Beruflich Dokumente
Kultur Dokumente
Topic 6
I. Common Stock Investments
A. Basic Characteristics
1. Equity Capital 2. Types
a. b. c. d. e.
Growth Stock Income Stock Speculative Stock Cyclical Stock Defensive Stock
b. Example
Par Value Book Value Liquidation Value Market Value Investment Value
LT Bonds
11.3% 10.6% 8.2% 6.8% 5.8%
LT Govt Bonds
11.9% 10.4% 7.9% 6.4% 5.3%
T. Bills CPI
5.6% 7.3% 6.7% 5.7% 5.7% 3.5% 5.2% 5.4% 4.5% 4.4%
Source: Ibbotson and Sinquefield, Stocks, Bonds, Bills and Inflation 1997 yearbook, Chicago.
Investment Wisdom
Dont try to buy at the bottom and sell at the top. This cant be done - except by liars Bernard Baruch
Fools and greed usually go hand in hand, which creates a field of opportunity for the rational man. Warren Buffett
Investment Wisdom
When it comes to risk, weve done better by avoiding dragons rather than by slaying them. Warren Buffett Traditional Wisdom can be long on tradition and short on wisdom. Warren Buffett
Investment Wisdom
Investing is the greatest business in the world because you never have to swing. You stand at the plate; the pitcher throws you GM at 47! U.S. Steel at 39! And nobody calls a strike on you. Theres no penalty except opportunity. All day you wait for the pitch you like; then, when the fielders are asleep, you step up and hit it. Warren Buffett
Investment Wisdom
On
An investor should act as though he/she had a lifetime decision card with just twenty punches on it. With every investment decision his card is punched, and he/she has one fewer available for the rest of his/her life.
Investing in Equities
Topic 6
II. Principles of Security Analysis
1.
2.
Sources:
Ben Graham long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Markets quotations will be anything but stable. For, it is sad to say, Mr. Market is a fellow who has incurable emotional problems. At times he falls euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesnt mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you. But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up someday in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you arent certain that you understand and can value your business far better than Mr. Market, you dont belong in the game. As they say in poker, If youve been in the game 30 minutes and you dont know who the patsy is, youre the patsy.
Adequate Size Sufficient Strong Financial Condition Earnings Stability Dividend Record Earnings Growth Moderate Price/Earnings Ratio Moderate Ratio of Price to Assets
C. Terms
C. Terms (continued)
2. Data Source
S&P Stock Guide Value Line, etc.
3. 4. 5. 6. 7.
Earnings Per Share (EPS) Market Price Book Value Per Share Dividends Per Share Current Ratio
C. Terms (continued)
8. Total Debt 9. Equity 10. Growth
1. Group A Criteria
#1: E/P > 2 (AAA Yield) (1 pt.) E/P > 1.33 (AAA Yield) (1/2 pt.) #2: P/E < .4 (Avg. P/E in last 3 yrs.) (1 pt.) P/E < .4 (Avg. P/E in last 10 yrs.) (1/2 pt.) #3: P/Bk < 2/3 (1 pt.) P/Bk < 1 (1/2 pt.) #4: D/P > .67 (AAA Yield) (1 pt.) D/P > .50 (AAA Yield) (1/2 pt) #5: P/NCA < 1 (1 pt.) P/NCA < 1.33 (1/2 pt.)
2. Group B Criteria
#6: CR > 2 (1 pt.) CR > 1.8 (1/2 pt.) #7: TD/E < 1.0 (1 pt.) TD/E < 1.2 (1/2 pt) #8: TD/NCA < 2 (1 pt.) NCA > 0 (1/2 pt.) #9: G10 > 7%/YR. (1 pt.) G5 > 7%/YR. (1/2 pt.) #10: No more than 2 declines in earnings of 5% each over the last 10 years for one full point. No more than 3 declines in earnings of 5% or more in last 10 years for one-half point.
Contemporary Fundamentals:
Contemporary Fundamentals:
Contemporary Fundamentals:
Lynch Maxims:
1. A good company usually increases its dividends every year. 2. You can lose money in a very short time, but it takes a long time to make money. 3. The stock market isnt a gamble, as long as you pick good companies that you think will do well, and not just because of the stock price. 4. You have to research the company before you put money into it.
diversify. 6. You should invest in several stocks (5). 7. Never fall in love with a stock, always have an open mind. 8. Do your homework. 9. Just because a stock goes down doesnt mean it cant go lower. 10. Over the long-term it is generally better to buy stocks in small companies. 11. Never buy a stock because it is cheap, but because you know a lot about it.
Source: One Up On Wallstreet, by Peter Lynch
John Templeton borrowed $10,000 and started a brilliant investment career, which enabled him to be one of two investors to become billionaires solely through their investment prowess. Templeton has had decade after decade of 20% plus annual returns and managed over $6 Billion in assets. Templeton is generally regarded as one of the worlds wisest and most successful investors. Forbes Magazine said, Templeton is one of a handful of true investment greats in a field of crowed mediocrity and bloated reputations. Templeton holds that the common denominator connecting successful people with successful enterprises is a devotion to ethical and spiritual principles. Many regard Sir John as the greatest Wallstreet Investor of all time.
Buffett on Diversification
You cant be a Bo Jackson in investing. Spread your energies and your capital too many ways, and you are courting disaster. If you have really taken your time and only picked stocks that are bona-fide doozies, theres no need to diversify for safety. If youre not supremely confident about the future of each stock in your small portfolio, perhaps you should never have invested in it. Remember, the fewer stocks you have, the more time you can spend becoming an expert in them . You should never own more than ten stocks. We dont believe in the Noahs Ark principle of investing, winding up with two of everything. Then you have a zoo.
Invest within your circle of competence. Its not how big the circle is that counts, its how well you define the parameters. -- Warren Buffett Good Businesses are the ones that in some way are reasonably sheltered from competition. That gets to having what I call a franchise of some sort. - Warren Buffett
Business schools reward complex behavior more than simple behavior; but simple behavior is more effective. -- Warren Buffett
Buffets Tenets:
10. Focus on return on equity, not earnings per share. EPS is meaningless, since the equity base can expand over time due to increased retained earnings. Therefore, EPS does not necessarily reflect good managerial performance. 11. Calculate owner earnings. Seek out companies that produce cash in excess. Owner earnings is equal to net income plus depreciation, depletion, and amortization, minus capital expenditures necessary to maintain its economic position and unit volume.
Id rather have a $10 million business making 15% than a $100 million business making 5%. I have other places I can put the money. -- Warren Buffett We like to buy Businesses, but we dont like to sell them. --Warren Buffett
Buffets Tenets:
12. Look for companies with high profit margins. Companies with tenacious cost-cutters. Remember companies with high costs will always come up with new ways to spend more. 13. For every dollar retained, make sure the company has created at least three dollars of market value. Calculate the retained earnings to market value ratio (use a 10 year trend). Dollar created/Dollar retained.
Buffets Tenets:
It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price. -- Warren Buffett
Buffets Tenets:
Buffets Yearly Check-up: - Calculate return on beginning shareholders equity - Check the changes in operating margins, debt levels, and capital expenditures. - Check the companys cash generating ability
1. Select those stocks with Value Line Timeliness ratings of 1 or 2 and Safety ratings of 1or 2. 2. Select companies with a franchise product or service. 3. Select companies with a long-term record and high prospects for continued growth well into the future. Look for regional or international expansion to maintain their growth. 4. Look for a company with relatively low risk. A beta of no more than 1.05; a capital structure with less than 1/3 debt. Check the value line in relation to price fluctuations. Find a company with low capital expenditures, this eliminates the costly potential of retooling every 5 to 8 years.
Step One: Find those companies that meet the Value-Line rank criteria of 1 or 2 on timeliness and safety. Or analyze a company given to you by your Professor. Step Two: Determine if the products offered by the firm are franchise products, i.e. no close substitutes, not heavily regulated, needed and desired. Consider the existing substitutes, the substitutes that are down and upline, new entrants and barriers to entry, and new technologies.
Investing in Equities
Topic 6
IV. Technical Analysis
A. Definition
Technical analysts base their buy and sell decisions on the charts they prepare of recorded financial data
Bar Charts
H C Dollar Price of Stock L
Trading Days
Trading Days
The Dow theory views the movement of market prices as occurring in three categories 1. Primary Movements: These are called bull and bear markets. 2.Secondary Movements: These are up and down movements of stock prices that last for a few months and are called corrections. 3. Daily Movements: These are meaningless random daily fluctuations.
2. Trading Action
a. Concentrates on minor trading characteristics in the market b. Examples include:
1. Monday is the worst day to buy stocks, Friday is the best. 2. If January is a good month for the market then chances are good a good year will occur.
3. Bellwether Stocks
a. A few major stocks in the market are consistently highly accurate in reflecting the current state of the market.
IBM DuPont AT&T Exxon GM
4. Relative Strength
The basic idea behind relative strength is that some securities will increase more, relative to the market, in bull markets and decline less, relative to the market, in bear markets. Technicians believe that by investing in those securities that exhibit relative strength higher returns can be earned.
5. Technical Indicators
a. Market Volume -- is a measure of investor interest
1. STRONG when volume goes up in rising market or drops during declining market. 2. WEAK when volume goes up in declining market or decreases during a rally.
What are two theoretical ways to determine the value of Common Stock? Net Current Asset in the Graham model is defined as? Why do we calculate geometric instead of linear growth rates? The Graham model is a fundamental valuation model? Explain. Define technical analysis. What are Bellweather stocks? Who was Peter Lynch and what is he primarily known for? What are Lynchs 10 golden rules for investing?