BUS-123: Introduction to Investments

This initial presentation is a gentle introduction to the concept of investing. You do not need any prior investment experience. Forget everything that you have heard from the talking heads on television or the InfernalNet or your brother-in-law, the self-anointed financial wizard. We start from the very beginning with the simple question, "What is an investment?"

What are the major investment asset classes? What returns can we reasonably expect from each over the long term? What risks are involved with each investment type? This presentation will answer these preliminary questions about the major investment types from general perspective. (Relax. We will get into the details about each as the course progresses. For now, make sure you understand what is in the presentation.)

Here it is! The entire semester in a nutshell. This session goes into detail about the relationship between risk and return. We cover the widely used, yet imperfect measurement for risk, standard deviation, and show how historically, the investments with the highest rates of return have demonstrated the greatest risk. Do you want to eat well or do you want to sleep well?

Are you a big fan of Las Vegas or Atlantic City? You say you want something exciting and risky? You say that stocks are not volatile enough for you? Well, then, you may be a potential sucker, uh, er, I mean, candidate for trading options! Are you not content enough to make $10 on a $20 investment? How ‘bout making $10 on a $1 investment?! Sound too good to be true? Well, yes, it is to good to be true, in our humble opinion. But that does not mean that there are not thousands upon thousands of options speculators who believe that they will defy the odds and actually make money trading options. In this presentation, we learn about stock options contracts ... and why prudent investors should stay far away from them!

This presentation discusses in detail many of the characteristics and the concept of "in-the-money" and "out-of-the-money" options. We also look at the very important break-even point or break-even price. This is yet another concept that reinforces the theory that buying options is generally a bad idea.

What’s that? You say that you are not daunted by the likelihood that you will lose significant amounts of money trading options and want to learn more about them? Well, all right, but don’t say that we did not warn you! This presentation discusses in detail many of the characteristics and strategies regarding options contracts including ways for you to play the part of the casino and allow the options speculators to bet against you.

We end our chapter on options with a discussion of employee stocks options (ESO) and the controversies regarding their past and current usage. We also take a look at some other types of options as well as warrants, option-like securities that are often given to investors as an added bonus for buying initial public offerings of stocks.

Futures contracts are useful financial tools when used properly. They are also incredibly risky when used for speculation. For hundreds of years, futures contracts, commonly called futures, have been used to help facilitate the trade of commodities such as corn, wheat, oil, and precious metals between producers and consumers. The financial world began using futures to accomplish many of the same outcomes with regard to financial products. These are useful tools and play an important role in the world economy. However, for some, they are highly charged speculations that can make and lose fortunes overnight. As we will see, for speculators, individuals who are not producers and consumers of the underlying commodity, futures contracts are derivatives that are even much more potentially dangerous than options contracts.

How and why do people choose one financial institution over another? There are as many answers to this question as there are investors. You have to decide with whom you will perform your transactions and hold your securities. This presentation discusses the many options available to investors including one of the most cost-effective strategies for long-term oriented buy 'n' hold investors, the dividend reinvestment plan (a.k.a. DRIP).

Just as banks and credit unions allow you to borrow from the value of your home, brokerage firms allow you to borrow from the value of your securities. This is called buying on margin. It allows an investor to borrow from the value of their securities without having to sell the securities which triggers commissions and taxes. However, for the more speculative-inclined, it also allows an individual to "leverage" their investment. This has the potential to magnify your gains but also has the potential to magnify your losses. Come and see if you will want to buy on margin.

"Buy low, sell high." You have heard the saying many times. But did you know that you can do the exact opposite? You can, "sell high, buy low." The technique is called selling short. Instead of making money when an investment goes up in price, this technique allows you to make money when an investment goes down in price. Although it is difficult to believe, you sell a security -- a stock, for example -- that you do not own. You borrow it from someone else. You then wait for the price to go down and buy it back, pocketing the difference. However, if the price goes up in value, you will lose money. It is potentially very risky since there is no limit to how high the price of a stock can go. Needless to say, selling short is more suited to traders and speculators, not long-term oriented prudent investors.

Often, new investors will confuse the type of the account with the investments that are held in the account. This presentation will describe the various account types with an emphasis on long-term oriented retirement accounts such as Roth IRAs and 401(k) employer-sponsored plans. We look at the advantages and the restrictions placed on tax-qualified accounts. We also spend a few moments discussing (bad) annuity products offered by insurance companies.

It is said that real estate has created more millionaires in the United States than any other investment class. Whether or not this is true is debatable. However, it is certain that real estate investments can be very profitable or very disastrous. Why? It has to do with the way real estate investments are normally made. Do you remember the financial leverage that you get from buying stocks on margin? With real estate, the leverage is normally enormous. We also take a look at Real Estate Investment Trusts (REITs) which are way to invest in real estate without having to deal with toilet or tenant problems.

This quick overview will hopefully dispel many of the myths and hype around gold, silver, and other precious metals and stones. We also discuss art and collectibles and stress that we should consider them possessions that bring us joy, pleasure, and wonder first and foremost ... and then as investments second.

Bitcoin! Ethereum! Ripple! DoggieCoin! JesusCoin! We're all gonna' get rich, rich, rich! Uh, not so fast. Let's conduct a prudent analysis of the advantages and disadvantages of cryptocurrencies. The technology behind cryptocurrencies, blockchain, will survive. The 2000+ cryptocurrencies won't. (Well, probably a few will survive. In the meantime, please stay far, far away from these modern day tulip bulbs. You've been warned!)

No other investment has the potential to make you wealthier and no other investment is as risky and demanding. However, if you have the motivation and desire to become a business owner, there is an entire industry out there waiting to help you. We want you to succeed!

You now have a strong foundation in the most popular financial investments, stocks, bonds, "cash" (a.k.a. short-term investments), and mutual funds. It is time to reflect and "tie them all together," so to speak. In this chapter, we analyze the age-old and still most important and, in my humble opinion, effective method for reducing risk, diversification. Diversification has been shown to be able to reduce our risk, as measured by variance and standard deviation. (Do you remember those two statistics from way back in chapter 1?) But can diversification eliminate all risk? The answer is no. We will take a look at why there are limits to how diversification can reduce our risk and why a combination of stocks and bonds actually demonstrated a lower amount of risk than a portfolio consistently entirely of bonds, even though bonds in general are less volatile than stocks.

Preferred Stock! Isn't that what you want? Well, if you are the typical retail investor, no, not really. Leave the preferred stock to the corporate holding companies such as Warren Buffet's Berkshire Hathaway. Convertible Securities! Doesn't that sound sexy? Well, again, like convertible cars, the reality is often a very different experience than the image. These hybrid securities which look and act both like bonds and stocks may be of interest to some investors. However, in my humble opinion, for the vast majority of us retail investors, we are better off sticking to stocks for growth and income and bonds for income (or mutual funds of stocks and bonds).

Over the long term, the return from bonds consists mainly of the interest income that bonds generate. For that reason, it is important to know how to calculate bond yields. In the presentation, we learn how to calculate current yield, yield-to-maturity, and yield-to-call. We also learn how to calculate taxable-equivalent for tax-exempt municipal bonds. Yes, I know, it is not very exciting, but it is important, especially if you are a bond or potential bond investor.

In this presentation, we start by looking at yield spreads and the yield curve and how the yield curve has been a very good indicator of the near-term future of the economy. We then turn our attention to the task of computing the value of a bond. The method should look very familiar since it is almost exactly the same as one of the methods we used for computing the value of stocks. The big difference is bonds are far more predictable than stocks so we can assign a much higher level of confidence to our results. But always remember, there are no guarantees when you invest in either stocks or bonds!

Bonds are not very ... well, they are more kinda' like ... uh, how shall we say it? Okay, let's not mince words: Bonds are boring! Stocks are exciting, sexy, and dangerous. Bonds are stodgy, reliable, and, yes, boring. In this first session, we introduce bonds and many of their characteristics and spend a great amount of time discussing the relationship of bonds and interest rates. Should you own bonds in your portfolio? Let's find out.

In this session, we slog through the major types of bonds including Treasuries, mortgage-backed and asset-backed bonds (issued through a process called securitization), municipal bonds (a.k.a. munis), corporate secured and unsecured bonds (a.k.a. debentures), non-investment grade bonds (a.k.a. junk bonds, high-yield bonds, distressed bonds), and foreign bonds. We finish with a discussion of bond ratings and the ratings agencies, bond quotes, and bond trading.

Benjamin Graham, the Father of Value Investing, wrote, "The investor's chief problem, and even his worst enemy, is likely to be himself." This quote deftly sums up the essence of the chapter. We discuss common investor weaknesses such as reading too much into the recent past, misperceiving randomness, being overconfident, and selling your winners while hanging on to your losers. We finish by introducing the very popular yet not normally very successful world of technical analysis. The best part of technical analysis is that you really do not have to know what you are doing. You only have to convince others that you know what you are doing!

Can you beat the market? Many investors believe they can. Yet, the truth is that it is not an easy task. In this presentation, we discuss some of the research that led some academics to theorize that it is actually impossible to beat the market. It's too bad for them that there are many individuals and groups that have been able to do better than the market over long periods of time. We will take a look at some of them and also review some famous myths and stupid sayings.

All publicly-traded companies must supply financial statements every quarter. Analysts and investors use these documents to conduct financial ratio analysis. We have already discussed some of the important ratios. In this initial presentation of chapter 17, we will review those ratios as well as take a deeper look at the very popular Price-to-Earnings ratio (P/E). In the second presentation of chapter 17, we will introduce and discuss other important financial ratios using the financial statements of Ford.

Get out those financial statements and let's calculate some financial ratios. In the second part of the chapter 17 presentation, we compute the profitability, liquidity, activity, and leverage financial ratios for Sprouts, the specialty grocery store chain. On your own, it would a great exercise to do the same for their major competitors such as Kroger and maybe Amazon (which owns Whole Foods).

We now embark upon the task actually identifying the value of a stock. How much is a stock worth? What techniques are available to determine the value of stock? In this session, we introduce the idea of stock valuation and then look at the price ratio models. As we will see, predicting the future price of a stock is anything but easy!

Welcome to the heart of our course! We are going to learn how to discount a future stream of dividend income. Huh? What that means is that we are going to learn how to assign a value to the stock on the basis of the cash flows that result from the dividends that the stock is paying. To do this, we will use the Dividend Discount Models. This is it, Dear Students! This is the heart of our course!

The Discounted Cash Flow Model is the last Dividend Discount Model that we will study. It is also the most powerful, in my humble opinion. In addition, the previous Dividend Discount Models all expected the company to be paying dividends. But what if the company does not pay any dividends? We can also use the Discounted Cash Flow Model to assign a value to a stock that pays no dividends. Very cool! (In fact, we can use this model with any potential investment – stay tuned.) Lastly, all these models use future predictions of dividends, dividend growth, and stock price appreciation. Just where do we get all these estimates? We will look at one of the most respected securities analysis firms in the industry, The Value Line.

What is the difference between a broker and a dealer (a.k.a. market maker)? Brokers charge commissions and dealers (a.k.a. market makers) make money from the difference (a.k.a. the spread) between what they buy and sell the security. This video uses the Casas de Cambio (money exchange houses) along the San Diego / Tijuana border to demonstrate how brokers and dealers charge investors for their services.

This next-to-last Introduction to Stocks presentation describes the major categories of stocks, including blue chip, income, growth, speculative, cyclical, defensive, turnaround, asset play, penny, and foreign stocks. We then turn our attention to market capitalization and the three major capitalization categories, large cap, mid cap, and small cap. Market capitalization is the fancy term we use for what investors believe a company is worth.

This final Introduction to Stocks presentation discusses various stock investment strategies including buy and hold, income, growth, aggressive growth, contrarian, and a few others that are best left unspoken in polite company.

After referring to them since the beginning of the semester, finally we define and discuss the major stock market averages and indexes that we use to measure the performance of various parts of the stock markets. As we saw in chapter 4 on mutual funds, market indexes have become very important because of the increasing number of index funds and ETFs (exchange traded funds), many of which make their way into employer sponsored retirement plans such as 401(k) and 403(b) plans.

Our fifth presentation covers more stock characteristics including stock spin offs, stock splits, treasury stock, and stock classifications. We pay special attention to earnings and dividends and begin analyzing the various numeric measures that are used when valuing a stock. (We will discuss stock valuation in detail in the next chapter.)

This presentation covers stock transactions, commissions, and other transaction fees. Transaction costs have fallen dramatically but we as retail investors are often unaware of all the costs associated with stock transactions. We also take a look at various stock quote sources.

Stocks are exciting! Stocks are sexy! Stocks are risky! We begin our in-depth study of stocks with an introduction to the basic concepts of common stock investing and the stock markets where stocks are traded. We look at the reasons investor choose stocks, historical returns, and their advantages and disadvantages.

In this presentation, we discuss the major stock market exchanges including the New York Stock Exchange, the American Stock Exchange (now called the NYSE American), and the NASDAQ, as well as the less reputable over-the-counter markets such as the Bulletin Board and the Pink Sheets (now called the OTC Markets). What we will see is that technology and the urge to consolidate are changing the industry at breakneck speed.

What are the major investment asset classes? What returns can we reasonably expect from each over the long term? What risks are involved with each investment type? This presentation will answer these preliminary questions about the major investment types from general perspective. (Relax. We will get into the details about each as the course progresses. For now, make sure you understand what is in the presentation.)

Here it is! The entire semester in a nutshell. This session goes into detail about the relationship between risk and return. We cover the widely used, yet imperfect measurement for risk, standard deviation, and show how historically, the investments with the highest rates of return have demonstrated the greatest risk. Do you want to eat well or do you want to sleep well?

Short-term investments are often simply referred to as cash. These instruments are very liquid and safe, often guaranteed. They should be used only when you need your money soon, within a year or so, maybe up to 2 or even 3 years for some people. Although they are usually thought of as risk-free, there are indeed risks when placing money in short-term investments. This session will help you learn when -- and when not -- to use short-term investments

In the future, if you are an employee in the United States, there is a strong probability that you will be presented with an employer-sponsored retirement plan such as a 401(k), 403(b), or some other similar program. The vast majority of these plans use mutual funds as their investment vehicles. For this reason, it is important for you to understand mutual funds, even if you hire someone to make your mutual fund choices. This session introduces the basics of mutual funds. In later sessions, we will discuss fees and costs, types of mutual funds, and choosing a mutual fund.

How do mutual funds earn their money? Many investors do not understand the ways that mutual charge for their services. After this presentation, you are going to understand how the mutual funds charge you. You may not like it but at least you will understand it. And since it is very likely that most all of us will be mutual funds investors at one time or another -- maybe most of our adult lives -- it is important for us to understand how the mutual funds are charging us.

With over 12,000 mutual funds, how and where do you start the process of categorizing them all? This presentation discusses the most important mutual fund categories. We start with the most riskiest mutual funds and work our way through to the least riskiest. We end with discussions of lifestyle (a.k.a. target date) funds, index funds, ETFs (exchange-traded funds), and the some of the more off-beat and arcane mutual fund categories.

This session covers just a few of the many dozens of mutual fund families. We take a quick look at some of the many convenient mutual fund services and some of the many mutual fund information resources. We end by looking a sample mutual fund and then look at many successful mutual funds, all of which have been in existence for more than 50 years and have returned close to 10% or more. Yes, 10% per year, even after 2008. Hard to believe, huh?

This initial presentation is a gentle introduction to the concept of investing. You do not need any prior investment experience. Forget everything that you have heard from the talking heads on television or the InfernalNet or your brother-in-law, the self-anointed financial wizard. We start from the very beginning with the simple question, "What is an investment?"

Often, new investors will confuse the type of the account with the investments that are held in the account. This presentation will describe the various account types with an emphasis on long-term oriented retirement accounts such as Roth IRAs and 401(k) employer-sponsored plans. We look at the advantages and the restrictions placed on tax-qualified accounts. We also spend a few moments discussing (bad) annuity products offered by insurance companies.

It is said that real estate has created more millionaires in the United States than any other investment class. Whether or not this is true is debatable. However, it is certain that real estate investments can be very profitable or very disastrous. Why? It has to do with the way real estate investments are normally made. Do you remember the financial leverage that you get from buying stocks on margin? With real estate, the leverage is normally enormous. We also take a look at Real Estate Investment Trusts (REITs) which are way to invest in real estate without having to deal with toilet or tenant problems.

This quick overview will hopefully dispel many of the myths and hype around gold, silver, and other precious metals and stones. We also discuss art and collectibles and stress that we should consider them possessions that bring us joy, pleasure, and wonder first and foremost ... and then as investments second.

Bitcoin! Ethereum! Ripple! We're all gonna' get rich, rich, rich! Uh, not so fast. Let's conduct a prudent analysis of the advantages and disadvantages of cryptocurrencies. The technology behind cryptocurrencies, blockchain, will survive. The 2000+ cryptocurrencies won't. (Well, probably a few will survive. In the meantime, please stay far, far away from these modern day tulip bulbs. You've been warned!)

No other investment has the potential to make you wealthier and no other investment is as risky and demanding. However, if you have the motivation and desire to become a business owner, there is an entire industry out there waiting to help you. We want you to succeed!