Professional Documents
Culture Documents
Chap 05
Chap 05
“Don’t gamble! Take all your savings and buy some good
stock and hold it till it goes up. If it don’t go up, don’t buy it.”
-- Will Rogers
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Where did the term “Common
What Are Stocks? Stocks” come from? The investors
are “Shareholders in Common.”
Historical Performance
Over the long-term of modern finance …
The return from the stock market (as measured by
the S&P 500) has averaged approximately 10% to
11% annually for the last ninety years
But in any one year …
It is unlikely that the return will be 10% or 11%
The return has varied from a high of 53.8% to a
low of -43.4%
2008’s return was -38.5%, one of the worst!
And in any given year …
There has been a one-in-three or one-in-four
chance of a down market
The major exception was the great run-up from 1982 to 2000
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15
10
0
1928–37
1933–42
1938–47
1943–52
1948–57
1958–67
1963–72
1968–77
1973–82
1978–87
1983–92
1988–97
1993–02
1998–07
2003-12
2008-17
1953–62
Rolling
10-Year
Periods
Source: The unmanaged Dow Jones Industrial Average, based on average annual compound returns over 10-year periods.
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14%
10%
8%
6%
4%
2%
Yield on Stocks
0%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
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“Volatility” Examined
S&P 500 for Year 2019
$13,000
$12,750
$12,500
$12,250
$12,000
$11,750
$11,500
$11,250
$11,000
$10,750
$10,500
$10,250
$10,000
$9,750
Primary Market
Why “Go Public?”
Why do corporations issue common stock?
To raise money to start or expand a business
To help pay for ongoing business expenses
As a way to gain prestige and respect within the
investment and industrial communities
As a reward for those who started the business
And also simply because once a business becomes
sufficiently large, it becomes very difficult for the
owners to “divvy up the spoils” without going public
If you were one of the people who started GE or Coca-Cola
or Walmart, how would you sell your share of the business?
Secondary Markets
Markets in which securities are sold after
they have been issued
a.k.a. Aftermarket
Secondary markets provide…
Liquidity
Easy method for transferring ownership of
securities
Mechanism for pricing and valuation of securities
When people talk about the “stock market,” they are almost always
referring to the secondary market.
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The floor brokers were very worried that the NYSE’s aggressive moves
to all-electronic trading meant the end of their way of life. It was not
really the end; it was just a big change – from face-to-face interaction
to sitting in front of a computer screen all day. Sound familiar?
20
With the advent of the Internet, the third and fourth markets
successfully started to court retail customers. This got the attention of
the NYSE and the NASDAQ!
“But Isn’t the Stock Market All Just
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Where did the terms bull market and bear market come from?
Bear Skin Jobbers: “Don’t sell the bear skin before the bear is caught.”
35
Transaction Costs
Traditionally, transaction costs were in the 1%
to 5% range, sometimes higher
The largest portion was the brokerage commission
Deep-discount Internet brokers have driven the
commissions down to as low as $5 per trade
A company called Robinhood started offering free
trades, targeted to young adults
And other brokerage firms have followed them!
But have transaction costs really gone down?
Yes, but more and more of the cost is hidden from
the investor Especially the “Internet garbage” brokers.
(Those aren’t my words!)
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Wall
Street
Journal
Example
“Omigod! You mean you actually wait until the next day to find out
how much your stock is worth?! How Twentieth Century!”
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On-line Examples
bloomberg.com
marketwatch.com (free version of Wall Street Journal)
morningstar.com
www.google.com/finance
Any others you want to check out?
Yahoo Finance used to be the best free finance web site on the
Internet, period. Sadly, Yahoo has literally destroyed the Finance
page along with the rest of the Yahoo web site.
(Note to online students: Please see the accompanying
presentations on how to use the above web sites to do your stock
research.)
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The NASDAQ Composite went from 800 in 1995 to 5000 in 2000 and
then dropped to 1200 in 2002 before starting to recover in 2003.
The NASDAQ indices are technology laden.
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29,224
29,221
29,218
29,215
29,212
29,209
29,206
25,000
20,000
15,000
10,000
5,000
“Volatility” Re-examined
S&P 500 for Year 2019 - Boring Version
You will not see this graph
on the nightly news!
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
There is no increased value from stock splits. If you had 1 share at $20,
now you have 2 shares at $10; the value is still $20. It is a psychological
increase at best. Warren Buffett of Berkshire Hathaway has refused to split
his stock since its inception. A single share now goes for around $340,000!
63
DRIPs are an excellent way to own stock for those interested in long-
term growth and not interested in current income. It allows the investor
to take advantage of compounding automatically with normally no (or
very small) transaction costs.
74
Anyone wanna’ buy some Tesla stock? Well, before you do,
take a look at the history of GoBroke, oops!, sorry, GoPro.
“An investment operation is one which, upon thorough analysis, promises
safety of principal and a satisfactory return. Operations not meeting these
requirements are speculative.” – Benjamin Graham
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Capitalization
Capitalization
The current price of the stock times the number of
shares outstanding
Large cap stocks
$10 billion and up
Mega cap stocks – $100’s of billions (GE, Walmart)
Mid cap stocks
$2 billion to $10 billion
Small cap stocks
$100 million to $2 billion
Micro cap stocks – $10 million to $50 million
Penny stocks
Typically sell from less than $1.00 to $5.00 per share
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Capitalization (continued)
Example:
Price $20.00
Number of Shares x 5,000,000
———————
Market capitalization = $100,000,000
The stock price is (for the most part) irrelevant. You must
look at the market cap to see what the value of the company
is. (Remember Warren Buffett’s Berkshire Hathaway?)
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Capitalization Examples
Walmart versus Target
Investment Strategies
Buy-and-Hold Strategy
Use fundamental analysis to identify high-quality
companies with good growth prospects and
potential for dividends at reasonable prices
a.k.a. Value Investing
a.k.a. Growth-At-a-Reasonable-Price (GARP)
“Our favorite holding period is forever”
Warren Buffett
Buy-and-Hold
Income
Growth Which strategy
Aggressive Growth do you favor?
Contrarian
Sector Rotation
Momentum Investing
Market Timing
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