INVESTING 101September 28th, 2009

What Is Investing?Investing - The art of committing money or capital to

future endeavors with expectation to obtain additional income.

Why?1. Achieve financial goal2. Increasing net wealth3. Retirement4. Stay ahead of inflation

TriviaInvestor A: Starts contributing $2,000

annually to an IRA at the age of 26.Investor B: Contributes $2,000 per year to

an IRA beginning at age 19 and ending at age 25.

Earn 10% per year.Who ends up with more money at age 65?

The Power of Interest10% Interest RateInvestor A:

Contribution: 80,000End Value: 973,704Net Earnings: 893,704

Investor B:Contribution: 14,000End Value: 944,641 Net Earnings: 930,641

Source: http://ww2.dowtheoryletters.com/DTLOL.nsf/htmlmedia/body_rich_man__poor_man.html

What’s the moral?Start saving and investing as early as possible

and are the most important factors in building wealthInvestor A put $2000 annually from ages 26 – 65Investor B put $2000 annually from ages 19-25Investor B > Investor A

The moral isn’t necessarily to stop investing after age 25Consider a hypothetical investor C who invests

$2,000 annually from ages 19-65, end with nearly $2 million

Growth of $1 Since 1964

Rule of 72A quick way to figure out how long it takes

for your investment to doubleExample: $1000 investment, at rate of 12%

72/12=6This means that every six years, your

investment will double

Stock OwnershipStock Definition

Dollar Cost AveragingAdvantages and Disadvantages

Funds

What does it mean to own a stock?Share of Stock: A security representing

fractional ownership in a firm and a claim on its net assets and earnings.

Value of stock changes with marketVoting rightsDo many things with stocks:

Buy (hold long positions)SellShort selling (short position)Cover shortMore on this later…

Dollar Costs AveragingAn investment strategy where you put equal

amounts of money into an investment periodically

Purchase more shares when prices are low, and less shares when prices are high – overall increase in portfolio value

What is a fund?A collection of stocks, other equity and debt

instrumentsCan track a particular index (such as the Dow

Jones or S&P 500)Diversification

“It’s the only free lunch”

Advantages / Disadvantages of Index FundsGuaranteed market rate of returnDiversified

Eliminates idiosyncratic riskLow expensesUsually tax efficientEasy to build a portfolio based on your risk

toleranceManagement Fee

2% or more per year

Index Mutual FundsHigher minimumsBetter for small, frequent purchases Only priced and traded at the close of the dayExamples:

VanguardFidelityBlackrockJanus

More on Investing in Funds Coming Up…

Investing BasicsBusiness Analysis

Accounting AnalysisFinancial Analysis

ValuationValueline

Business AnalysisProcter & Gamble

Competitive advantages?Brand names?Ability to raise prices with inflation?Economic moat?Industry and type of product?Consistency?

Accounting AnalysisDo the firm’s accounting policies reflect the

business reality of the firm?If not, we must make adjustmentsMore on accounting analysis later. Yes, it

needs its own week (or two…)

Financial StatementsBalance Sheet: A list of the things owned

and owed by the firm and the difference between the two

Income Statement: A list of the resources acquired and consumed by a firm over a period of time

Cash Flow Statement: A list of the flows of cash in and out of a company over a period of time

Balance Sheet for P&G

Reminders About Value LineGood starting pointUsually a reliable source for objective data

aggregated in a consistent formatIt’s generally a good idea to ignore Value

Line’s predictions (or any analyst predictions for that matter)

Accessible via OSU libraries and ccig.osu.edu.

CCIG Finance$20 to become member

Free pizza and pop every MondayInvesting 101 PacketEligible:

Log onto Forum for discussion Attend CCIG events

CCIG Events (Subject to Change)Businesses coming to OSU:

JP MorganCompass DiversifiedOther businesses

Private Equity Meeting in January (tentative)Berkshire Hathaway Annual Investor Meeting

in May (tentative)

Free book for most active member

RECAPThe Power of Interest Rate and TimeTime Value of MoneyRule of 72Stock ownershipDollar Cost AveragingDiversification

Recommended ReadingWall Street Journal (IT’S FREE)CCIG Library:

The Intelligent Investor by Benjamin Graham The Dhando Investor by Mohnish PabraiSecurity Analysis by Benjamin GrahamCommon Stocks and Uncommon Profits by Philip

FisherOne Up on Wall Street by Peter Lynch Monkey Business by John RolfeWhen Genius Failed by Roger LowensteinProfits from the Peak by Brian Hicks

Next Week…Getting started

Choosing a BrokerAccount Types

Investing in fundsClub portfolio

Play alongWhat type of investor are you?

Discuss implication and meaning

EventuallyDiscuss individual valuations of stocks

How do you put a price tag on an investment?Advanced:

OptionsHedging strategiesShort sellingDiscounted Cash Flow

See you next weekIn the meantime, visit ccig.osu.edu