1. Copyright by Harrison Li, Ohio State University Investments: life changing decisions Harrison Li The Ohio State University li.427@osu.edu

2. Copyright by Harrison Li, Ohio State University Outline Why invest? Why invest? Investment and risk Investment and risk Different types of investment Different types of investment Security market investment Security market investment Different types of investors Different types of investors Stock market investment Stock market investment Basic analysis and technical analysis Basic analysis and technical analysis Investment Strategies Investment Strategies

3. Copyright by Harrison Li, Ohio State University Why invest? I want to be rich and famous. I want to be rich and famous. Warren Buffett, Yongping Duan.

4. Copyright by Harrison Li, Ohio State University Why invest? Saving also has risks Saving also has risks 1. The risk of inflation. Inflation is usually higher than interest rates. 2. US dollar is depreciating against other currencies. Make quick and correct decisions in your life Make quick and correct decisions in your life 1. Most people do not want to make decisions. They want someone make decisions for them. 2. Most people follow, only the elites lead

5. Copyright by Harrison Li, Ohio State University Investment and risk Investment, the decision between rich and poor, life and death, is too important to be overlooked. Investment, the decision between rich and poor, life and death, is too important to be overlooked.

6. Copyright by Harrison Li, Ohio State University Investment and risk Usually, higher risk gives higher return Usually, higher risk gives higher return Your Money, your life. Which kind of investor do you belong to? Your Money, your life. Which kind of investor do you belong to?

7. Copyright by Harrison Li, Ohio State University Different types of investment Real estate, Collections Real estate, Collections Investment in a company. Investment in a company. Invest with several friends. Investment banking. Security market investment Security market investment

8. Copyright by Harrison Li, Ohio State University Security market investment Bond Market Bond Market Government Bond, Company Bond Currency Market Currency Market USD to EUR 1.1501 in 03/2002, present 0.7578 Stock Market Stock Market Chinese Shanghai Composite index, 130% growth last year Indian BSE 30 index, 330% growth in the past four years Future, option market Future, option market Zero Sum game. High risk, high return. Leverage can be used to magnify the financial consequences.

9. Copyright by Harrison Li, Ohio State University Different types of investors Hedgers Hedgers Try to reduce the risk they face from future market moves. Speculators Speculators Bet on the future market direction. Arbitrageurs Arbitrageurs Take offset positions in two or more instruments to lock in a profit

10. Copyright by Harrison Li, Ohio State University Introduction to stock market The capital raised by a corporation through the issuance and distribution of shares. The capital raised by a corporation through the issuance and distribution of shares. Different market, different rules Different market, different rules Major differences between US and Chinese stock market: 1. You can not short stock in China 2. US:T+0, China:T+1. 3. About 30% tax on profit in US. No tax in China right now. 4. Different interest rates, different P/E 5. 10% up limits and down limits in China

11. Copyright by Harrison Li, Ohio State University Introduction to stock market Most American families choose Mutual Funds Most American families choose Mutual Funds Advantage: Advantage: 1. Diversification 2. Not as much time and effort consuming as trading by yourself. Disadvantage: Disadvantage: 1. You are not in control. 2. Usually, returns not as high. Historical average returns of mutual funds are roughly 8% per year. 3. Buried Cost Exchange Traded Funds (ETF) Exchange Traded Funds (ETF) Example: Index fund

12. Copyright by Harrison Li, Ohio State University How to predict a stock ’ s future price? Basis strategy, Buy low sell high. Or short high buy back low. But, How high is high, how low is low? Basis strategy, Buy low sell high. Or short high buy back low. But, How high is high, how low is low? What does the price of a company ’ s stock represent? What does the price of a company ’ s stock represent? The price represents this company ’ s future ability of making profits. How to predict a stock ’ s future price? How to predict a stock ’ s future price? Basic analysis Basic analysis National Economics, bull or bear market, interest rate, financial statements Technical analysis Technical analysis Candlestick Graph

13. Copyright by Harrison Li, Ohio State University Basic analysis How to determine a bull or bear market? How to determine a bull or bear market? Forecast of national economics Forecast of national economics The bull markets in China and India are supported by their 10% GDP growth. The bull markets in China and India are supported by their 10% GDP growth. Time rules Time rules 1. Every market has momentum. 2. No market will keep rising, no market will keep falling. 3. Trading time for space.

14. Copyright by Harrison Li, Ohio State University How to determine bull or bear market? “ Reverse action ” rule. “ Reverse action ” rule. When nobody is buying stocks, the daily volume has dropped to its lowest level, it is usually the end of a bear market. When everyone is buying stocks, everyone made some profits, people even borrow money to buy stocks, it is usually the end of a bull market. Take the opposite reactions with the majority. Different stock groups in a bull market. Different stock groups in a bull market. In a bull market, growth stocks are usually the first group to go up, then the blue chip stocks follow. When many companies with net losses also go crazy just by adding some “ concepts ”, like “ internet ”, “ china ” concepts, it is usually the end of a bull market.

15. Copyright by Harrison Li, Ohio State University How to determine bull or bear market? The rule of government interference The rule of government interference Interest rates, tax, etc. Interest rates, tax, etc. The first and second wave of government interference usually will not change the trend of the market. The first and second wave of government interference usually will not change the trend of the market. Consecutive interference by government (for example, keep increasing interest rate five times in three years) usually means the end of bull or bear market. Consecutive interference by government (for example, keep increasing interest rate five times in three years) usually means the end of bull or bear market. Hot money can not support several markets at the same time. Hot money can not support several markets at the same time. The end of bull market for US stocks in 2000 was the beginning of the bull market of real estate. The end of bull market for real estate in 2005 was the beginning of bull market of merchandise futures. The end of bull market for US stocks in 2000 was the beginning of the bull market of real estate. The end of bull market for real estate in 2005 was the beginning of bull market of merchandise futures.

16. Copyright by Harrison Li, Ohio State University Basic analysis Financial Report Financial Report P/E P/E P/E=Price/earning per share Usually, the lower the better. Average P/E for NYSE: 20. Average P/E for Chinese stock market: 32. Profitability Profitability Profit Margin = net income/revenue Operating Margin = Operating income/Net sales Usually, the high the better

17. Copyright by Harrison Li, Ohio State University Basic analysis Financial Report Financial Report Management Effectiveness Management Effectiveness ROA= Net Income/ Assets ROE= Net Income/ Common Stockholder ’ s Equity Usually, the high the better. Price/ Book value per share Price/ Book value per share Also=Total market capacity/ Common stockholder ’ s equity. Usually, the lower the better Cash flow Cash flow Operating cash flow should usually be positive.

18. Copyright by Harrison Li, Ohio State University Basic analysis Attention! P/E could fool you. Attention! P/E could fool you. Never, ever short high P/E ratio stock in a bull market. AOL, P/E ~ 100 in November 1994, then grew 14900% in the next 5 years. Growth Growth Earnings Growth: Apple, 04 ’ Total earning 276million. 05 ’ Total earning 1335million. 383% growth. Earnings Growth: Apple, 04 ’ Total earning 276million. 05 ’ Total earning 1335million. 383% growth. Attention!! Earning should be earning after one time gain or loss. Revenue Growth : Apple, 04 ’ Revenue 8279million. 05 ’ Revenue 13931million. 68% growth Revenue Growth : Apple, 04 ’ Revenue 8279million. 05 ’ Revenue 13931million. 68% growth Apple stock price grows 1500% in three years. Apple stock price grows 1500% in three years.

19. Copyright by Harrison Li, Ohio State University Basic analysis New Merchandise New Merchandise Did you know that you can gain enough money to buy several hundred Ipods, When you are eager to buy the new Ipod Nano? New Service New Service Did you know that you can make a fortune when you are using Google every day (even when you are searching papers)? New management New management Did you know that you can get 400% return in 6 months, when you are working in The Huatian Hotel (on the Chinese stock market) every day? Continuous growth Continuous growth MOTOROLA stock went up 90% after it developed the new Razor phone. but young kids quickly tired of the Razor, and the stock has dropped 25% since.

20. Copyright by Harrison Li, Ohio State University Technical analysis Candlestick Graph Candlestick Graph Supporting Position and Resistance Position Supporting Position and Resistance Position Supporting Position

21. Copyright by Harrison Li, Ohio State University Technical analysis Supporting Position and Resistance PositionSupporting Position and Resistance Position Resistance Position

22. Copyright by Harrison Li, Ohio State University Technical analysis Buying Point and Selling Point Buying Point and Selling Point Buying Point: Price and volume both generally increase

23. Copyright by Harrison Li, Ohio State University Technical analysis Buying Point and Selling Point Buying Point and Selling Point Selling Point: Huge volume, relative high price, close price lower than open price

24. Copyright by Harrison Li, Ohio State University Which one is better, Basic analysis or Technical analysis? Using Basic analysis to determine which stock to buy. Using Basic analysis to determine which stock to buy. Using Technical analysis to determine buying point and selling point Using Technical analysis to determine buying point and selling point

25. Copyright by Harrison Li, Ohio State University Stock Picking Strategy Bull market or Bear market? Bull market or Bear market? Never short stock in a bull market, never hold stock for a long time in a bear market. Never short stock in a bull market, never hold stock for a long time in a bear market. Never, ever touch penny stock. Never, ever touch penny stock. Invest on growth stocks. Earning grows over 30% per year, revenue grows over 15% per year. Invest on growth stocks. Earning grows over 30% per year, revenue grows over 15% per year.

26. Copyright by Harrison Li, Ohio State University Stock Picking Strategy New merchandise, new service, new management group. New merchandise, new service, new management group. P/E is not important, Forward P/E is important P/E is not important, Forward P/E is important At least one of the major share holders should be institutes or mutual funds. If no institutes or mutual funds like this stock, it is probably not worth investing. At least one of the major share holders should be institutes or mutual funds. If no institutes or mutual funds like this stock, it is probably not worth investing. If a company is going to buy back its common stock, the price usually goes up. Be extra careful if a management group sells a huge amount of their stocks. If a company is going to buy back its common stock, the price usually goes up. Be extra careful if a management group sells a huge amount of their stocks.

27. Copyright by Harrison Li, Ohio State University Stock investment strategy Profit without risks Profit without risks Arbitrageurs, price smaller than equity per share, cash per share (hard to get, but do not miss it) All eggs in one basket? All eggs in one basket? Should concentrate limited time, effort, money on several stocks you are confident in. Long term investment Long term investment Never enter a war without being fully prepared. Never buy a stock without careful research. Never enter a war without being fully prepared. Never buy a stock without careful research. Set the cut-loss price and target price before any trades. Write down the reasons why you buy or short a stock, look at them every day. Set the cut-loss price and target price before any trades. Write down the reasons why you buy or short a stock, look at them every day.

28. Copyright by Harrison Li, Ohio State University Investment and life Investments, life change decisions Investments, life change decisions Do not be too happy when making money or too upset when losing money. The biggest opportunity is always the next one. Do not be too happy when making money or too upset when losing money. The biggest opportunity is always the next one. Health, family members, and friends are more important than making money. Health, family members, and friends are more important than making money. Wish everyone wealth this year. Happy Chinese golden pig year! Wish everyone wealth this year. Happy Chinese golden pig year!