Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Investments: Analysis
and Behavior
Jerome M
...

Understand the nature and performance of financial
assets
...

Practice obtaining important financial information
...


1-2

0

1

2

3

4

5

J an-0

J an-0

J an-0

J an-0

J an-0

J an-0

Oc t- 0
5

9

J an-9

Net New Cash Flow into Equity Mutual Funds ($ billions)
40

20
1200
1100

0
1000

-20

-60

S&P 500 Index Value

80
1600
1500

60
1400

1300

900
800

-40
700

600

1-3

Buy High, Sell Low?!


It is obvious that investors should buy low and
sell high in order to build wealth over time
...



To be a successful investor, you should be able to
use the analytical tools and control your emotions
and psychological biases!

1-4

Building Wealth
Recipe for success:
Start with some cash…
Earn a high rate of return…
Add lots of time…


How important are time and return?

1-5

Table 1
...

Look What $10,000 Turns into

Number

With an Investment Return of:

of Years

6%

9%

12%

1

$10,600

$10,900

$11,200

2

11,236

11,881

12,544

3

11,910

12,950

14,049

4

12,625

14,116

15,735

6

14,185

16,771

19,738

8

15,938

19,926

24,760

12

20,122

28,127

38,960

16

25,404

39,703

61,304

20

32,071

56,044

96,463

24

40,489

79,111

151,786

28

51,117

111,671

238,839

32

64,534

157,633

375,817

36

81,473

222,512

591,356

40

102,857

314,094

930,510

(Note: Annual compounding is assumed
...
e
...
S
...

 Depending



what index is used
...

 50%/50%

allocation to stocks/bonds would
average around 9%



But there is a lot of volatility!
1-8

Year

Stocks

Treasury

Treasury

(S&P 500)

Bonds

Bills

1970

4
...
11%

6
...
2%

6
...
5%

1971

14
...
23%

4
...
6%

19
...
4%

1972

19
...
69%

4
...
7%

8
...
5%

1973

-14
...
11%

7
...
0%

18
...
0%

1974

-26
...
35%

7
...
3%

-7
...
3%

1975

37
...
20%

5
...
4%

31
...
5%

1976

23
...
75%

5
...
1%

-0
...
0%

1977

-7
...
69%

5
...
4%

15
...
1%

1978

6
...
18%

7
...
6%

13
...
8%

1979

18
...
23%

10
...
0%

-8
...
7%

1980

32
...
95%

11
...
1%

20
...
9%

1981

-4
...
86%

14
...
9%

4
...
5%

1982

21
...
36%

10
...
1%

17
...
6%

1983

22
...
65%

8
...
7%

2
...
0%

1984

6
...
48%

9
...
9%

7
...
4%

1985

32
...
97%

7
...
9%

3
...
1%

1986

18
...
53%

6
...
2%

-2
...
8%

1988

16
...
67%

6
...
3%

6
...
9%

1989

31
...
11%

8
...
4%

3
...
7%
1-9

Figure 1
...


Start with $10,000 in each asset
...

 Matching

goal characteristics with investment
characteristics
...

 Formula driven
...

 Employers may contribute too
...


1-12

The Long-term Payoff to Regular Investing
Can Be Huge
Young investors can accumulate significant wealth through regular investing of modest amounts
...

Wealth Created With an
Amount Invested

Number

Investment Return of:

per Year

of Years

6%

9%

12%

Young Investor

$300

40

$46,429

$101,365

$230,127

$1,200

40

185,714

405,459

920,510

$2,000

40

309,524

675,765

1,534,183

$6,000

40

928,572

2,027,295

4,602,549

$12,000

40

1,857,144

4,054,589

9,205,097

$300

20

11,036

15,348

21,616

$1,200

20

44,143

61,392

86,463

$2,000

20

73,571

102,320

144,105

$6,000

20

220,714

306,961

432,315

$12,000

20

441,427

613,921

864,629

Middle-age Investor

1-13

Key Investment Concepts


A portfolio


Diversified (hopefully!) collection of
stocks, bonds and other assets
...



Risk


Chance of economic loss
...



Expected Return


Anticipated gain of a specific period
of time
...

1-14

Efficient Market Hypothesis


Idea that every security at every point in
time is fairly priced
...
A
couple years later, most of
these managers are no
longer performing so well
...
08)15 = $15,861
N
15

I/Y
8

PV
-5,000

PMT FV
0
|
CPT FV = $15,860
...
0815 = $5,000
N
15

I/Y
8

PV
PMT FV
|
0
15,860
CPT PV = -$5,000
1-18

Valuing Assets – payments
Future value = Payment  1  interest

rate  - 1
interest rate
t

t


1

interest
rate
-1
Present value = Payment 
t
interest rate  1  interest rate 

Over the next 30 years, an employee contributes
$3,000 per year to an investment expected to earn 9%
per year
...
09 - 1
$3000 

0
...
09)3 = $1,295
(B) Future value = $1,000 X (1 + 0
...
09x3 = $1,310
1-20

Behavior is important too


Incentives
 Stockbroker

and
commissions
 Mutual fund incentives


Psychology
 The

higher the degree of uncertainty
in a decision, the more emotions and
psychological biases are used to
help make the decision
...
barrons
...


Investor’s Business Daily

http://www
...
com/default
...
Big on
investor education
...
wsj
...
Print subscribers
get interactive access at a
bargain price
...
usatoday
...

htm

Don’t underestimate “McPaper’s”
Money Section when it comes
to business, economic, and
financial news
...
com/index
...


The Economist

http://www
...
com/

Offers analysis and opinion on the
business and political events of
the week
...
com/

Terrific commentary on economics
and financial markets from an allstar stable of regular columnists
...
fortune
...

Interesting advice on career
development
...
kiplinger
...


Money

http://money
...
com/

Interesting market commentary,
company and mutual fund
analysis aimed at novice
investors
...
smartmoney
...

1-23

Getting information - Online
CBS MarketWatch

http://cbs
...
com

Focused on financial news and
information
...


The Motley Fool

www
...
com

An online forum designed to "educate,
amuse and enrich investors
...


MSN Money

http://moneycentral
...
com/home
...


TheStreet
...
thestreet
...


U
...
Securities and Exchange
Commission

http://www
...
gov/

This is the place to find free access to
official SEC filings by individual
companies, obrain information
about individual brokers, or file a
complaint about shady business
practices

Yahoo! Finance

http://finance
...
com/

A terrific web site with U
...
markets,
world markets, quotes, financial
news, and data
...

Understand how the incentives of various market
participants influence investor decisions and also
highlight the impact of a person’s own psychology
...

Gain familiarity with the institutions and language of
Wall Street so as to facilitate the development of an
effective personal investment strategy

---