September 28 th, 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 goal 2. Increasing net wealth 3. Retirement 4. Stay ahead of inflation

Trivia Investor 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 Interest Source: mlmedia/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 wealth Investor A put $2000 annually from ages 26 – 65 Investor B put $2000 annually from ages Investor B > Investor A The moral isn’t necessarily to stop investing after age 25 Consider 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 72 A quick way to figure out how long it takes for your investment to double Example: $1000 investment, at rate of 12% 72/12=6 This means that every six years, your investment will double

Stock Definition Dollar Cost Averaging Advantages 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 market Voting rights Do many things with stocks: Buy (hold long positions) Sell Short selling (short position) Cover short More on this later…

Dollar Costs Averaging An 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 instruments Can track a particular index (such as the Dow Jones or S&P 500) Diversification “It’s the only free lunch”

Advantages / Disadvantages of Index Funds Guaranteed market rate of return Diversified Eliminates idiosyncratic risk Low expenses Usually tax efficient Easy to build a portfolio based on your risk tolerance Management Fee 2% or more per year

Index Mutual Funds Higher minimums Better for small, frequent purchases Only priced and traded at the close of the day Examples: Vanguard Fidelity Blackrock Janus

Business Analysis Accounting Analysis Financial Analysis Valuation Valueline

Business Analysis Procter & Gamble Competitive advantages? Brand names? Ability to raise prices with inflation? Economic moat? Industry and type of product? Consistency?

Accounting Analysis Do the firm’s accounting policies reflect the business reality of the firm? If not, we must make adjustments More on accounting analysis later. Yes, it needs its own week (or two…)

Financial Statements Balance 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 Line Good starting point Usually a reliable source for objective data aggregated in a consistent format It’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 Monday Investing 101 Packet Eligible: Log onto Forum for discussion Attend CCIG events

CCIG Events (Subject to Change) Businesses coming to OSU: JP Morgan Compass Diversified Other businesses Private Equity Meeting in January (tentative) Berkshire Hathaway Annual Investor Meeting in May (tentative) Free book for most active member

RECAP The Power of Interest Rate and Time Time Value of Money Rule of 72 Stock ownership Dollar Cost Averaging Diversification

Recommended Reading Wall Street Journal (IT’S FREE) CCIG Library: The Intelligent Investor by Benjamin Graham The Dhando Investor by Mohnish Pabrai Security Analysis by Benjamin Graham Common Stocks and Uncommon Profits by Philip Fisher One Up on Wall Street by Peter Lynch Monkey Business by John Rolfe When Genius Failed by Roger Lowenstein Profits from the Peak by Brian Hicks

Next Week… Getting started Choosing a Broker Account Types Investing in funds Club portfolio Play along What type of investor are you? Discuss implication and meaning

Eventually Discuss individual valuations of stocks How do you put a price tag on an investment? Advanced: Options Hedging strategies Short selling Discounted Cash Flow