UGBA 196: Chapter 10
Investment Strategy: Investment categories
Cash: CDs, Money Market Accounts or Funds, Currency Stocks: Individual Stocks, Mutual Funds, ETFs, Sector Funds Bonds: Governement, Municipal, and Corporate Bonds Real Estate: Real Property or Real Estate Investment Trusts Business Opportunities: Proprietership, Partnership, or Corporation
Investment Strategies: Size Choices
Large Cap, medium cap, small cap, micro cap
the key to investing in stocks
SPOTTING TRENDS -be observant -if you find a business that is doing well and expanding with a great idea, research the company, and if it meets your criteria, consider buying shares
Value Investor
an investor looking for stocks which have stumbled and whose shares are at "bargain" prices -in down markets there may be many stocks that fall into this category -sometimes stocks have been beaten down due to temporary problems that you think will be fixed -these are broken stocks not broken companies -need to figure out why the stock sells for such a low price and what would cause the price to rise -may be more difficult to identify and research
Growth Investor
an investor looking for strong companies to grow their sales and earnings -usually this means that sales and earnings could grow 15% or more from one year to the next -best time to buy a growth stock is when it is not as popular as you think it will become over the next 6-18 months, these may be smaller companies and to that extent they may involve more risk -these stocks may be out of phase or not popular on Wall Street at a particular point in time -in a declining market these stocks go "on sale" quickly -in a rising market, one worries about getting in too late, losing money, and feeling foolish -focus for young investors should probably be in growth companies, growth industries, and growth or emerging economics -growth is important because you want the stock to be worth more in the future than when it was bought
Dividend Investor
an investor wanting income more than growth. The focus is on stocks that pay above average dividends -a "good dividend" is one that provides a yield greater than the rate on a 10-year Treasury bond -look for companies that earn substantially more after taxes than they pay out in dividends -look for companies with available cash with which to pay the dividend -look for companies with a history of raising dividends each year -look for some potential appreciation in the value of the shares -be wary of stocks that are paying very high dividends (8% or greater). many times these are companies that are about to cut their dividend payments -at a time when interest rate are at a historic low, look for stock of solid companies with good dividends and potential for growth
Discipline: Allocation of Assets
at least once a year, review the allocation of assets in your portfolio
Trend: Environmental Needs
clean water for drinking and irrigation -convert the use of coal to natural gas and renewable resources -protect populations from nuclear disasters -reduce pollution around the planet -prepare for sea level risings
Price/Earnings Ratio
compares the price of a share to its earnings per share. Price of share divided by earnings per share -THE P/E RATIO TELLS YOU WHAT THE MARKET IS CURRENTLY PAYING FOR EARNINGS -indication of how the market values those shares
Growth
determined by calculating the percentage rate of increase over time, usually a quarter or a year, past or current, to the same period of time in the future -LOOKING TO CALCULATE THE RATE OF GROWTH
Discipline: DIVERSIFY
diversifying substantially lowers your risk! -spread your investments over different industries or sectors, different areas of the world with different risks and growth rates, and different size companies -number of individual stocks needed to diversify: five stocks in five very different industries OR five mutual funds, ETFs, or index funds in 5 different categories - no more than 20% of any portfolio of five stocks or 10% of any group of 10 or more stocks should be in any single stock for a prolonged period of time
Discipline: DO YOUR HOMEWORK
don't blindly trust someone else with your money even a so called professional -do your own research and manage your own portfolio, whether or not you enter your own orders or work with a broker -look at a company's website. read the description of the company and its business then read the rest of its annual report front and back including the FOOTNOTES which are where they may disclose things in "smaller print". Read the section on RISK FACTORS
Investment Strategies: Sector Choices
energy, materials, retail, consumer staples, technology, pharmaceuticals , etc.
Discipline: Keep it Simple and Stay Informed
few investors can beat the overall stock market by choosing individual stocks, so don;t bother trying unless you are willing to do your homework and pay attention to the marketplace
Investment Strategies: Objective
growth, value, dividends, speculation, interest
Investment Strategy: Tolerance of Risk Choices
high, medium, low
figuring the return on investments
if save and invest regularly and can average 6-8% per year compounded over your earning years, you can become financially independent -DON'T FORGET TO COUNT YOUR DIVIDENDS ALONG WITH CAPITAL APPRECIATION WHEN FIGURING THE RETURN ON YOUR INVESTMENTS
Discipline: DOLLAR COST AVERAGING
investing a set amount of money in the shares of a business on a regular schedule regardless of the cost of the shares at the time. Mathematically, you will buy more shares at lower prices than higher prices -essential to a successful long term investment program regardless of what happens to the stock prices -dollar cost averaging of ETFs sector funds, and mutual funds are a good way to start investing and not have to worry each day about the market
Earnings Per Share (EPS)
investors want to know the profit or loss attributable to each share -total earnings divided by total number of shares outstanding
Discipline: 5 years
its best to invest in stocks with money that you won't need for five years. You don't want to be forced to sell good stocks if the market is down
Investment Strategies: Geographical Choices
north america, europe, asia, BRICs (Brazil, Russia, India, China), emergin markets
Trend: The World is Running out of Cheap Energy
oil is now harder and more expensive to get coal and nuclear sources are being challenged renewable resources are too far down the road to be significant but there seems to be no option but to develop these sources
Discipline: Identify Trends
once you identify these trends and classes you can focus on buying the best stock or fund in that category
Discipline: Control Your Risk
periodically rebalance your portfolio in terms of risk, allocation and diversification -do this at least once a year
Investment Strategy: Portfolio Management Choices
professional, personal, or combo
Discipline: Jim Cramer's Rule
spend one hour per week doing homework for each fund or stock you own
Discipline: Do Not Buy Your Entire Position At Once
stage and stagger your purchases and sales if possible. When purchasing a position in a stock, buy it in 2-4 stages or pieces to get the best average price either by the number of shares or the dollar amount -do the same for selling unless something dramatic has happened and you have a good reason to get it all sold at once -just try to get 6-8% or more in the middle unless your homework suggests more gains might be possible -limit your losses by adhering to these disciplines
Discipline: 6-18 months
the market usually forecasts 6-18 months in the future -you should do the same when researching your investments and planning your strategy -a trend should be something you can reasonable project over 6-18 months
Market Cap
the total value investors are placing on the company on this moment -single share price*total number of shares outstanding -large cap company: market cap over $5 billion -mid cap company: market cap of 1-5 billion -small cap company: 250 million-1 billion -micro-cap company: market cap under 250 million -larger cap companies may offer greater liquidity whereas smaller cap companies might offer greater growth potential even in
Discipline: Market Timing
there is never a right or wrong time to invest in stocks. Trying to "time" the market is extraordinarily difficult to do with any degree of success
Discipline: Be cautious of companies that buy back large amounts of their own stock
they may view it as a good investment and a way to increase shareholder value but in some cases they may just be trying to increase earnings per share and the stock's price by reducing the number of shares outstanding
Trend: More people have higher income
they want more protein found in meat, which means huge increases in grain, soybeans and corn for feeding -requires more arable land for which there is shortage
PEG Rate
tool frequently used to try to decide if a stock is in a "buy" range or a "sell" range -compares how much investors are willing to pay for each dollar of earnings to the expected rate of growth of future earnings -compares the current P/E ratio to the growth rate -some investors believe that a PEG rate under 1.0 indicates an attractive buying range because the growth rate is increasing faster than the market is currently valuing the stock -some investors believe you should not buy or continue to own a stock whose PEG rate is more than 2.0 or 2 times its growth rate
Discipline: Establish Sell Point
- establish your sell point when you buy a stock. Review and adjust it as you update information -true investors are not forced to sell their stocks due to a daily or weekly market declines unless the market price actually indicates a change in the company's prospects, its industry, or the economy's fundamentals -reasons to sell might include: falling revenues and or profits, accounting problems, lawsuits or poor management, over expansion, competition in the market place
Conservative Strategies for Beginning Investors
-START EARLY and save 15% of earned income -PAY OFF HIGH INTEREST credit card and charge card debts -ESTABLISH A 3-6 MONTH EMERGENCY FUND -MATCH AN EMPLOYER CONTRIBUTION TO YOUR RETIREMENT PLAN -invest the next 10,000 in exchange traded funds, secotr fund or mutual funds for diversification -invest in individual stocks if you intend to devote the TIME necessary to manage your investments -consider what percentage to put into YOUR RETIREMENT ACCOUNTS and what percent to put into your individual investment account -develop a long term INVESTMENT PLAN -use DIVERSIFICATION, ALLOCATION OF ASSETS, AND DOLLAR COST AVERAGING AS PART OF YOUR PLAN -BUY AND HOMEWORK
Trend: The World is Getting Older
-birth rates are declining -there are fewer young people to support the needs of elders -there is increasing demand for medical and financial services
Be A Skeptic: No sure way to determine the future price of a stock
-don't estimate future earnings per share for more than two years, beyond that the margin of error is too high -LISTEN TO THE QUARTERLY OR ANNUAL ANALYST'S PHONE CALL -some investors will not buy stock without listening or reading the transcript of this call -can be extremely informative and are usually archived in the company's website -whatever the company tells the analyst has to be made public -always be wary of initial public offerings which are done in a rising "hot" market and are timed and priced mainly for the benefit of the seller rather than the benefit of the investor
Discipline: Be Smart About Tax Strategies
-don't worry too much about paying taxes. Gains are fleeting so take them -for tax purposes, make sure you buy stocks in the right account -gains, losses, interest and dividends are taxed differently than in retirement accounts -be aware of the one year rule when short term gain becomes a long term gain, you may not want to take a profit on day 360 and pay a higher tax rate -short term losses may be worth more than long-term losses-->short term losses can be used more effectively to offset income which is subject to higher ordinary tax rates
goal of investing in stocks
-earn an above average annual rate of return (6-8% or more including dividends) and to compound that rate of return over time NO STRATEGY WILL WORK ALL THE TIME
Discipline: Sell if the stock declines by a preset percentage
-ie 10-15% -consider selling in stages, this way you are limiting your losses and if the stock rallies then you are still in the game by owning at least some of the shares
Trend: Rising Inflation and Rising Interest Rates
-inflation may be way some countries will try to pay off their massive debts -with inflation comes higher interest rates
Trend: Raw Materials are in more remote and hard to reach areas
-many need major infrastructure to get them to market. major projects need funding
Investment Strategy: Look for trends
-may be the most important thing you do in investing. Look ahead 6-18 months -the majority of money made in the market is from being in the right kind of stock , the right kind of asset, at the right time
Most Common Errors in Starting to Invest
-not getting started, reduces the magic of compounding -not having a thought out investment plan -not taking time to be informed -not checking up on a broker, adviser or money management group -investing money that should go elsewhere (ex: paying off high interest credit card debt) -buying high and selling low (a victim of market sentiment) -buying on hot tips and rumors -becoming emotionally attached to a company or stock -thinking a low priced stock will make you more money or have a greater percentage gain than a high priced stock. FOCUS ON THE PERCENTAGE GAIN OR LOSS
Trend: Emerging Market Growth
-recognize the accelerating growth rate of emerging companies and the slowing growth rate of developed countries -these economies are creating more jobs, consumer demand, and a massive need for raw materials, energy, infrastructure and certain food products
Discipline: Reason you bought the stock no longer exists
-sell if the reason you bought the stock or fund no longer exists
Earnings
-specifically the prospect of future earnings ARE THE SINGLE MOST IMPORTANT FACTOR IN DETERMINING WHETHER INVESTORS WILL PAY MORE FOR THE STOCK IN THE FUTURE -companies use earnings to: reinvest and grow the business, to acquire other companies, to buy back their own shares and to pay dividends
Discipline: Don't Panic out of winners
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Discipline: NEVER borrow money to buy stocks or invest in the market
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Life Cycle Funds
A recent investment twist is to automatically balance and diversity the ratio of stocks to bonds in a professionally managed fund based primarily on the age of the investor -emphasis with younger people is to own mostly stocks and for older people is to own mostly bonds -the ratio will adjust more towards bonds as the investor ages
The Securities Investor Protection Corporation
a federally mandated nonprofit coporation funded by its members which protects securities investors from certain types of financial consequences if a member broker-dealer firm goes bankrupt or if securities were misappropriated, stolen or never purchased -in the event of bankruptcy, SIPC will liquidate the firm's assets and organize the distribution of cash to customers -if cash and securities are not avialble or sufficient to cover losses, the SIPC will compensate customers for their losses up to a max of 500,000 of their equity including up to 100000 in cash -ONLY DO BUSINESS WITH SIPC MEMBER FIRMS