Stock Selection Guide Tutorial

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.

Goals of Stock Selection

The rationale behind this method of analysing 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.

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 judgement 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.

Adding Judgement

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 judgement, 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 facilate 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 judgement to those areas which demand input.