We left you last week with Cora's reasons and warrants in her argument for her class paper on the stock market. Basically, the warrant is the "glue" that holds a reason to a claim in an argument. For example, Cora states that stock markets are the best investment tools, and she's found the charts and stats to support her claims. She believes the warrants that bind her reasons to her claims are as follows:

1. If a person invests in an index fund - or a fund that represents the market on a whole (and this warrant requires much more evidence).
2. If the investor diversifies to avoid casualties caused by singular equities that refuse to follow the upward trend of their market.
3. If the person is a long-term investor.

Four reasons, according to our book,* could make Cora's warrants debatable to others:

So, Cora needs to be specific about her warrants, and this means she needs to gather more evidence. Let's look at #1 in the first list, where Cora talks about index funds. Here, she might include information about these funds. She discovered that index funds are an easy way to invest in a group of equities, and that this method of investing also supports her following two warrants.

Index funds are not mutual funds. They are equities that represent groups of stocks that belong to a specific index or sector, and they can be bought without a broker or agent just like a regular stock. For instance, if you go to the BUYandHOLD stock picker (under the chart on the right-hand side of this page) and type in "QQQ," you will see a chart and figures on an index stock for NASDAQ. The index fund for the S&P 500 is "SPY," and the index fund for a group of socially responsible funds from Calvert is "CSIXX." (A partial list of stock market indices are found at Wikipedia.org). These funds are not recommendations, just representative samples of hundreds of index funds available in both market and sector indices.

These funds are usually not recommended for short-term investors, because they don't grant many opportunities for quick returns. Additionally, an index fund will never outperform its market, because it is a reflection of that market. However, the long-term investor who believes the market will continue to rise above any given period (say from now to ten years from now), these funds may contribute to profits. How profitable is that future for any index fund? That is hard to predict, and the only information we have to support this statement is from previous charts that show an increase in three major markets (see last week's article).

An index fund allows diversification within one index or sector, and Cora can claim this method might prove profitable based on historic sources. However, she might add that diversification with several index funds and individual securities might further minimize the risk of an individual's portfolio.

Through these steps, Cora gratifies the four points about warrants above. She explains her warrants so they are clear to the reader, she can support her claims with charts so they are believable and logical, and she can frame her wording so this argument is appropriate and understandable to her classmates. Now, the problem arises where someone might claim her argument is false. For example, someone might argue - convincingly - that we can't predict the future of the stock market, and that reliance on past information is an inaccurate method to predict the future. How can she overcome this obstacle?

For Cora to construct a convincing argument, the obstacle must be addressed up front before anyone has a chance to voice it. So, the first paragraph of her paper would include the following items:

These sentences are in order for a reason, because the thought processes becomes logical through this format. So, one example (and there could be many variations on her theme), is Cora's paragraph below:

1) "The stock market is the best investment tool, because charts and statistics prove the stock market historically offers the best return on our initial investment. 2) This is important information for teens who want to save money for college. 3) However, we can never predict the future, and the stock market is no exception. 4) What if we invest our money and the stock market fails to respond as it has in the past? 5) I will argue that the best solution to this problem lies in building a diversified and long-term portfolio of index funds and individual securities."

Now, Cora can lay out five paragraphs or more to support and illustrate each one of her sentences above. Remember, there are many variations on this theme, and Cora's argument may not be appropriate for every investor. In fact, it might be more appropriate to say that it's important for parents to invest for their children's education before their children are teens. However, Cora is addressing her classmates, and her argument is appropriate for this venue.

Next week, we'll view Cora's last defense and explore the finalization of her paper. I'll also share how she used what she learned to overcome my objections about one of her future plans (I knew this learning process was dangerous).

Until Then,
Linda Goin

* The Craft of Argument was written by Joseph M. Williams (U. of Chicago) and Gregory G. Colomb (U. of VA), Longman Publishing, 2001 - There are separate approaches for teachers (parents) and mid-teen to college level young adults to learn the "craft of argument." Simple explanations, and many examples and tools are included to remember the steps. All lists and procedures used in this particular series developed from this book.

BUYandHOLD does not recommend any securities. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy. The securities markets are subject to the risks of fluctuating prices and the uncertainty of rates of return and yields inherent in investing and past performance is no guarantee of future results.