The Wonderful World of Investments A presentation by Lew Johnson to Queen’s Commerce Trading Competition November 17, 2009

What is Investing? Investing is giving money up today for (hopefully) more money tomorrow. Investments exist to facilitate growth in the real economy. Financial securities are the media through which investing takes place.

Types of Securities Underlying securities  Bonds  Common equity  Preferred equity Derivative securities  Options  Futures  Forward contracts  Swaps  Synthetic securities

Types of Securities (continued) Structured products/hybrids  Mutual funds  Hedge funds  Income trusts  Exchange traded funds  Segregated funds  a hybrid of insurance and mutual funds with a minimum guarantee  Principal protected notes  a fixed income security with a minimum guarantee and some equity participation through the use of derivatives  Securitizations  E.g., CDOs, ABCP

Types of Market Participants Fundamental analysts “Comparables” investors Technical analysts Arbitrageurs Day trippers Momentum Indexers

Investors versus Traders Investors tend to have a longer term goal  Investors hope to gain from the economy Traders usually are looking for a short-term profit  Traders hope to gain from the market What do traders provide?  An orderly market  Liquidity  Price discovery

Investment Objectives And Constraints Objectives  Return  Risk Constraints  Liquidity  Time Horizon  Tax Considerations  Legal And Regulatory Factors  Unique Circumstances

Objectives Return  Nominal versus Real  Pre-tax versus Post-tax  Stated Return Desire  Required Return Risk  Investor’s Willingness To Take Risk  Investor’s Ability To Take Risk  Risk Tolerance = Willingness + Ability

Investor’s Life Cycle Accumulation Phase Early to middle years Low net worth Long time horizon Bearing risk for higher returns is reasonable Consolidation Phase Mid-point and later Earnings exceed needs Moderate risk to protect investments Spending Phase Earnings have mostly ceased Time horizon is shorter Protection of assets important Inflation an immediate concern

Investments in Practice The tension of fear and greed Want more return, don’t want more risk  Diversification

Good Investment Principles Buy low, sell high Sell high, buy low Don’t get greedy Don’t fall in love with a stock Look beyond the numbers Don’t be afraid to make mistakes Don’t be afraid to admit mistakes Think globally

Hot Topics Regulation of the Financial System Income Trusts Hedge Funds Global Credit Crunch Financial Engineering Currency Volatility US Trade and Budget Deficits BRIC