dollar-cost averaging. Although it is such a basic concept, I am always amazed and intrigued by the simplicity and effectiveness of dollar-cost averaging.
• Savvy Saver Blog
  This is another financial blog of a 27-year old. This blog has been active for over a year and looks like a great read. Beyond investing, this blog also appears to advocate living below your means and making smart decisions with your money
• My Money Blog
  This is another blog by a 27-year old. He has contributed to this blog for a considerable amount of time. Beyond regular financial ideas, the blog contians an imaginary portfolio that is tracked and compared to the S&P500.

As you can probably see, I have an interest in financial blogs written by people in my age range under similar circumstance. Fortunately for these bloggers, they appear to all be making money by this point while I am still in school shooting for a PhD. However, one day I hope to get out of school and make money so I don’t think there is any harm in learning the ropes of financial investments in my current state (that is, as a poor grad student).

And now for a picture of the dog. This is Jade freezing on the ice at my parent’s house in Virginia. I don’t think we’re in Arizona anymore, Jade.

merry christmas

Today, I had a great Christmas with the folks. I received a bunch of small gifts this time like a waffle maker, a fabric steamer, a mechanical Oral-B toothbrush, DVDs, clothes, and money. My family and I watched the Usual Suspects, one of my all-time favorite movies during the afternoon then had a great Christmas dinner. The rest of my day was spent browsing the internet and reading editorials.

One of the interesting editorials that I ran into was by Penne Restad at the Washington Post. It discussed the culture war associated with the Christmas season – Christmas, Hannukah, Kwanzaa, Happy Holidays (for the atheists), etc. This well-written article discussed this debate from a historical perspective – from the Puritans to the rise of commercialism. As a Christian, I am unsure how to approach the current Christmas culture clash (too many c’s). Part of me is frustrated by all of the politically correct speak associated with the season. Yet, I have a hard time trying to debunk the tolerance movement in this case. Sure, everyone should have the right to celebrate the holiday season in any manner they wish.

Yet, I wonder whether we, as Christians, should let the Christmas culture war concern us. Let’s face it – Christmas is a commercial holiday. Do we really want to be associated with the greed and maniacal behavior associated with the season? We can try to expound the “reason for the season” to the public but I feel that this has little effect on non-believers and only provides a stronger association between Christianity and commercialism, greed, etc. It’s an interesting debate.

Just in closing, I think the true meaning of Christmas – the celebration of the birth of Christ – is very important to Christians. We should always maintain this focus through the holiday season. But more importantly, the life, death, and resurrection of Jesus Christ should be celebrated every day of our lives.

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And now for a lighter note, this is a picture of Jade bringing back a ball. I happened to snap the photo just as her ears were pointed straight up. Quite the wingspan. She almost looks like a rabbit… a wascawy wabbit.

I hope you had a great Christmas and enjoy the few days remaining in 2005!

the new blog and a hike

Tonight I installed the WordPress personal publishing platform, that is, blogging software. I am really impressed with WordPress – an open source software that uses PHP and MySQL, two things I don’t understand. Fortunately, it looks like I can use the WordPress software with little understanding of those two technologies. If anyone has access to a server and is looking to have their own blog, I definitely recommend WordPress. Their installation tutorial was very easy and I found my blog up in running within 10 minutes. This was a little longer than their 5-minute claim but this is because I have never touched the PHP and SQL portions of my server.

Ok, now that I got that behind me. My sister and I hiked to the Cascades (in Southwest Virginia) this afternoon with Jade. Although it only lasted 2-hours, this was Jade’s first hike. She did really well considering most of the trail was covered with either ice or hard-packed snow. In fact, Jade demonstrated greater balance than either myself or Leigh Anne. I suppose the dog has the four-wheel drive where we humans only have two-wheel drive. And even though we were hiking on ice for two hours, Jade maintained a high energy level and never complained about her paws even though they were in constant contact with the cold ice. I think she will be a good hiking dog – when off the leash she remained close even though other hikers and dogs were in the vicinity.

This is a black-and-white picture of Jade that I took once I arrived back home. This was the only moment she was conscious – the rest of the time she has been sleeping. I think we effectively wore her out with the hike.

I’ve been thinking of making a goal to hike at least 30 times in 2006. That could be one of my New Year’s resolutions. Logically, hiking seems to be a great idea because (1) it is good exercise, (2) reduces stress, (3) gives me an opportunity to practice photography, and (4) it is a great release for all of Jade’s pent-up energy. Thirty times would correspond to approximately once every two weeks. I could chronicle my hikes with descriptions and pictures that might actually make my blog useful! Hmm… I wonder if I could actually be that disciplined. From past experience, I usually always fail at goals that involve exercise.