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Stock
Selection Guide Tutorial
Learning Stock Analysis |
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We have updated
the online
tutorial originally by Doug Gerlach that will help you understand
SIG's analysis. |
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Note:
The following is used with the permission of the original
author.
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Overview
Before we begin, it might be a good idea to get a general grasp of what this
method of stock selection is all about.
History of the SSG Form
- The Stock Selection Guide was first developed in the 1950's, during
the early years of the National
Association of Investors Corporation (which began with four investment
clubs in Michigan in 1951). Over the past forty-five years, the SSG has
proved to be a very effective tool in helping individuals to make better
investing decisions when considering stocks for purchase. Amateurs and
professionals alike use the SSG to assist them in investing profitably
in the stock market, including over 4,000,000 past and current members
of NAIC.
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Goals of Stock Selection
- The rationale behind this method of analyzing
stocks can be summed up fairly simply in two parts.
The first: companies that have performed exceptionally well
over the past five or ten years can be expected to continue to
perform well over the next five years. In practical terms,
this means that it is possible to quantify (to some degree) the
success or failure of a company's management. If a company has
grown revenues and earnings consistently at an annual average rate
of, say, 14% over the past ten years, and the same management team
is in place at the company, then we can reasonably expect similar
growth in the future.
The second goal is simply to determine a reasonable or fair
price to pay for a stock with such prospects.
This method of stock selection is ideally suited
for investors with a long-term, "buy and hold" philosophy who are
seeking stocks that will return an average of 15% a year on initial
investment. Price appreciation and dividend yield are taken into
account in determining the stock's potential return on investment,
and quantified on the form.
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Role in the NAIC Methodology
- The two-sided form, while daunting at first glance,
is not terribly difficult to master. With the advent of pocket calculators
in the 1970's and personal computers in the 1980's, entering the data
on an SSG form today can take only a few minutes. However, the SSG
is not designed to be a "crystal ball" to allow the user to predict
the future. Proper use of the form requires that the investor apply
his or her own judgment several times before reaching a personal decision
regarding the suitability for purchase of the stock under consideration.
The SSG is but one tool in any investor's toolbox. Used properly,
it can help an investor build a secure financial future. NAIC has
produced several other paper forms that assist its members in making
investment decisions. These include the Stock Comparison Guide,
Challenge Tree, Portfolio Management Guide and Portfolio Evaluation
Review Technique.
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Adding Judgment
- Two investors can complete an analysis of the
same stock, using the same data, and their conclusions might be so
different that an outside observer would not recognize that the same
company was being analyzed. Why? Because stock selection is highly
dependent on the opinions of the person completing the form. There
are many opportunities for investors to apply their own judgment,
making decisions about the company's prospects that affect the final
outcome. The SSG form is not a substitute for doing research on a stock;
it is merely a tool that narrows the focus on some of the most important
aspects of successful companies. In addition, each investor will have
different goals that the stock must reach to be a candidate for purchase,
which can affect the outcome of the analysis.
Even when using software to facilitate analysis
according to these principles, an investor must always use his or
her experience and knowledge in determining a reasonable expectation
of a stock's future performance. The keys to successful stock selection
are to understand the conclusions of your analysis, and to learn
to apply your own best judgment to those areas which demand input.
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*
This site not affiliated with the National Association of Investors
Corporation (“NAIC”) in any way,
nor does NAIC sponsor or endorse this web site or any of the products or
services offered herein.
The author founded a successful investment club and has been a member of NAIC
since 1990.
Stock
Investment Guide, SIG, Portfolio Analysis Review, Comparison
Analysis Review,
CAR, and PAR are trademarks of Churr Software.
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