Basic Investment Principles- From Asset Allocation to Z Scores

BASIC INVESTMENT PRINCIPLES – FROM ASSET ALLOCATION TO Z

SCORESPart of the

ALTERNATIVE INVESTMENT BASICS SERIES 2015 2015 Series

Premier Date: December 3, 2015

BASIC INVESTMENT PRINCIPLES – FROM ASSET ALLOCATION TO Z SCORES

MEET THE FACULTY

PANELISTSHeather Schwarz-Lopes EarlySharesJames Suh DarcMatterMichael Terrien West Loop Financial


MODERATORChris Cahill,

Lowis & Gellen, LLP

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Practical and entertaining education for business owners and executives, Accredited Investors, and their

legal and financial advisors.

For more information, visit www.financialpoisewebinars.com

DISCLAIMER:

THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT

MAY BE BEST FOR YOUR INDIVIDUAL NEEDS


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http://www.financialpoise.com/

ABOUT THIS EPISODE


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This webinar provides a practical overview of basic investment principles you need to be successful. Diversification, timing, investment choices, and more will be discussed.

ABOUT THIS SERIESBASIC INVESTMENT PRINCIPLES – FROM ASSET ALLOCATION TO Z SCORES

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The personal investment landscape in the United States is undergoing the greatest transformation since the popularization of the mutual fund. The JOBS Act of 2012 lifted the ban that previously prevented private placements from being advertised. At this point, millions of accredited investors are only beginning to understand that there are investment options available to them that they never before considered. This webinar series was created for those millions of Americans who meet the federal government’s definition of “accredited investor,” to help them decide if some of their investment dollars should be allocated away from stocks, bonds, mutual funds, and the like and into the asset class that is commonly referred to as “alternatives,” which includes PE, VC, hedge funds, private placements, and hard assets (things like gold, land, comic books, and much else). Like all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes: think sitcom rather than soap opera.

EPISODES IN THIS SERIES

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(Dates below are premier dates; all webinars also available on demand)

#1 Are you an Accredited Investor, and if you are, so what? 5/7/15

#2 What is the JOBS Act and Why Should You Care? 6/4/15

#3 What is Equity Crowdfunding and Should it Matter to You? 7/9/15

#4 The Nuts & Bolts of Investing in a VC Fund 9/10/15

#5 Angel Groups vs. 506 Platforms 9/17/15

#6 The Nuts & Bolts of Investing in Pre-IPO Share 10/8/15

#7 The Nuts & Bolts of Investing in a PE Fund 10/29/15

#8 The Nuts & Bolts of Hedge Fund 11/12/15

#9 Basic Investment Principles- from Asset Allocation to Z Scores 12/3/15


INVESTING IS NOT GAMBLING

7RISK RETURNS SAFETY LIQUIDITY TAXES

Not roulette, thoroughbred, harness, or dog racing, or sports betting, or lotteries

Is committing capital with a reasonable expectation of profit; or purchasing businesses at a significant margin of safety


TIME IS INVESTOR’S FRIEND

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Albert Einstein: Compound Interest is “the greatest mathematical discovery of all time”

Earnings of principal plus earnings of reinvested earnings:

$15k invested at 5.5% interest results in $57,200.89 in 25 years if left alone

$15k at 5.5% interest results in $33,487.50 in 15 years, not bad but better to start early


PRINCIPAL ASSET TYPES

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Cash and Cash Equivalents: Money Markets, CDs, Savings and Checking Accounts, Corporate Paper, T-Bills

Fixed Income: T-Notes, T-Bonds, Corporate Bonds, Municipal Bonds, Annuities, CDs

Public Equities: aka “stocks,” which are ownership interests; can yield dividends from profits; and get paid last (and usually nothing) upon business failure

Investment Funds: a collection of stocks and bonds, selected and managed by a professional manager; can be focused on equities types (Small Cap/Mid/Large Cap, ETFs, specific industries, specific places)

Alternative Investments: options, futures, precious metals, real estate, REITs, hedge funds, private equity, angel investing syndicates, venture capital funds


ACCREDITED INVESTOR

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There are several types of “accredited investors,” including:o A natural person with net worth (alone or with a spouse) in excess of $1 million

o One’s primary residence is not counted as an asset, and any mortgage is not counted as a liability, unless the mortgage is underwater

o A natural person with income exceeding $200,000 (or joint income with a spouse exceeding $300,000) in the 2 most recent years, and reasonable expectation of similar income in the current year

IF you meet either standard then YOU are an accredited investor.


CURRENT YIELD v. WORST ONE-YEAR RETURNS

(last 20 years)

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Asset Class 2015 (to 9/30) Worst 1-yr return

US Treasuries 1.4% -1.8%

Aggregate Bonds 2.3% -3.7%

Global REITs 3.8% -59.9%

Global High Yield Bonds 7.9% -32.8%

Master Ltd Partnerships 6.7% -39.2%

Source: InvestmentNews Blog (Nov. 19, 2015)


PORTFOLIO (CONTRA IRVING BERLIN)

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“I’m Putting All My Eggs in One Basket” (1935) (written for “Follow the Fleet” and introduced by Fred Astaire and Ginger Rogers)

Better Sir Mix-a-Lot than Irving Berlin

oMix asset classes, with mix adapted to the aggressiveness of overall investor strategyoProtect downside risk, counter inflation risk

Conservative strategy: more current income from Bonds, equity emphasis on high-quality companies with enviable track records

More aggressive strategy: more equity, and less fixed income securities


PORTFOLIO

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Bond vs. Stock

Long Term Bond vs. Short Term Bond

High Credit Quality vs. Low Credit Quality

Large Cap Stock vs. Small Cap Stock

Growth Stock vs. Value Stock

Alternative Assets and Negative Correlation

Cash?


P/E RATIO

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A means for valuing Public Equities

Theoretically, it shows how much investors are willing to pay per dollar of earnings

P/E Ratio = Market Value per Share divided by its Earnings per Share (EPS)

Usually calculated using EPS from last four quarters (the “trailing P/E”)

Sometimes EPS derived from estimated earnings over the next four quarters (“forward P/E”)

Some analysts will combine forward and backward looks in calculating P/E Ratio


P/E RATIO

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A $10 stock with a P/E Ratio of 75 is more expensive than a $100 stock with P/E Ratio of 20

Unprofitable company has negative EPS, and therefore a nonexistent P/E Ratio or P/E Ratio of 0

Important: Is company’s P/E Ratio higher than the industry average?

P/E Ratio tends to be lower during inflationary times

Important: Are P/E Ratios low in general? High in general?


ALPHA and BETA

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Alpha is a measure of performance on a risk-adjusted basis, and is often referred to as “excess return” or “abnormal rate of return.” Beta is a measure of volatility or risk.

Alpha is often considered the active return on an investment, for it gauges the performance of an investment against a market index used as a benchmark. Market indexes are often considered to represent the market’s movement as a whole. The excess returns of a fund relative to the return of a benchmark index is the fund’s alpha.

Alpha is often represented as a single number (like 3 or -5), but this refers to a percentage reflecting how the portfolio or fund performed compared to the benchmark index ( i.e. 3% better or 5% worse.)


TAX ASPECTS

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Initial tax benefit (lowering taxes upon investment, e.g., SEP IRA)

Continuing tax benefit (shielding periodic

returns) Terminal tax benefit (relief when investment

realized or upon liquidation)


INVESTOR PRESPECTIVE DISTORTIONS

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[happens to the best of them, er, us]

*House Money Illusion: gains from seem less real, so not treated with the same care as initial savings from toil

*Backfire Effect: doubling down on our beliefs when exposed to opposing viewpoints (“We ARE in a Bull Market!”)

*Confirmation Bias: Seek out only that information which confirms what we already believe (“My go-to is Bull Market News!”). A cure: see research of The Good Judgment Project, at www.goodjudgment .com


INVESTOR PRESPECTIVE DISTORTIONS, continued

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*Anchoring Bias: Clinging to irrelevant piece of information when estimating value (“I paid $900 for that, so it is worth much more than the current market price of $38.50)

*Recency Bias: Using the recent past as a guide to the future (2006: Look at those real estate prices increase! Gotta get in on this flipping game!”)

*Blind-Spot Bias: The tendency to think the aforementioned biases afflict them but not me.


HELP, FROM WHOM?

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RIA: registered investment advisor, registered with the SEC, required to meet fiduciary standard; usually paid “fee-only” (not same as “fee-based”)

Brokers: buy and sell on behalf of customers, required to meet “suitable recommendations” standard; paid by commissions

Financial Planners: look at whole financial picture, including estate, retirement, and tax planning, plus insurance and debt management needs; may be RIAs or Brokers, and may be certified financial planner (CFP)


VETTING THE HELP

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a. search on Google for litigation and complaints b. read Form ADV at advisorinfo.sec.gov c. review advisor’s history at brokercheck.finra.org d. ask advisor if she has ever been audited by state or federal regulators e. request a customized investment policy statement (IPS)

MORE ABOUT THE FACULTY

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CHRISTOPHER CAHILL

Mr. Cahill is counsel with Lowis & Gellen LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’ committees, potential purchasers and others through bankruptcy cases, out-of-court workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has substantial mega-case experience at national law firms representing very large debtors, and has counseled and litigated on behalf of manufacturers and secured lenders in large and middle-market cases.

Mr. Cahill also publishes frequently and speaks regularly on commercial insolvency issues. He is an executive editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland, Elizabeth Vandesteeg & Christopher M. Cahill eds., 2015) and is the host of Accredited Investor Markets Radio, a weekly broadcast for investors, on accreditedinvestormarkets.com.

[email protected]

http://www.accreditedinvestormarkets.com/aimkts-radio/

mailto:[email protected]

MORE ABOUT THE FACULTYHEATHER SCHWARZ-LOPES

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[email protected]

Heather Schwarz-Lopes is an expert in building successful businesses and a financial banking veteran. She is currently the CSO and co-founder of EarlyShares.com. Conceived out of her frustration with the lack of resources afforded to small business owners, EarlyShares.com is dedicated to bridging the funding gap for small business entrepreneurs through the application of Crowdfunding. Early in its beginning, the organization came to the attention of the Start Up America Partnership, which made EarlyShares.com the featured company on their website on April 5, 2012, the same day President Obama signed the JOBS Act into law. Mrs. Schwarz-Lopesʼ enviable successes in the development of small businesses has prepared her to found a company that will assure the stringent vetting of small business applicants as well as solid investor protections.

As Sr. Vice President, Private Banker at Wells Fargo, Heather collaborated with a six-member Wealth Management team to offer world-class financial services to both corporate and high-net-worth individuals. She was responsible for communicating with corporate clients and high-net-worth individuals through the wealth management process to perform data gathering, needs assessment, goal development, and strategy implementation. Monitoring portfolio risk and performance, as well as adjusting strategies when necessary to achieve client goals and objectives was part of Heatherʼs responsibility. Additionally, she tracked leads and client relationship tasks using CRM software, compiling portfolio analytics for client presentations and delivering seminar-training sessions.

In 2004, through a network of established professional relationships with previous clients and associates, Mrs. Schwarz-Lopes started a financial services company: Beyond Leading Corp. The company provided commercial and residential mortgage solutions, yacht financing and comprehensive financial planning services. She managed a team of seventeen people, mainly composed of underwriters, loan officers, loan originators, and administration staffs with substantial hands-on experience building direct relationships with banks and other financial institutions. Heather has been an active participant in the Crowdfunding Industry as a co- founder of EarlyShares.com. She is a member of the Young Entrepreneurs Council and CIFRA.


MORE ABOUT THE FACULTYJAMES SUH

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[email protected]

James Suh is the head of business development at DarcMatter, where he coordinates partnership endeavors and client acquisition strategies. In addition to providing critical commentary on the JOBS Act during its early development, James currently works closely with alternative asset managers seeking to streamline their fundraising endeavors. James graduated from Duke University with a B.A. in Political Science and English.


MORE ABOUT THE FACULTYMICHAEL TERRIEN

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[email protected]

Michael S. Terrien is the founder and Managing Member of West Loop Financial LLC (WLF). WLF is a registered investment advisor (RIA) committed to disciplined, evidence-based investing and personalized, comprehensive financial planning designed to help clients build their tomorrows while guarding against the pitfalls on the road today and in the future. West Loop Financial is a member of The BAM Alliance (BAM), a nationwide network of like-minded advisors. Mr. Terrien brings the intensive commitment to client service and attention to detail developed over a legal career spanning more than 20 years to West Loop Financial.


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IMPORTANT NOTE:

THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS. 31

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