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About Intelligence Report

I often hear from new subscribers who have questions about how they can start to implement my investing philosophy into their own investment plans. My simple, no-nonsense approach to financial freedom sometimes raises questions as investors streamline their current, complicated and scattered portfolios into low-maintenance, reliable blue-chip investments.

But any investment (including the one you made with your Intelligence Report subscription) is only as good as its long-term performance. That said, I want you to start acting on my advice and reaping the rewards of the long-term benefits of your Intelligence Report subscription. To help you start using Intelligence Report today, I’ve put together a list of the questions I’m most frequently asked by new subscribers. If your questions aren’t answered here, you can write to me at 9201 Corporate Blvd, Suite 200, Rockville, MD 20850 or send me an e-mail. While I can’t answer every question personally, I often address topics in upcoming issues. In the meantime, check out the overview below for help in getting started with Intelligence Report today.

Q: Why don’t you have a hotline?

A: From time to time, I get letters or e-mail asking why I do not use a hotline to keep investors advised on harrowing market gyrations and the like. Not a chance in a million. My bedrock principle of investing is to never trade on emotion. You make big money by (1) investing long-term and (2) harnessing the awesome power of compound interest. It’s really that easy. The less you spin, the more you win. Compound interest and reactionary alerts just don’t seem like much of a fit.

Q: Can you take a look at my portfolio or tell me which investments are right for me?

A: Unfortunately, I am unable to do so as SEC regulations prohibit my giving personal portfolio advice. Additionally, it would be difficult for me to assess your financial situation, risk tolerance, needs, and goals via e-mail, or snail mail, for that matter. This is also why you will never see a model portfolio in Intelligence Report. I do not believe in one-size-fits-all investing, and neither should you. Each month, I bring you many different investments from which to choose based on your individual portfolio needs.

Q: Why don’t you have a model portfolio?

A: Although model portfolios may sound practical, I believe they are a sham and, in fact, hinder your investment success. Model portfolios imply that every investor has similar goals and invests at about the same time, which, of course, is not the case. In the end, I believe model portfolios open the door to confusion. You know your financial situation better than anyone else. The information I bring you each month is aimed at helping you build an investment foundation based on your individual needs. Remember, your ultimate goal is to put together a winning portfolio that you feel comfortable with.

Q: How should I build my portfolio?

A: I advise you to maintain a constant balance in your portfolio between fixed-income securities, blue-chip stocks (and/or assorted mutual funds), and gold and foreign currencies. Your most important task is asset allocation. Portfolio balance and diversification tower above your securities selection as the foundation for your investment success. For most investors, I advise a 50-40-10 plan. You want 50% in fixed income, 40% in general equities, and 10% in gold and foreign currencies.

For the equities portion of your portfolio, I advise exactly 32 stocks (if you choose to invest in individual stocks), with no more than two from each industry. You will achieve approximately 90% of the diversification of owning all NYSE-listed stocks. Mutual funds are a great alternative as well. Invest equally in the stocks (or funds) you own, and once your portfolio is established, don’t buy a new stock unless you first sell a current position.

Once your portfolios are in place, do not mix and match fixed income holdings and equities. You want to maintain balance at all times. Why? Because I, like you, do not have tomorrow’s newspaper. We do not know the future.

To construct a brand-new 32-stock Retirement Compounders portfolio, proceed exactly as follows: (1) Buy the Top 10 from this month’s Intelligence Report. (2) Starting from last month’s issue, top down, add additional names not listed in this month’s IR. Then continue with the next most recent issue until your list totals a couple of dozen names. (3) Use the next couple upcoming issues to round out your list to 32 names.

Q: Should I invest in individual stocks or mutual funds?

A: For portfolios less than $350,000, absolutely go with mutual funds–the commissions you’ll pay for individual stocks are a killer. Of course, even if you have the minimum or more, you may find mutual funds to be easier and more rewarding. If mutual funds are your bag, stick with them in the equities portion of your portfolio. It’s a personal choice.

Q: Sometimes you write about “Retirement Compounders.” What are these, and how do they fit into my portfolio?

A: Young Research’s Retirement Compounders model is an internal proprietary list of companies, most of which are included on my common stock Monster Master List, that is used exclusively as the basis for the common stocks that my family-run investment company manages for individuals.

In Young Research’s Retirement Compounders program, we develop a standard portfolio of exactly 32 stocks–not one more or one less. Investors looking to achieve portfolio diversification intuitively recognize that by owning two stocks from different industry groups, diversification doubles from owning just one stock. By moving to four stocks and then eight stocks, diversification doubles twice more. Most investors have no trouble dealing with an eight-stock portfolio. The next doubling takes a portfolio to 16 stocks. The diversification is statistically supportable and necessary, but beyond the scope of many individual investors, which is where registered investment advisors, mutual funds, and ETFs come in. The final doubling, at least for me, is to a 32-stock portfolio. With 32 stocks, I get more than 90% of the diversification of owning all of the stocks on the NYSE, which is ample diversification.

The next doubling–to 64 stocks–actually does little to improve diversification, but forces a portfolio manager (perhaps you) to delve regularly into the bowels of 64 10Ks and 10Qs, which, for my money, cannot be justified on any front. The reason most mutual funds have so many stocks is liquidity–pure and simple. Funds cannot become hugely profitable behemoths for management companies without blowing up the portfolio to accommodate sizable cash inflows. In fact, long term, a portfolio of just eight stocks from uncorrelated industries will offer the bulk of diversification required. Where finances and manpower are in place to craft a portfolio of exactly 32 names, empirical statistical evidence is supportive.

OK then, proper counterbalancing for Young Research’s Retirement Compounders starts with 32 stocks. As you can see, considerable discipline is introduced right out of the starting blocks. The next serious discipline is a dividend mandate. Not only must each name in our Retirement Compounders pay a dividend, the Retirement Compounders as a group must have a yield higher than that of the Dow 30 or S&P 500.

And when referring to the 30- and 500-stock indices, it’s important to note that over extended periods, the Dow and S&P 500 track closely. Why then is it necessary to study 500 names when a rigorous monitoring of just 30 names is proven to provide about the same end result? The answer, of course, is that there is never a need to monitor such an unwieldy group of names.

So again, it’s 32 stocks on the nose–not 31, not 33. This exacting discipline forces us to eliminate a stock before adding a new name. It’s a discipline I aspire to for you.

Our RCs portfolio is based on discipline of both the number of stocks in the portfolio and the necessity of a dividend for each stock. It is also based on patience. Our view is long-term. We have no preset target price for elimination or ideal holding period. But should conditions change, we are prepared to make a change immediately. In truth, this is a rare occurrence, but we are not put off by such a necessity.

As for the types of businesses we choose, Young Research’s Retirement Compounders program concentrates on companies that are pretty darn easy to understand. And when we get away from the basic motorcycles, gum, candles, and guns sort of theme, our concentration is on a specific management style that is based on common sense.

I use Young Research’s RCs list to make the recommendations I bring to you each month. Not surprisingly, my family investment management company also relies exclusively on Young Research’s RCs program to craft individual stock portfolios for discerning private clients. I never go outside Young Research’s work to bring you dividend-paying stocks in these letters. Young Research does not rely on outside research, especially brokerage firm research. We do 100% of our work in-house, and you are the direct recipient of our total independence.

Since its inception, Young Research’s Retirement Compounders have developed a record of comfort and consistency. The results have been beyond what I might have hoped for. You can find the latest return information in the newsletter in the What’s Up list.

Should you make my Retirement Compounders your only equities portfolio? As I wrote earlier, I want most investors to follow my 50-40-10 plan, with 50% in fixed income, 40% in general equities, and 10% in gold and foreign currencies. Your Retirement Compounders could make up your 40% equities component.

Q: What exactly are zeros, and where do I buy them?

A: Treasury zero coupon bonds are a special kind of Treasury for growth-oriented investors. Like T-bills, notes, and bonds, they are loans you make to the government. However, they pay no interest while the loan is outstanding. Instead, the interest accrues, and you get paid all at once, along with the return of your principal, at maturity. But be aware that zeros are federally taxed as if they did pay current interest. You must pay taxes annually all along the way, just as if you had actually received the interest payment, even though you don’t. The term “zero” refers to the fact that you receive no current income. Zeros are for the investor who does not need current income.

Your profits are locked in with zeros if you hold them to maturity. But there is another way to use zeros in your portfolio to make even more money. Between the dates you buy and sell your zeros, the value of the zeros in your portfolio fluctuates directly with long-term bond rates. If rates go up, zeros go down. If rates go down, the value of zeros goes up. It’s just that basic.

Zeros are for investors looking to invest both long-term to meet specific goals and in a shorter course of the business cycle to reap more immediate gains. Zeros are not for income investors, novice investors, risk-averse investors or Nervous Nellies. If you are the least bit hesitant, if you are short-term-oriented or green, if you can’t sleep like a baby because of the volatility, please do not consider zeros–they are not for you.

STRIPS (Separate Trading of Registered Interest and Principal Securities) are a type of zero coupon instrument. When I talk about zeros in Intelligence Report, I am talking about government-issued STRIPS. When purchasing STRIPS, I recommend you deal with an active, seasoned broker at one of the primary dealers in STRIPS–like UBS PaineWebber or Merrill Lynch. You can really take a thrashing on brokers’ commissions with zeros. Do not buy from a discount broker because they buy from a primary dealer themselves and add another markup to you. You will pay a front-end sales charge of 3%–5% and more with brokers who are not both primary dealers and active, seasoned pros in the zeros market.

In most cycles, I recommend short and intermediate maturities. In the past, I have used long STRIPS in my program but am unlikely to again. The 1980s and 1990s were most likely a once-in-a-lifetime play for long bonds. Please check the most recent issue for my up-to-the-minute advice on our current strategy.

Q: What is preferred stock?

A: Preferred stock shares are issued by a company as debt instruments, much like corporate bonds. The company promises to repay the money lent by the investor and to pay interest (usually quarterly) to the preferred shareholder in the form of dividends.

The first group of stock a company issues is common stock; a company may then issue preferreds. Preferred-stock holders get “preferred” treatment over common-stock holders: Only after preferred-stock holders have received their dividends do common-stock holders receive any dividends. If a company should go bankrupt, preferred-stock holders will receive principal before common-stock holders, but after creditors and bondholders.

If interest rates fall, the issuing company must still pay out fixed preferred dividends. The prices of common stocks rise and fall with market conditions, but preferred-stock holders receive a fixed dividend year after year. Generally, this leads to greater price stability with preferreds than with common-share ownership.

Preferreds have similar characteristics to bonds, but there are several differences that will affect you and the issuing corporation. Bonds are simply IOUs issued with a promise to repay by a certain date. Both bonds and preferreds pay a specific dollar amount each year. From a tax standpoint, companies would rather issue bonds.

New issues are regularly offered with five-year call protection. That means the issuing company can’t pay off the loan (and must continue to pay you interest for at least five years). Brokers may try to convince you to sell a preferred at a profit rather than let it get called away from you at the call price. Most often, this advice is unable to stand up to mathematical testing.

Most preferreds are NYSE-listed and trade just like common stocks. You can open The Wall Street Journal any day of the week, turn to the NYSE stock listings, and find your preferred stock. Your issue has solid visibility.

So, here are the guts of how to play the preferred game. Let’s say you buy a new issue 7% preferred at the usual $25 with normal five-year call protection. Your preferred’s management cannot call your issue away from you for five years, and then only at $25 a share. And the entire time, you collect 7% per year, regardless of what the stock market does.

Q: Is now a good time to invest in preferred stocks?

A: For over two decades my advised approach to preferred investing was to invest in blue-chip preferreds for income and ignore price fluctuations. This strategy was successful because interest rates were in secular decline. Investors could always expect interest rates to be lower and preferred prices to be higher at some future date. The secular decline in interest rates is now finished. The next significant move in inflation and interest rates will be up.

As such, now is not the time to be in preferreds. At my family investment firm, we have completed liquidation of all our preferreds positions, which at one point had been substantial. And I advise the same strategy for you. At the top of the next cycle you will have a tremendous opportunity to score big with long zeros and TIPS. Investors who have been with me since 1980 know that during that period we made a huge score with the Benham zero-coupon portfolios. That day will come again, but not before a gut-wrenching run-up in rates.

I hope I’ve answered your questions about how to get started with your Intelligence Report service today. I’ll look forward to many years of building your wealth together by using a simplified, long-term approach to financial success.

Warm regards,

Richard C. Young

Dick YoungRichard C. (Dick) Young is editor of Intelligence Report.

Dick has been on the cover of Money magazine, featured in Forbes, and profiled in The Wall Street Journal.

For several decades, Dick was a keynote speaker at many of the major investor conferences around the world. For more than 40 years, Dick has been helping individual investors just like you.

His investment plan is simple and focused: “Diversification and patience built on a foundation of value and compound interest.” This focus can help you achieve your long-term investment objectives and sleep well at night.

With a B.S. degree in investments, he began his investment career in 1964 with Clayton Securities in Boston.

In 1978, he founded Young Research & Publishing, Inc. to publish Young’s World Money Forecast. In 1989, Dick founded Richard C. Young & Co., Ltd. to manage portfolios for discerning investors.

Dick is a life-long jazz, rhythm & blues enthusiast, and Harley-Davidson devotee. He and his wife, Debbie, when not traveling America on their Harleys, live on high ground in the southernmost spot in the U.S.–Key West, Florida.