Gary W. Tapp, Ph.D. gt454bb@hotmail

Georgia Council on Economic Education w w w . g c e e . o r g

Gary W. Tapp, [email protected]

Investor EducationFinancial Fitness for Life

and

Why Invest?

• You can earn income by receiving dividends.– Owning stock can

supplement your job income.

• Rewards last a lifetime.– Investing provides

assets that grow over time.

Why Invest?Be a part owner of America’s economic growth.

– Investing helps companies to grow and provide more jobs and income.

– Investing helps create new goods and services for consumers.

POWER OF COMPOUND INTERESTHuge Advantage From Starting Early (Saving $100/month at age 25, assumes

8% return/year vs. starting at age 35)

Source: Massena Education

Keys to Investment Success

• Use the Incredible Power of Compound Interest: (Be an investor, not a trader).

• PLAN Ahead: Identify your goals and risk tolerance.

• UNDERSTAND the risk/return trade-off.• DIVERSIFY your holdings: Rebalance your

portfolio regularly.• Participate in GLOBAL GROWTH.• Be DISCIPLINED! (Not emotional.)

• Don’t underestimate the power of the U.S. economy to regenerate itself!

IV. Intro to Markets: Basic Kinds of Investment Assets

1.Stocks (Equities)1. Mutual Funds, index funds (one way to diversify)2. Exchange Traded Funds (ETFs: another way)3. Individual Stocks

2.Bonds (Fixed Income)1. Government2. Corporate3. High Yield

3.Commodities1. Mutual funds, ETFs

4.Real Estate1. Direct Investment2. ETFs, REITs

5.Cash

Not A Gamble: U.S. Stock Market History

Stock Prices Reflect Earnings and Dividend Growth

• How the company makes money• 52-week price range• Projected 3-5 year earnings growth rate• Forward P/E and P/E to growth rate• Dividend yield and when dividends are paid• Date and consensus estimate for next

quarterly earnings report• Chief competitors and their valuations on P/E

and PEG.

Research: Before you buy an individual stock, know as many of

these as you can:

• Mutual funds: A portfolio of stocks (some include bonds) run by a manager who tries to beat the market (fee is about 1.0-1.5%). You get the end of day price. Only 25-30% of mutual funds beat the market average.

• Exchange Traded Funds (ETFs): a basket of stocks that replicates a market index (S&P 500, S&P 400 Midcap index, Russell 2000 Small cap index, etc.): Fees typically are 0.15%-0.50%. You can buy or sell during the trading day and get intra-day prices.

Two Ways to Diversify in Stocks

Projected Long-Term Returns and Risk (assuming 3% inflation)

Framework: We live in an interdependent world economy

• A doubling of world labor force has lowered the returns from low wage labor and boosted returns from knowledge-based jobs.

• China and other developing countries need U.S. spending to keep their exports growing. With its dollars, China buys U.S. securities, which offer superior safety and comparable rates.

• U.S. borrows China’s surplus savings to help finance U.S. growth at rates lower than they would be without China.

• Result: a symbiotic world economy, with a higher premium on education than ever before.

• Biggest risks are likely to come from this global linkage.

1981 82 83 84 85 86 87 88 89

1990 91 92 93 94 95 96 97 98 99

2000 1 2 3 4

2005 6

0

1.1

2.2

3.2

4.3

5.4

6.5

Emerging Countries Outpacing Developed Countries

Real GDP, percent change

Developing countries

High-income countries

One Way to Participate: Largest U.S. Companies Are Already Global (pct of employees abroad)

• Coca-Cola: 81%• United Technologies: 67%

• Alcoa: 65%• Hewlett-Packard: 62%

• Johnson & Johnson: 60%• McDonald’s: 58%• Procter & Gamble: 57%• American Express: 56%• IBM: 54%• Citigroup: 53%• 3M: 52%

• Merck: 52%• Exxon Mobil: 50%• Intel: 50%

• General Electric: 49%

US Industries with Most Foreign Revenues

• Electronic equipment: 72%• Energy equip/services: 69%• Personal products: 61%• Computers & periph.: 55%• Chemicals: 54% 71% of Fortune 100 CEO’s have Tobacco:

51% experience working overseas.• Communic.Equip.: 51%• Household Prods.: 50%• Leisure products: 47%• Office electronics: 47%• Auto components: 45%• Industrial conglomerates: 44%• Beverages: 43%• Pharmaceuticals: 43%• Machinery: 41%• Healthcare equipment: 40%

A Global Economy: 47% of the Revenues of S&P 500 Companies Come from Overseas

Source: Factset, Baseline, U.S. News & World Report

Where Are We Now? Buy Low, Sell High?


The Wall of Worry: Secular Risks

• Governmental Disputes Could Threaten Financial System

• Global Markets Linked More Than Ever• U.S. Current Account and Budget Deficits Increase

Vulnerability to Shock from Foreign Markets• Internet + Increased Global Capacity Pressuring

Profit Margins• Since 9/11/01, New Risk of Catastrophic Events• Since October ‘08, New Risk of Financial System

Disruption

Seven Keys to Investment Success

• Use the Incredible Power of Compound Interest: (Be an investor, not a trader).

• PLAN Ahead: identify your goals and risk tolerance.

• UNDERSTAND the risk/return trade-off.• DIVERSIFY your holdings: Rebalance your

portfolio regularly.• Participate in GLOBAL GROWTH.• Be DISCIPLINED! (Not emotional.)

• Don’t underestimate the power of the U.S. economy to regenerate itself!


Rules for Improving Your Financial Life

• Get a good education• Work long, hard, and

smart• Learn money-

management skills• Live below your means• Buy a home (you can afford)

•Save early and often•Invest in common stocks for the long term (diversify)

•Gather information before making decisions•Get married and stay

married


Register at www.smgww.orgV.

http://www.smgww.org/


V. Stock Market Game: The Basics

You can: Buy Stocks, Mutual Funds, Exchange-Traded Funds, Bonds; You can short-sell Stocks.

What is a stock? An ownership share, or shares of ownership, in a corporation.

What is a bond? You lend the company money in return for its promise to pay you a set rate of interest for the life of the bond.


Can You Buy Stock in

or

What is an ETF (Exchange-Traded Fund)?

• A basket of stocks that tracks an index; you get a diversified portfolio.

• Examples: SPY: (S&P 500)• XLE: S&P Energy Sector• XLK: (S&P Technology Sector)• EEM: (Emerging Markets Index)• EWJ: Japan Index• FXI: China Index• EWZ: Brazil Index



The Different Markets

New York Stock Exchange The oldest stock exchange in the United

States, founded in 1792 and stocks are still traded on the floor. Traditionally for large corporations with large volumes of shares.


NASDAQ An electronic marketplace enabling

buyers and sellers to get together via computer to trade stocks. Traditionally high-tech firms that are very active. Created in 1971.


American Stock Exchange (AMEX)

Located in New York, handles about 10% of all securities exchange. Has mostly small-cap stocks, exchange-traded funds and derivatives.


National Rules

• $100,000 to Invest for 10 Weeks– NYSE, AMEX, NASDAQ

• Must Purchase Minimum of 10 Shares• Minimum Share Price of $3• Margin Line of Credit is $50,000• So your buying power is $150,000.• 4 pm Closing Price (not real-time)


Georgia 3x3x3 Rules

• Purchase a stock before end of third week

• Must purchase at least three stocks• Must hold three stocks for 3 weeks• SUGGEST DOING THIS RIGHT AWAY!


Game Transaction Fees

• Game Transaction Costs:

• .75% Interest (annual rate) Earned on Unspent Cash

• 1% Transaction Fee (all transactions)• 7% Interest Charged on Margin Loans

>>>>>>>Hardest thing to do? <<<<<<<<Get them to spend the $100,000!


VI. How to Play: Buying, Selling, Selling Short

• Buy ↑ Sell

[Long position]

• Short Sell ↓ Short Cover

[Short position]

What is a Short Sale?What is a Short Sale?

Your friend loans you this-



You immediately turn around and sell the thing for $200.00.

(the $200.00 goes in your pocket)


What do you owe your friend at this point?



You expect leather briefcases to be on clearance sale at

Macy’s for $150.00


When they go on sale, you buy your friend a new briefcase for $150.00. She gets her briefcase

back and you just made $50.00!


Your broker loans you this- 100 shares


You immediately turn around and sell it for $50.00 per share.

(the $5,000 goes in your pocket)


What do you owe your broker at this point?


100 shares of Coca-Cola


You expect the CDC to announce that Coke causes cancer…

• Coke can clean a car battery!

…so you wait.


Instead, the CDC announces that Coke cures cancer!

What happens to the price of Coke stock?


The Risk of Short Selling?

If the price of the stock goes up before you return the stock to

your broker, you will lose money. (Remember the

Market’s Long-Term Trend!)


VII. Practice: How to Research and Trade


SIA_2_A206

COMK8131


Let’s Select a Stock and Make a Trade!

• Research: Yahoo Finance (See Summary page, Profile, Key Statistics, Analyst Estimates, Competitors) CNBC, Bloomberg,

• Buy or Short-Sell?• Why do we think it is a buy or a sell?• How much will 10 shares cost us? 100

shares?• How many shares to buy?


Research Activities: See Handouts

• For ticker symbols: www.marketwatch.com/tools/quotes/lookup.asp

• For most other info:Use Yahoo Finance web site.


Two Basic Valuation Measures

» P/E: Current price per share/TTM earnings per share (EPS): What earnings per share are we getting for our price?

» If price is $20 and TTM EPS is $2.00, P/E is ______?

» P/E/G: P/E to Growth: Forward P/E/Projected 3-5 Year EPS Growth

» If fwd P/E is 20 and projected growth is 10%, the PEG is ____?

• Current price and 52 week range (are we buying high or low?)

• Forward P/E and PEG ratio• NOTE: Many co’s will report 3rd quarter results in

October or November. Know the reporting date and estimate! (Yahoo Finance: Analysts’ estimates)

• Projected earnings growth rate (you can calculate from forward P/E and PEG ratio)

• Chief competitors, their earnings growth rates, and their valuations on P/E and PEG.

• Another source: www.investeens.com/ 10 steps to evaluating corporations.html

Research: Before you buy, know as many of these as you can (use Yahoo Finance):

http://www.barchart.com/stocks/low.php

Resources:

www.finance.yahoo.comhttp://data.cnbc.com/quotes/ibm

www.morningstar.comwww.bloomberg.com

http://fortune.com/fortune500/2013/

www.investeens.comCompany websites

http://www.barchart.com/stocks/low.php

http://fortune.com/fortune500/2013/

High School Projects: Compare Rivals

BASIC COMPARISON SHEET

HD LOW

PRICE 81.3 48.36

52 WK RANGE 62-82.50 34-52

MKT CAP 114.4B 50.5B

TTM P/E 22.08 23.11

FWD P/E 18.4 18.23

PEG RATIO 1.23 1.24

PRICE/SALES 1.45 0.97

PRICE/BOOK 8.11 4.06

REVENUE 79.36B 52.8B

PROFIT MARGIN 6.80% 4.30%

EPS 3.69 2.09

PROJECTED EPS

GROWTH/YR 14.95% 14.70%

(fwd p/e/peg ratio)

Source: Yahoo Finance; calculate projected Eps growth from fwd P/E and PEG ratio



HD 100

Play SMG on iPad!



VIII. Managing the Project in Class

• Teams of 3 or 5 (recommend friends)• Rankings posted weekly• Do not liquidate portfolio on the last day• Grade activities, not profit/loss• Awards by region and state – luncheon for

GA county winners in May• InvestWrite: Essay contest with awards and

certificates (all grades)

How Much Time?• Some teachers spend one class period before game

starts (explain basics, set up teams). Others take 2-3 periods to set up. (Many allow ten minutes at end of period once or twice a week.)

• Students can then work outside of class, in computer lab, or in class free time. (Best time to make trades is during the day before 4:00.)

• Monitor to make sure they follow Georgia rules.• Use another whole period 5-6 weeks into the game to

review portfolios or possibly make presentations for projects.

• Use a third period at end of game to review and have teams present what they learned.


Suggested Team Roles

• Some teachers let the kids choose their teams; others assign teams. Roles can be rotated every two weeks.

• 3 or 5 on a team works best (for votes)• Director (see Teacher’s Guide for roles)• Lead Researcher• Lead Portfolio Coordinator• Lead Trader• Lead Reporter


More General Suggestions

• Lessons and Activities: Use the Teacher Support Center on SMG Site!

(Log in; click on “Explore Teachers”; click on “Teacher’s Guide”): Lessons, Class Projects, Resources

Competition gets them interested (some teachers post team rankings each week).

• Grade on project assignments, NOT on portfolio results!

• Don’t tell them what to buy.• They are free to be aggressive or conservative.



How to Win (or Lose) Big

• Select stock kids are familiar with; NKE (Nike)

• Buy at $100/share• 1000 shares with

$100,000• Price rises to

$101/share• Account increases by

$1,000

• Select stock with a lot of volatility; XYZ

• Buy on margin• Buy at $10/share• 10,000 shares with

100,000• Price rises to

$11/share• Account increases

by $10,000

How Most Students Play

Sample Projects for Elementary

• What are the largest public companies (by revenues) headquartered in Georgia?

• Make a table showing their closing stock prices at the end of 2012, the end of 2013, and the current price.

• Look up its sales for each of last three years and show on graph. (Yahoo or Google)

• Show the number of shares outstanding for each and multiply by current stock price to get the market capitalization of each stock.


Sample Projects for MS and HS Assignments

• Market: What are the major news items coming in the next ten weeks?

– Quarterly earnings, legislative events, economic news (GDP, job growth), Federal Reserve moves

• Market: What are the major risks over the next ten weeks?– Russia/Ukraine? debt ceiling/shutdowns? Q3 earnings?

• Companies:– New product cycles, upcoming earnings reports

• Where are the Excessive Highs or Lows?– Check new high and low lists on

http://www.barchart.com/stocks/low.phphttp://www.barchart.com/stocks/high.php

http://articles.moneycentral.msn.com/Investing/StartInvesting/StartInvestingWithJust100.aspx

More MS and HS Projects• What public companies are headquartered in

Ga.? (Or top ten)• List their market caps, dividends per share,

earnings per share, P/E ratio• What was their earnings growth rate in 2013

(over 2012)? Rank the ten largest companies by earnings (income in dollars).


MS and HS Presentation Projects

• Each person selects one stock to recommend and submits a short paper, slide show, or video explaining why the stock was selected. Include company profile, its industry, major competitors. How fast is the company growing?

• Each team submits a report on the valuation of at least three companies, including price/earnings, price/sales, and PEG.


Communication Skills• Each team member (or each team) researches

and presents a portfolio of five stocks to a client. You can add variety by assigning three different kinds of clients:

• young person with first job, • a couple in their ‘30s with young children, and • a couple in their 60’s. • Presentation can be in a skit, a slide show, a

paper, or a video.



What are Your Questions?

Not A Gamble: U.S. Stock Market: 1926-July 2014

Documents

Gary W. Tapp, Ph.D. gt454bb@hotmail