Now it is time to take our new-found knowledge and put it into practice.

I have another tip about investment books to share with you today. Did you know that you can search many investment books online? Using Amazon.com you can search many books and read the pages that contain your search term! The only limitation is that you must be logged into Amazon using an account that has made a recent purchase. However, everyone can preview the cover, table of contents, index, and an excerpt from the book.

I often reference the following investment books:

• The Intelligent Investor by Benjamin Graham
• Security Analysis: 1934 Edition by Benjamin Graham, David Dodd
• Security Analysis: 1940 Edition by Benjamin Graham, David Dodd
• Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher
• Value Investing by Bruce C. N. Greenwald
• Investment Valuation by Aswath Damodaran (You can even read the whole manuscript of Investment Valuation here.)
• You Can Be a Stock Market Genius by Joel Greenblatt
• The Warren Buffett Way by Robert G. Hagstrom
• Damn Right! by Janet Lowe
• Yes, You Can Time the Market! by Ben Stein

I hope you find these links a useful reference. Let me know if I missed any important books on this list that you reference often. I’ll add them to the list.

Mike Price also recently wrote about special situations discussed in Joel Greenblatt’s book, You Can Be a Stock Market Genius.

You can often find some information about conflicts of interest in proxy statements, and I recommend that you read the proxy statement of any company that you currently own or are considering purchasing.

Visit the summary page of the 30 Days to Becoming a Better Investor community event, and catch up on the old posts you may have missed.

I hope you have recovered from all that turkey on Thanksgiving. There is a lot of learning still to come in the final days of the 30 Days to Becoming a Better Investor community event. There is still time to contribute as well, but don’t put it off any longer.

Catch up on all the 30 Days to Becoming a Better Investor submissions by visiting the summary.

Today is the Thanksgiving holiday here in the United States. I hope you are able to spend some time with family and friends today. They are an important part of your success at becoming a better investor.

I am thankful for my health and that of my family’s. I am also thankful for my ability to participate in the stock market. I’m amazed that I’m able to share my thought and ideas here at Fat Pitch Financials and get such great feedback from my community.

I hope you were able to enjoy a great Thanksgiving today with your family. Thank them for being there for you even when you are obsessing over your investment.

Mike Price of Value Investing, and a Few Cigar Butts just wrote an article challenging these claims that you can make 50% returns, even if you are as smart as Warren Buffett. Mike makes some good points, but I’ll let you decide if it is possible to make amazing returns.

Catch up on all the past posts in the “30 Days to Becoming a Better Investor” series by visiting the summary page.

A proxy statement details the corporate governance issues that are going to be discussed at a company’s annual meeting. This includes information about when and where an annual meeting is going to be held. It also lists the issues to be voted upon at the annual meeting and details what those issues are. Those issues may include:

• Capital structure
• Management compensation
• Insider ownership
• Election of the board of directors
• Conflicts of interest
• Takeover defenses
• Corporate structure

Given all these issues, proxy statements are often very long and complicated. Until I ran across an article on AAII by John Deysher entitled, “The Proxy Edge: Exercising Your Shareholder Rights “, I did not have a good systematic way to review the proxy statements that I received and those of companies I was interested in investing. I now use the shareholder scorecard at the end of that article as a framework to focusing my research efforts when reviewing a proxy. To better explain how I review a proxy, I’m going to walk you through one of my recent reviews.

Microsoft Case Study
If you are a frequent visitor to Fat Pitch Financials, you probably know that I recently purchased shares of Microsoft. As part of my decision to make that purchase, I reviewed the recent Microsoft proxy statement.

Finding the Proxy
The first step I took was to find the most recent proxy statement for Microsoft. I called on my good buddy EDGAR and I clicked on Search for Company Filings and then Companies & Other Filers. On the Companies & Other Filers page I filled in “Microsoft” in the company name box and I clicked the exclude button under “Ownership Forms 3, 4, and 5″. After clicking the Find Companies button, I scanned down the results page for form DEF 14A, which is the definitive proxy. Filings are listed in order by date with the most recent filings listed first. If I want to look at older proxies for previous years, I just continue reading down the list.

Sometime there are also amendments added to the proxy, and they are reported as from DEFA14A. You can see an example of an addition in the Microsoft filings list. It is worth the effort to quickly click on these additional proxy material filings to make sure nothing important is hiding in these additional documents. The recent Microsoft DEFA14A is just an email sent to Microsoft employees encouraging them to vote in the their proxy.

To view a form, click on the “[html]” link next to the form you are interested in viewing. When I clicked on the DEF 14A “[html]” link I get a long list of links. The important link is “1 DEF 14A ddef14a.htm“. The other links are just supporting graphics.

Annual Meeting Information
Information about Microsoft’s annual meeting is listed just below the regulatory filing information. It states:

The Annual Meeting of Shareholders of Microsoft Corporation will be held at the
MEYDENBAUER CENTER
11100 NE 6th Street
Bellevue, Washington
on November 9, 2005, at 8:00 A.M.

Voting instructions follow this information. I also noticed that Microsoft is providing live coverage of the annual meeting on their site and a transcript along with video and audio of the entire annual meeting. That type accessibility is very shareholder friendly and a plus in my book worth 2 points.

Capital Structure
Microsoft has one class of stock that has gives owners 1 vote for 1 share, so I give Microsoft a score of 10 points. The questions to ask about Microsoft’s capital structure include:

• Is there a non-transferable super-voting common class of stock? No.
• Is there a widely held class of stock that gets 0 votes? No.
• Are there any additional classes of shares owned by insiders only? No.
• Is there non-cumulative voting of directors? No. I believe you can cast your all your votes for one or two directors, but it’s not clear to me.

Management Salary Compensation
Salary information is listed in the “Summary Compensation Table” on page 5 of the proxy. Given the massive profits of Microsoft, I am impressed that none of the salaries of top management exceeds $1 million. Bill Gates and Steve Ballmer both earned $600,000 in base salary for 2005. Microsoft definitely deserves a score of 10 points in this category. The questions to ask about Microsoft’s managment salary compensation include:

• Is there minimal disclosure in the proxy statement of how salaries are determined? No. On page 7 the “Compensation Philosophy and Practice” and “Components of Executive Compensation” discuss the basis of how salaries are determined.
• Are salaries higher than for executives running similar-sized companies in similar industries? No. A good source for quick executive salary information can be found at the AFL-CIO’s Executive Paywatch. It is pretty common to find technology executives making more than $1 million in base salary in much small and less profitable companies.
• Are past increases in salary not in line with company performance? No. Salaries appear to have only increased moderately over the past three years.

Compensation: Bonuses & Cash Incentives
Ideally, a company would base its incentives on the companies return on assets or return on capital. If Microsoft had such an incentive system, I would give them a score of 10 in this category. However, Microsoft’s compensation incentives have some flaws. The questions to ask about Microsoft’s compensation incentives include:

• Are vesting periods short (less than three years)? No. The stock award and options seem to vest over five years according to the footnotes in the “SUMMARY COMPENSATION TABLE ” on page 5 and 6. In 2005, no stock options were granted to any of the executive officers. I believe Microsoft is phasing out the use of stock options.
• Are incentives based on non-return measures like earnings per share, sales levels or stock price? Yes. According to page 7 of the proxy, “The performance-based commitments used to determine bonuses will vary for each executive based on his/her responsibilities and may include financial or strategic measures, including but not limited to: revenue, contribution margin, innovation, product development and implementation, quality, customer satisfaction, or developer community satisfaction.” I’m subtracting 2 points for this vague set of measures that includes sales.
• Does the proxy lack a disclosure of how bonuses are determined? No. Page 7 and 8 give some information on how bonuses are determined. I would like to have seen more detail on exactly what metrics are used, however.
• Are there any Golden Parachute agreements? No. I did not spot any in this proxy.

Microsoft gets a total of 8 points for compensation incentives.

Compensation: Stock Options/Restricted Stock
If a company does not have a stock option or restricted stock incentive plans, I give them 10 points for this category. However, Microsoft does have a restricted stock incentive plan, so I ask the following questions:

• Are the restricted stock issued in modest quantities? Yes. However, given Microsoft’s shift from stock options to restricted stock it is a bit difficult to analyze this. Plus 2 points.
• Does the company treat option exercise as a compensation expense? Yes. Microsoft has started expensing all stock-based compensation. (I didn’t spot this in the proxy, but I found it doing a quick Internet search.) Plus two points.
• Is the option/restricted stock strike price at or above the stock’s price at the time of grant? Yes. The value is based on the closing price on the date of grant according to a footnote on the “SUMMARY COMPENSATION TABLE “. Plus two points.
• Is the vesting period greater than three years? Yes. The vesting period is over five years according to a footnote on the “SUMMARY COMPENSATION TABLE “. Plus two points.
• Are the restricted shares “funded” with shares repurchased on the open market? Not clear. I do not believe Microsoft’s proxy addresses this issue.

Given the above, I give Microsoft 8 points in this category.

Insider Ownership of Shares Outstanding
According to the table titled, “INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS, DIRECTORS, AND MANAGEMENT” on page 5, executive officers and directors own 13.79% of the outstanding shares of Microsoft. That gives Microsoft a score of 4 point out of 10 in this category. To earn ten points, insiders need to own more than 40% of outstanding shares.

Board Composition & Board Committees
I ask the following five questions regarding the Board:

• Are at least 2/3 of the board outside directors? Yes. Only Gates, Ballmer and Jon Shirley are obvious insiders. Plus 2 points.
• Is each outsider truly an outsider? Yes. According to what I read in the proxy I believe so. If I was concerned about the number of insiders, I would research each Board member more thoroughly. Plus 2 points.
• Is the Chairman of the board an outside director with no ties to management? No. Bill Gates is the Chairman.
• Are any insiders on the audit, compensation, governance, or nominating committees? No. I checked the table on page 2 of the proxy to answer this question. Plus 2 points.
• Are votes/seats held by insiders commensurate with shareholdings? No. Insiders hold three seats or 30% of the seats. Insiders only own a bit more than 13% of shares.

Microsoft gets a total score of 6 points for this category.

Conflicts of Interest & Related-Party Transactions
Page 9 of Microsoft’s proxy lists any potential conflicts of interest and related-party transactions in the section titled, “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS “. I asked the following questions regarding conflicts of interest:

• Does the company occupy a building leased from management or an affiliate? No.
• Does the company engage in business with another company owned or controlled by management? Yes. Microsoft does business with Corbis Corporation, which is solely owned by Bill Gates.
• Did the company buy real estate or businesses from management or affiliates? No.
• Did the company make loans to management on generous terms? No.
• Does management receive excessive perks? No.

I give Microsoft a score of 8 in this category.

Takeover Defenses
I do not belive Microsoft has engaged in any takeover defenses, so I give them a full score of 10. Some takeover defenses include, staggered board of directors, poison pills, restrictions to call special meetings, ability to issue unlimited preferred stock, and super-majority voting requirements.

Governance Statement
Microsoft details much of their corporate governance in their proxy and they also provide a link to a more comprehensive governance guidelines. I give Microsoft a full score of 10 in this category.

Re-Incorporation Strategies
Microsoft has no re-incorporation strategies, so I give it a full 10 points for this issue.

Conclusions

Microsoft appears to have fairly good corporate governance, which is shareholder friendly now. If I did the math right, Microsoft gets an 86 in my review.

There are a lot of details buried in these filings. If you would like to get a sampling of what can be unearthed, I recommend visiting Footnoted.org. Michelle Leder is a pro at reviewing these documents and she reports on her interesting findings daily on her site.

Like everything, it takes a bit of practice to review proxy statements efficiently and thoroughly. Start by going through all the current proxies of the companies you own. Hopefully, you won’t find anything too shocking and new to you in your search. If you do, it might save you some heartburn in the future. After you go through a few of these proxies, you will get a lot more efficient at it and you will be prepared to start reviewing proxies of companies that you are potentially interested in investing in the future.

I always find it informative to read about the lessons that other investors have learned from their experiences. “There is always somebody who will do things better than you,” according to Charlie Munger. Instead of being envious of others, learn from them I say. That is one of the reasons I decided to host the 30 Days to Becoming a Better Investor community event.

It’s not too late to contribute to the 30 Days to Becoming a Better Investor community project. I’ll make sure that I fit in all the submissions before the 30 days are up.

I think there is some real potential in using low cost country or region specific index funds to add diversity to your portfolio. The challenging part would be to identify international indexes trading at attractive values in order to maintain a margin of safety.

Jonathan details a way you can reduce your taxes by selling your index ETFs that are down for the year and then immediately purchasing similar ETFs. This is a pretty clever trick that could potentially save you a bit a money. Read “How to Beat the Market?” for the details. Jonathan describes two scenarios to explain the potential tax savings and an interesting discussion follows.

You can follow the 30 Days to Becoming a Better Investor series on the summary page.

David also notes all the other financial calculators that are available on Choose to Save and his own site. I’m a big fan of leveraging technology to help answer financial questions, so I’m having a lot of fun playing with these calculators. Try them yourself.

Learn how you too can contribute to the 30 Days to Becoming a Better Investor project. You can review the first half of this series by visiting the 30 Days to Becoming a Better Investor summary.

Tonight, I have another treat for you. Phil Town recently wrote a post on how to know if your advisor is smart. Phil walks you through how you can evaluate the value of a company in your head when someone offers you a stock. You can quickly tell if your adviser is trying to pawn off a clunker of a stock on you or whether he or she might be on to something using Phil’s method.

As Phil wrote, “If… you are getting recommendations that turn out to be wonderful businesses at attractive prices, hey, tell me who these guys are, too!”

You know, I did think of one topic I think that people would benefit from, and that would be how to start a personal finance blog on Blogspot or some other easy-to-use forum. There is something about putting your goals out for everyone to see that helps you focus on the goal (like Samuel Johnson’s man about to be hanged).

I definitely am NOT qualified to do that, but there may be readers that are. Just one possibility to post upon–it doesn’t even have to be for all to see. A simple “my net worth will be worth $x more this time next year” at the Thanksgiving dinner table with relatives can be a driver. You can bet a lot of people would do most things short of robbing a bank to make sure they can tell relatives the next year that they achieved that goal.

Signing up for goals are fine, but sometimes committing to them in such a public forum is more powerful.

I agree with Dwight that blogs are great tools for helping you commit to your goals. For example, I track the performance of my son’s Coverdell ESA on Fat Pitch Financials. I have learned a lot by tracking this portfolio online using a blog.

I started blogging about my investments last year using Blogger. Blogger is easy to use and only takes a few minutes to setup. I am currently using WordPress to run my blog now. You can try out WordPress for free using my current host, TheIcy.net, which offers a free blogging plan.

If you want to learn more about starting a blog, I would start with About.com’s Guide to Web Logs and Wikipedia’s entry for Blog.

Let me know if you decide to start a blog too. As a first step, if just want to write down your goals online, as Dwight suggested, you can leave a comment below detailing your investment goals.