“Million Dollar Nest Egg”

Strategy

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 Million Dollar Nest Egg Strategy

“Million Dollar Nest Egg”

Strategy
Build retirement we alth for yourself, not Wall S treet

INSIDE THIS 1. Introduction

REPORT Imagine that, “me” with a Million Dollar Nest Egg!

1 Introduction The top 10 percent of all wealth-holders in the U.S. own about
80 percent of the financial assets of the nation, mostly in
2 Prologue
stocks and bonds. Source: http://finance.yahoo.com/expert/article/yourlife/
3 Success Formula
So, how do the wealthy ones get there? Plain and simple:
4 The Power of • wealthy people don’t settle for market returns
Compounding • wealthy people exploit the power of compound interest to its
Interest fullest
5 Exploiting your
The book explains how to find and leverage higher rates of compound
advantages as an
Individual Investor
interest to build a larger nest egg with moderate monthly contributions.

6 Diversification
revisited 2. Prologue
7 Getting 20% annual Why share this valuable information?
returns

8 Getting started In late 1999, this author’s wife decided to leave her teaching career so
she could stay at home with our two small children. The cost of child
care was high and our work days were hectic to say the least. The
benefit of the second income was marginal, so we decided to tighten
our belt and see how we could do on my one salary.

The school system notified my wife that she should decide what to do
with the retirement money she had accumulated. Being a regular
reader of the financial “advice” in the newspapers and business
periodicals, we did what the experts suggested—we put the $ 10,933.37
into a rollover-IRA at one of the large financial services company. It
was invested in an aggressive mid-cap growth mutual fund. The fund
seemed well diversified, averaging 84 equities, spread over several
market sectors (Consumer Discretionary, Consumer Staples, Energy,
Financials, Health Care, Industrials, Information Technology, Materials,
Telecommunication Services, and Utilities). After completing the roll-
over forms we smiled with relief knowing that professional investment
managers were going to help us grow that money for our golden years.
We could go play with the kids, and not worry about it, right?

As you might guess, we got into the fund just before the high point,
shortly before “the bubble” burst. (See the tall peak in the graph
below)

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Figure 1. The NASDAQ Composite Index peaked in March 2000

Even as the market was dropping like a lead balloon, we listened to the
“experts” and tried not to panic. In hindsight selling the mutual fund
shares and keeping that money in the fund’s cash account would have
been the right thing to do. But, sadly, per the experts, we never did
move that money. And even now that we know we can do better with
that money, we leave it there as painful reminder that no one will care
for our future as much as we will. Approximately 8 years after the initial
investment we logged onto the web site of that well-known financial
services company to see that this part of our retirement nest egg was
worth $6,612.74. Quite unemotionally it reported:
-37.41% -$4,090.58.

While we couldn’t blame the fund managers for the bubble, it left us
with a sick feeling of not being in control of our own future. More
recently having crossed that mid-life milestone we realized that even
with the 401k contributions, we were not on track to meet our financial
goals. History told us that maybe we shouldn’t rely just on the advice
from the financial service industry and the so-called “experts” on
television. Then just to seal the deal, the worst financial crisis since the
Great Depression hit the U.S. and the world. Sadly and painfully, at the
tail end of 2008, that investment was worth even less! The financial
services industry was steering our golden years into the poor house. If
you were not affected by the tech bubble, most certainly you were
impacted significantly by the financial crisis of 2008.

The Dow Jones Industrial Average (DJIA) is an index of

supposedly the largest and most stable growth companies in
the United States
• On June 11, 1997 the DJIA closed at 7,575 points.
Over 11 years later on November 20, 2008 the
DJIA closed lower than that mark at 7,552 points.

• As of November 20, 2008, the DJIA has

fallen 5,712.23 points or -43% since Jan 1, 2008.

The facts were right there in front of us, and for anyone else who cared
to pay attention. Our own investment strategy wasn’t working, and it is
no wonder when you look at the numbers.

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We decided to educate ourselves and take control. We needed to

make sure we were funding our own retirement, not the retirement of
the financial services fat cats who were peddling the advice and
services that was putting us on a road to a miserable retirement.

Needless to say we were pleased with what we learned, and want to

spread the word. The good news is that with a little effort, it is not
difficult for any person to take ownership for his or her financial future.

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3. Success Formula
Learn from the right experts
One of the best contemporary books for the individual investor is

“Rule #1” by Phil Town.

It is one of the “must reads” for anyone wanting to take control of his or
her own financial future. Not only is Mr. Town’s personal story inspiring,
he has done a wonderful job of distilling the tenets that Graham, Buffet,
Use fundamental and others successful investors have applied over and over again to
analysis to gain consistent returns with almost no risk. Mr. Town explains in detail
determine the true how to identify great businesses, how to value the business (and it’s not
intrinsic value of a the P/E!). He goes on to explain that there are all kinds of reasons why
company before stock prices for these businesses may be beaten down, and he shows
considering an you how to use the “tools” to see when money is moving into these
stocks so you can get in at that right time. Take heed that the internet
investment. This
has changed the playing field dramatically for individual investors. The
philosophy ensures tools that Mr. Town presents were once available only to professional
that only the highest traders and are now available free on the internet. In the last section
quality companies we explore other ways to find these great businesses.
with sustainable
business models are Dedicate some time each week
deemed worthy. Most people spend more time on their grocery shopping each week
than they ever spend planning their own financial future. In a way, the
formula and time commitment for financial success is not that different
from your weekly ritual to replenish your food supply. Before you
grocery shop you take inventory of what you have and what you need,
you create your list, browse the products looking for quality items on
sale, make the purchase, and probably revisit most of those products
(in your pantry or refrigerator) each day.

If you could spend just a fraction of the time you spend each week on
grocery shopping managing your own financial future, you can grow a
small nest egg into a million dollar or (multi-million dollar) nest egg with
low risk high returns. Invest a little time along with your money and get
on track for a plentiful retirement.

Be a Good Consumer
The actual activities involved in purchasing shares of great businesses
are more aligned with shopping for a car than grocery shopping. If you
are a savvy consumer, you probably do a little research before you visit
the dealer or used car salesman. Most people will identify the class of
vehicle to purchase, ensure it is of good quality, find out how much it is
worth, and aim to purchase the vehicle for a price lower than its fair
value.

To investigate quality, you may research the vehicle model you want
through Consumer Reports. If you are buying a used car you probably
want to research its history with a report from CarFax. With only the VIN
number of the car, this service can tell you the prior ownership of the
vehicle, including whether or not the car was involved in any accidents.

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How do you tell if a business is of high quality though? Your best bet for
consistency is to find business with a consistent history of increasing
growth with little or no debt.

Next you want to educate yourself on the real value of your purchase.
Returning to our car purchase example, you also are likely to look up
the book value of the car you want to purchase. This information is
available from several web sites such as www.kelleybluebook.com.
Knowing the fair value of the car allows you to negotiate with the seller
with the confidence that you will get a fair deal for yourself. But how
do you tell if the stock price of a business is fairly priced, inflated, or
attractively low? You need to know the intrinsic value of the company.
Mr. Town’s book shows you step by step how to calculate the intrinsic
value of the business. The last section of the report gives guidance on
how to find the consistently growing businesses whose stock price has
temporarily dipped well below its intrinsic value.

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4. The Power of Compound Interest

One of the great things about retirement accounts is that your earnings
grow tax-deferred so you can realize the full power of compound
interest. But what about the rate of return on the money invested?
Certainly a higher rate of return is better, but will a few percentage
Compounding
points have a significant impact on the growth of an investment
growth is not linear, account over time? Does it really make a difference whether your
it’s geometric. retirement account earns 6%, 8%, 10%, 15% or higher a year? Yes, it
Because you get matters! In fact this is THE most important factor you need to consider.
interest on your
interest, growth “The famous economist Milton Friedman once said that the greatest
accelerates over invention of man was compound interest.”
time.
Let's take a simple example:

Suppose you are 40 years old and have $10,000 in an IRA account. For
the purpose of this example, let's assume you will never add another
dollar to that account from your own pocket. How much will that
$10,000 be worth at age 65? The answer depends drastically on your
rate of return. If you were getting a 6% annual return on your
investment, then in 25 years that $10,000 would turn into $42,918. How
would that same amount grow with a higher rate of return?

At 8%, in 25 years that $10,000 would turn into $68,484.

At 10%, in 25 years that $10,000 would turn into $108,347.
At 15%, in 25 years that $10,000 would turn into $329,189.
At 20%, in 25 years that $10,000 would turn into $953,962!

Think about that. Without adding a dime to that account you

could turn that $10,000 into almost 1 million dollars.

Let’s be a little more conservative with our example and see what
would happen if we add a small amount of money to that account
each month. How would the nest egg change then?

6% 8% 10% 15% 20%

Monthly interest interest interest interest interest
addition Over 25 Over 25 Over 25 Over 25 Over 25
years years years years years
$0 (no
monthly $42,918 $68,484 $108,347 $329,189 $953,962
contribution)
$50 $ 77,647 $115,564 $172,764 $474,420 $1,289,068
$100 $112,377 $162,645 $237,181 $619,652 $1,624,175
$200 $181,835 $256,805 $366,016 $910,114 $2,294,388

Quiz question 1: If someone offered to give you one of two checks, one

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check made out to you for $112,377 and the other check made out to
you for $1,624,175, which one would you take?

Quiz question 2: (this is really question #1 using different words):

Would you prefer to own:
• a $10,000 investment growing at 6% interest to which you add
$100/month ($112,377) OR

• a $10,000 investment growing at 20% interest to which you add

$100/month ($1,624,175)?

Quiz question 3: If it were possible to generate that $1,624,175 for

yourself, would you want to learn?

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5. Exploiting your advantages as an

Individual Investor
One of the biggest reasons individuals hand their money over to
“professional” investors is because they have come to believe the
aphorism "You can't beat the market". Indeed history does show that
many fund managers may not be able to beat the market consistently
year after year. However, an agile individual investor can do better
than the market. Let’s explore the advantages of the individual
investor.

Fund managers control 14 trillion of the 17 trillion dollars in the market.

That sounds impressive, but the downside is that fund managers cannot
move money in and out of stocks quickly. It may take days or weeks for
them to move into or out of a particular stock. Using the free, publicly
A “must read” book
available tools on the internet, it is possible to “see” money moving in
is Rule #1 by Phil and out of these companies. Mr. Town explains how to do this in his
Town. book Rule #1.
Not only is Mr.
Town’s own story • Advantage #1: The individual investor doesn’t have the same
volume of money to move and can be more nimble.
inspiring, he explains
in very simple terms However the goal is not just to beat the market, you want to earn a
the strategies that consistent level of return each year. If the market drops 3% in one year,
Warren Buffet used who wants to "beat the market" by losing only 2% that year? We want
to accumulate over to earn 15-20% on our retirement investment. It can be done. Warren
$40 billion. Buffet has earned a 22% annual return from 1964–2005. One of the keys
to his success is his famous rule number one – “Don’t lose money”. Or
as Hippocrates put it, “First, do no harm”. The point seems obvious, but
unless you are actively involved in managing your money it can
happen. (Refer to the prologue in this report as a case in point) Most
institutional investors are compelled to be “in” the market all the time.
As an individual investor, you don’t have to be. It is perfectly fine to sit in
a cash account waiting patiently (like a cat) to get into the right
businesses at the right time. Remember rule #1 – “first do no harm”.
You can’t lose money if you are sitting in cash.

• Advantage#2: The individual investor doesn’t have to be “in”

the market all the time.

For years the high commissions charged on trades could eat into the
individual investor’s profit. If you purchased $1,000 worth of stock,
watched it rise 10%, and decided to sell, your gross profit appears to be
$100 (10%). However if your account was charged a $20 commission to
purchase, and another $20 commission to sell, your net profit is really
only $60 or 6%. Of course, as the small investor invests more money, the
impact of the commission fees will not be as great. But none the less,
who wants to hand over part of their earnings if you don’t have too.
Professional traders often have negotiated lower commission rates and
are trading larger sums of money, so the impact is not as larger.
(Incidentally, although you avoid commission fees by leaving your
money in a mutual fund, you are still paying fees to the fund
managers.) There is good news however.

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• Advantage #3: Beginning in 2007 it is now possible for the

individual investor to trade with 0$ commissions. Having no
commission fees now allows even the individual investor to profit
from the gentle fluctuations in the market. See section 7.

Finally, some of the larger funds may avoid small cap businesses
(market capitalization between $300M and $2B) because they can’t
gain a sizeable position in these businesses. Getting around these
restrictions often requires additional filings with the SEC, which is often a
signal that results in inflating the price before the fund can make its
purchase.

• Advantage #4: Since the individual won’t be purchasing huge

positions, the individual investor has a wider variety of businesses
from which to choose.

“But still, isn’t it risky for me to manage my own money?” The greater
risk is not taking some responsibility for your own future. Remember, the
fund managers and financial services industry will continue to make
millions of dollars each year regardless of the performance of your
money. The real risk can be listening to the “experts”. Reread the
prologue for a real life example.

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6. Diversification Revisited
In column his column “To Diversify or Not to Diversify” multi millionaire
"Diversification is a investor and author Robert Kiyosaki explains that diversification is not
bad for the passive investor that is satisfied with average returns. He
protection against
further explains that diversification benefits the financial services
ignorance. It makes
industry because as it insulates them from the markets up and downs
very little sense for too. Losses are diluted, but so are gains.
those who know
what they are How does Warren Buffet’s, the second wealthiest person in the world
doing." approach diversification? Mr. Buffet’s holding company, Berkshire
Hathaway owns many businesses outright. He has partial ownership of
-- Warren Buffet
other businesses through stock positions. But just 10 stocks make up
85% of his share holdings. His philosophy is “focus”, not “diversification”.
Contrast this against the dozens or even hundreds of stocks often held
in mutual funds, or against an index fund that tracks a major cross-
section of the market. (This is not to say that you shouldn’t invest in an
index fund. If you are satisfied with average returns and you are
comfortable knowing your future is subject to the ups and downs of the
market as a whole, the index fund is a fantastic low-fee vehicle. See
the Motley Fool for more advice there). But we know we can do better
than that with just a little knowledge, guidance, and patience.

Why not look at diversification in a new light?

If you are nervous about taking control of your own money, then let
your financial services institution manage the majority of your retirement
funds. But take a small percentage of your money and put it in a self-
directed IRA account. We show you the how to open one with 0$
trades in the next section.

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7. Getting 20% Annual Returns

One way to get a 20% gain in a year is to pick the right stock at the right
time. You buy it and hold it through it’s up and down fluctuations, but
so long as the overall trend is positive your, gain reaches 20%. If you
can pick the right stock at the right time, it is possible to see even
greater returns in the course of a year.

But do you really have to sit through the weekly or monthly up and
down trends? Is there a way to capitalize on these fluctuations rather
than be held hostage to them through a strict “buy and hold”
mentality. Remember rule number 1 is “first do no harm”. If your golden
stock is trending in the wrong direction (we’re not talking about daily
fluctuations – you need to emotionally detach yourself from daily
movements), why loose that money? The answer to this question used
to be, that it is not worth it to keep paying commission charges to get in
and out of a stock. Large institutional investors on the other hand
historically have much lower commission rates (and much larger
trades), so this was much less of a factor in their decision. Now for the
first time in history, the small individual investor can pay $0 commission
on trades.

“By the inch it’s a synch”

We know this is simple math, but let’s take a look anyway. Let’s say you
open a savings account that returns 5% a year with a starting balance
of $100, compounded annually. In 1 year (12 months) you would have
$105. Even if that 5% is compounded monthly, your rate is still 5% and
you would have $105.12 at the end of the year. Try it at
http://www.bankrate.com/brm/cgi-bin/savings.asp

So we would need to see $120 in our account at the end of a year to

realize a 20% return.

We’re going to ignore the commissions charged for trades (because

now we can!) Over the course of the month or even a week, is it
unreasonable to have a stock gain 1.7%? Not at all. It is not
uncommon for a stock to move that much in even a single week or
even a single day. Let’s play this out in our example. Let’s say in
January you buy a stock with your $100 it gains at least 1.7% within 4
weeks time (or less). You sell the stock and add a $1.70 to your
account. You now have $101.70. Despite our earlier focus on
compounding interest, let’s leave that out of this example to keep it
simple. If you repeat the same set of steps with the same stock or a
different stock in February, you add at least another $1.70 to your

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account. 12 months times $1.70 is $20.40. At the end of the year the
account now has $120.40. Hmm, that is a 20% annual return! Reread
section 1 to recall what this could mean for your retirement lifestyle.

How do you minimize risk though? What if the stock goes the other
way? If you have a company that is trading below its intrinsic value
and you can “see” that others (usually institutional investors) are getting
into a stock, that’s when you move. If you “see” other are getting out
of the stock, again that’s when you move. The tools that are now
publicly available on MSN money and Yahoo finance. Phil Town’s
book, Rule #1 explains how to use these tools.

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8. Getting Started
Commission free Trading

The first step to getting started is to open an IRA brokerage account.

The brokerage account will allow you to purchase not only mutual
funds, but also individual stocks. Trading within an IRA account will
allow you to compound your gains tax-deferred. (You may also want
to consider a Roth-IRA brokerage account depending on your
If you give a man a
expected tax bracket at retirement). There are plenty of on-line brokers
fish you feed him for that offer IRA accounts from which to choose. The commissions
a day. If you teach typically range from $7.95 to $19.95. The problem with the commission
him how to fish, you is that it eats into your profits, especially when you are just getting
feed him for a started. But there is good news.
lifetime.
Zecco.com is an on-line brokerage site that in 2007 introduced $0.00
commissions to buy and sell stocks. How do they stay in business?
“Okay, teach me to Zecco makes money through 2 major revenue streams, online
fish, and then advertisements and interest from margin accounts.
please point me to
the fish too!” Zecco is safe and secure; trade confirmations are mailed to your home
address from their clearinghouse. The advantage to you as in individual
investor is that you can get into and out of a stock for no cost! You can
open an account at http://www.zecco.com

Identifying businesses for your portfolio

So what if you’ve read all of the books to learn about Value Investing.
You are familiar with the terms such as ROIC, Equity Growth Rate, and
EPS Growth Rate. So how do you find the businesses in which to invest?
The best way to get started is to invest in what you know. Peter Lynch,
former manager of Fidelity’s Magellan Fund is one of the most well-
known advocates of this strategy. The book is One Up On Wall Street :
How To Use What You Already Know To Make Money In The Market by
Peter Lynch and John Rothchild.

Proverb:
If you give a man a fish you feed him for a day.
If you teach him how to fish, you feed him for a lifetime

Most people would agree that it is better to learn how to fish. But once
you’ve learned, wouldn’t it be nice if someone could point you to the
best fishing hole?

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Finding wonderful, undervalued businesses

What happens when the businesses you know are not growing at the
desired rate, or are not selling below their intrinsic value? The other
option is to find a business of which you have some cursory knowledge,
and take the time to learn more about the business and the industry.
Ultimately you want to find companies that you understand that are
both high quality and have stock prices that are well below their
intrinsic value.

“It takes a wise man to learn from his mistakes, but an even wiser
man to learn from others."

The site www.ValueStockMoves.com offers a subscription service

that monitors thousands of publicly traded companies daily to
find businesses that offer a strong return on capital, with
consistently high EPS growth and equity growth rates and have
prices that have fallen below their current and future intrinsic
value. Invariably these are the companies to watch for future
significant future gains! Amazingly the monthly subscription cost
is less than a tank of gas and you get access to a list of
businesses that meet rigorous criteria. This is by far the most
valuable investment research information available for the
money. This service also display common technical indicators to
help you know the best time to get into these stocks so you can
begin securing your future right away.

www.ValueStockMoves.com

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