Investment Guide from A. Portfolio Series

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Investment Guide

A. Portfolio


COPYRIGHT. 2021 Adrianna Group, LLC All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, photocopying, recording, or otherwise without the publisher's prior written permission.

Designed and Written by Marcus L. Craig


Preface

The definition of gambling can be as broad as a person makes it. Life can be as much of a gamble as waking up for the next day. However, investing your money into revenue-producing assets that employ people to maintain that asset’s value is speculative, but it’s not gambling.

Bulls, Bears, and Corrections

The difference between a bull market and a bear market is that a bull market refers to a financial asset or market that is performing well for a sustained period, vice a bear market is when there’s a decline of 20 percent or more from its 52 weeks (1 year) high. A correction would be when there’s a decline from 10-19 percent.

American Stock Indices A stock index is a publication that computes the collective performance of a group of stocks. These indices are typically weighted by price or market capitalization (the size of a company). In essence, a company’s stock that’s higher price or market capitalization will weigh more heavily than their peers within the same index. The S&P 500, NASDAQ Composite, and Dow Jones Industrial Average are America’s three major stock indices. The Russell 2000 is another well-known index but not as popular as those mentioned above. The S&P 500 is a market capitalization-weighted index of 500 large companies in America. To clarify, large capitalized (large-cap for short) companies are worth at least 10 billion dollars. In addition, mid-cap companies are worth between 2-10 billion dollars in value, and small-cap companies are generally worth between 300 million and 2 billion dollars. Finally, micro-cap companies are valued between 50 and 300 million dollars. Next is the NASDAQ Composite, which is a market-cap weighted index of over 3,000 companies. NASDAQ stands for National Association of Securities Dealers Automated Quotation System. A significant portion of the companies tracked within the index is technology firms. Additionally, there’s the Dow Jones Industrial Average. It is a price-weighted index of 30 large, high-quality companies that trade on the New York Stock Exchange (NYSE). The NYSE is the largest stock exchange both in America and the world.


Lastly, the Russell 2000 is a market-cap weighted index of 2,000 small-cap companies publicly listed in America.

Benchmarks

Benchmarks are a measure of how successful or unsuccessful an investment has been. In the United States, the S&P 500 is the most widely used benchmark. Benchmarks work by comparing the performance of the S&P 500 to the performance of an asset over a period you specify.

Rising Tides

In the stock market, what typically occurs is shares in companies across indices in America move up and down collectively. It’s similar to the popular notion of a rising tide lifting all boats. The major reasons why this correlation occurs are: -The American jobs market (the gain and loss of jobs month over month). -Consumer and investor sentiment. -Corporate earnings. -Geopolitical events. Consumer sentiment is a large force in the stock market, given that roughly 70 percent of the U.S. economy is made up of the personal consumption of goods and services. In addition, investor sentiment is critical to the movement of the U.S. stock market, given that people often invest based on what occurs with current events. One of the ways that investors can mitigate correlation risk is to include individual companies in your investment portfolio that you expect to outperform stock indices even though this doesn’t occur without its risks. Two examples of companies that have succeeded in this since being publicly traded would be Amazon and Netflix.


Active Versus Passive

Active investing takes an engaged approach where you research, buy and sell stocks more frequently than what’s considered passive investing. In contrast, passive investing has a more reserved approach to investing. Passive investors are also long-term investors and may hold a stock for years. This guide will review ETFs (Exchange Traded Funds), which are an efficient and popular way to engage in passive investing.

The Variety of Investment Analysis

The varying kinds of investment analysis are but are not limited to top-down, bottom-up, and technical. Top-down investing is an investment approach that takes a bird’s eye view first of investment and looks at broad factors like geopolitical and other general industry factors, then going into finer detail such as sector-specific dynamics. Meanwhile, bottom-up investing is an approach where an investor prioritizes fundamental metrics first, such as a company’s financial and operational well-being. This approach is indifferent to the kind of industry the company operates within. Lastly, the technical analysis evaluates financial data and statistical patterns found in both historical and real-time data. Passive, long-term investors are more focused on top-down or bottom-up approaches to investment analysis; however, technical analysis is often applied in situations where you are about to buy or sell stock in a company.


To Stock or Not to Stock

Stocks, also known as shares or equities, are a representation of ownership in a company. As an owner of shares in a company, you have the option of exercising your right to vote on matters such as electing board members to the Board of Directors. A company’s Board of directors comprises personnel who have expertise in a field that complements the business they assist in overseeing and is used to sustain a company’s success. In addition, the board members provide inputs on a slew of matters such as C.E.O. compensation, strategic direction, mergers, acquisitions, etc. Stocks can typically be placed in two categories; growth and value. Growth stocks may significantly increase their value due to the expected high demand for their product or service. The second category is value. Value stocks are shares in a company that are relatively lower than their peers. The lower value can be due to factors such as a company not being “appreciated” by investors in the stock market. Another reason may be that the overall stock market has gone down, and companies doing well also had their shares sell lower.

For your awareness, there are stocks known as value traps. A value trap starts when a company is trading at a lower level relative to its previous performance. The trap portion comes in where the stock appears to be a great buy, but the company will struggle for the foreseeable future. This risk is often mitigated by maintaining a diversified portfolio as well as thoroughly researching a company.


The Things We Look For

Investing to a large degree is your price expectation of an asset in the future and not where it currently is based on a variety of factors. Those factors include, but are not limited to the following: 1.

The industry or industries that a business operates in. Some companies may be diversified or undiversified conglomerates for example. The difference is that a diversified conglomerate owns loosely related or unrelated industries (think 3M). An undiversified conglomerate may own a variety of businesses in a specific sector (Raytheon Technologies is a conglomerate focused on the aerospace sector).

2. The company’s product line (ecosystem). How well businesses can get consumer purchases to stay within their product line-up and how well those products and services complement each other can be critical to success. The best example of a stellar ecosystem is Apple. All of their products integrate electronically with each other and their sales of each product have been quite remarkable over the past decade.

3. Pricing power. It’s the ability to raise the price of your product without decreasing demand. 4. Brand awareness is significant because the public needs to be able to recognize a company’s brand, product, or service. 5. Geographic position also comes into play. You would want to see a company entering new markets and remaining competitive in locations they already operate. The cruise line Carnival is a perfect example of this, given that their ships are homeported worldwide.


6. Profitability. There are rare occasions where a company can get away with not being profitable. This occurs if their product or service is considered to be the truth. But typically, you would want to see a company be able to turn a profit consistently. And if they are not profitable, they need to release updated time frames as to when they’ll be profitable. 7. The target audience a company caters to can impact success. Companies have to be able to keep up with consumer trends. 8. A competitive advantage (also known as a moat) may be among the most critical metrics because an advantage often decides profitability, brand awareness, and ultimately success. Intellectual property is probably the most common advantage because it can be challenging to compete with a product or service where the law protects its design and process. The Walt Disney Company is a perfect example because they own storied characters from franchises such as Marvel and Pixar. 9. Business strategy plays another essential role. Whether or not a company is behaving reactively or proactively is something to look at as well. News articles can depict what a company’s strategy is, along with watching C.E.O. interviews. Ultimately what you would want to see ideally is a company taking the initiative to disrupt their operations to serve consumers better. Frequently, businesses will also acquire or merge with other companies. 10. Financial health is also one of the most critical factors. Three financial documents can tell the story of a company’s economic well-being. They are the cash flow statement, income statement, and balance sheet. A cash flow statement is a document that shows a business’ movement of their cash or cash equivalents (a financial product that can be quickly sold for cash). By looking at a company’s flow of money, you can also get a picture of how effective a company is at making money. Next is a company’s income statement. It illustrates how money a business generates (its revenue) is subsequently turned into net profit over a specified period. Lastly, the balance sheet shows a company’s net worth. Net worth is best defined as the assets minus the liabilities of a company.


The Discovery of REITs

A lot of people have not heard of REITs; therefore, I want to cover that here. REIT stands for Real Estate Investment Trust and is a business that typically both owns and operates real estate assets that produce a steady stream of income. Additionally, REITs often specialize in owning certain kinds of real estate assets to serve specific tenants. This may range from hospitals and shopping malls to luxury apartment complexes. An example of this would be AvalonBay Communities, which invests in apartment complexes in prime locations like Washington, D.C, and Seattle. Finally, publicly-traded REITs can be a great option if you want to add dividends to your portfolio.


Nothing is Without Risks Like anything in this world, there are risks associated with investing in the stock market, and the following risks are included, but not limited to what you will see as an investor. Strategy Risk: whether or not a company’s strategy will work or not. Volatility Risk: occurs when there are wild swings in the price of a company’s share price. Inflation Risk: the risk that the cost of goods and services required to sustain a business’ operations rising or falling. Interest Rate Risk: when the Federal Reserve raises or lowers the interest rates under their control, it can increase or reduce the cost and risk of raising money or moving money from one kind of asset to another. This can have far-reaching implications in terms of a particular business’s ability to borrow and affect the currencies and monetary policy of nations around the world. Currency Risk: Because businesses can operate in numerous countries worldwide, they receive revenue in different currencies. It leaves companies susceptible to the risk of currencies appreciating or depreciating, therefore affecting income. Regulatory Risk: Regulatory certainty or uncertainty can impact how a business steers its decision-making throughout the life of a company. Credit Risk: The ability or inability to access credit can help a business grow or it can financially paralyze it. A company’s financial health can dictate if the market charges a company a premium to borrow money. This is illustrated in the bond market where if a company is perceived to have poor financial health it will have a higher interest rate to pay investors. Reputational Risk: Like people, businesses have a reputation they have to maintain. Companies have to be careful that their actions or inaction deter consumers from thinking positively of their brand. An example of this would be the alleged scandal at Papa Johns that ultimately forced the Founder and C.E.O. to step down from his job. Liquidity Risk: Liquidity can be defined as the ability to buy or sell an asset quickly. Some assets are difficult to sell, thus making them illiquid. Real estate is an example of an illiquid asset, while stocks are considered to be liquid.


Earnings Reporting Earnings reports from companies are released every quarter, and they look back the past three months. However, some companies do not report the financial details of every business division, so be aware that you might not get the details you initially hoped. Additionally, some companies release financial guidance for either their fiscal or calendar year, providing investors with better clarity of their performance expectations.

Stocks Worth Checking Out

Lockheed Martin is the largest defense contractor in the world. Their technology is found across nearly every warfare area you can think of, and the need for a country to defend its homeland isn’t going away anytime soon. Along with the company’s profit margin being relatively high, the business has a deep bench of intellectual property, and their best customer is the world’s largest defense spender. The Walt Disney Company has been beloved by families for generations. Their library of movie franchises to include a large portion of the nation’s superheroes will have the company around for a long time. The company also has diverse revenue streams that include merchandise, theme parks, cruise ships, and the Disney+ streaming service, and it doesn’t hurt to own ESPN. Everyone on Earth needs water. The need for water is the foundation of why American Water Works might be the stock worth owning for a lifetime. They operate the largest, most geographically diversified collection of water utility assets of any publicly traded water utility in America.


The Era of the ETF Since the end of the last financial crisis in 2008, investors have grown the ETF market to a multi-trillion-dollar asset class that is continuing to have stellar growth. An ETF is a collection of stocks or other assets assembled into a tradable, often transparent financial product. Often times an ETF was created in service of tracking a specific index such as the S&P 500. An ETF can either hold all of the index’s holdings or own a portion of those holdings. Assets to include dividend-paying companies, currencies, commodities, and bonds can comprise ETFs too. There are several factors to look for when evaluating whether or not you should invest in one ETF or another. The following is a brief list of items to look for when looking for an ETF to invest in. Whether or not the ETF issuer (the brand that created the ETF) is reputable. The top three are BlackRock (which owns the iShares brand), Vanguard, and State Street (which owns the SPDR brand). Other prominent players in the space are Invesco, Fidelity, and Charles Schwab. The kinds of assets the ETF invests its capital in is another critical item. So, again, make sure the ETF you’re investing in is aligned with what you are attempting to get financial exposure.

Expense ratio. As it relates to ETFs, an expense ratio is an annual fee you would be paying for every $1,000 you invest with an ETF. The expense ratio is expressed as a percentage. For example, if the expense ratio for the Marcus Craig ETF is 0.35%, the annual fee you pay each year for investing $1,000 would be $3.50. It would be $7 if you invested $2,000 and so on.


Another factor to look at is the top 10 holdings of the ETF because it illustrates which assets have the most significant collective weight in the ETF, which can affect its performance. Lastly, the amount of assets under management is an essential metric because a high asset under management number can indicate a highperforming or popular ETF. ETF.com, in our experience, is the best website to research and discover information regarding ETFs. I recommend viewing two ETFs closely; the Healthcare SPDR ETF (ticker symbol: XLV) and the Technology Select Sector SPDR Fund ETF (ticker symbol: XLK). Both of these ETFs are among the largest in the industrial sector that they invest in. Both are also from the same reputable ETF provider State Street. Additionally, both ETFs have expense ratios that are below the average ETF expense ratio.

The Step-by-Step on How to Invest in the Stock Market 1.

If you want to go with a well-rounded financial services firm, I recommend Charles Schwab. They have zero-commission trades, and they offer a large variety of financial products, research, and advising services. I also recommend the Robinhood smartphone app if you don’t already have a relationship with another brokerage service. The financial services company was made famous for first having zero-fee commissions for buying and selling stocks and ETFs. The Robinhood user interface is simpler to navigate, but financial companies require no minimum money to start.


2. Fund your investment account only with money you know you can afford to lose if you lose all of the money (hopefully you don’t). Some brokerage services have minimum amounts of money that you need to start investing through that company. You need no magic number to start investing in the stock market, but whatever that number is, you should be comfortable with it. 3. Before you start purchasing shares, remember to leave some money in your brokerage account in the form of cash, just in case you see other financial opportunities. 4. If you are still on the fence with a company or ETF you want to invest in, then you can create a watch list so that you can still be aware of the performance without investing your money. 5. The following are a couple of types of execution orders available to you to help manage price risk when you are about to purchase shares. The first is a market order which is an order to buy or sell stocks or ETFs at whatever price you can get when you place an order. Next would be a limit order, which is when you opt to buy/sell a security at a specific price or better. This essentially creates a ceiling and floor with regards to the amount of money you’re spending or making to buy and sell shares.


Never Leave Home Without Your Investment Advice 1. Consistently read the news to maintain awareness of financial markets. 2. Continually learn and retain as much as you can because you never know when it could help you in the future. 3. Invest in companies or industries that you know or can easily understand. 4. Maintain your patience with your investments unless something drastically changes with the company or industry that would justify you exiting out of a position earlier than you thought. A perfect example would be the situation with Pacific Gas and Electric (PG&E). The company was found liable for some of the wildfires that occurred between 2015 and 2018. The financial cost to the company put a strain so hard on the company’s financial health that a lot of investors found it no longer worth it to invest. Historical performance does not predict future performance. However, there is nothing wrong with looking back at a company's historical performance to see how it’s performed through economic events. This is important because if a company has lost half its value during a stock market growth period, it’s a red flag that there may be several issues.

Epilogue If you want to go fast, go alone, and if you’re going to go far, go together. Look out for more investment content from our A. Portfolio financial series.


The investment guide in no way guarantees the investment performance of your portfolio. We recommend using your discretion and discussing your investment goals and risks with a Registered Investment Advisor (RIA). You can check the background of the financial professional you may be working with by using the Broker Check feature at the FINRA website. FINRA (Financial Regulatory Authority) is a self-regulatory agency for the financial services firms that are members. The Securities and Exchange Commission is the top regulatory agency concerning financial products and services in America.

www.adriannamedia.com


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