October 1 st 2012. Common Cents Investment Group October, 2012 Agenda Helpful hints Today in the Market Stocks vs. Bonds vs. Options Accounting

October 1st 2012

Common CentsInvestment Group

Common Cents Investment GroupOctober, 2012

Agenda

Helpful hints Today in the Market Stocks vs. Bonds vs. Options Accounting Analysis Additional Info


Helpful Hints

There’s an app for that… Investopedia Bloomberg Yahoo! Finance

Morningstar Access http://ccig.osu.edu/?p=399


Today in the Market

The fourth fiscal quarter starts today Value Investing Congress http://www.bloomberg.com/video/which-stocks-are-hot-this-

year-alTGSDSDQFOKYmh8r5qPrw.html

Google overcomes Microsoft in market cap today Displays how the the technology industry has

shifted Financials and Energy industries are on the

rise http://www.bloomberg.com/video/what-to-buy-at-the-sprint-to-t

he-finish-HN5q~W2AQDqfMeFGbFGRbw.html

http://www.bloomberg.com/video/what-to-buy-at-the-sprint-to-the-finish-HN5q~W2AQDqfMeFGbFGRbw.html




Today in the Market

Facebook reveals a new focus Moving towards E-Commerce http://video.cnbc.com/gallery/?video=3000119464&play=1


Useful Definitions

Speculation: The practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good. Separate than profiting from long term value such as capital gains, interest or dividends

Risk Capital: Investment funds allocated specifically to speculative activity (high risk/high reward activity)


Stocks vs. Bonds vs. Options

Stock: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings

Bond: A debt investment in which an investor loans money to an entity (corp. or govt.) that borrows the funds for a defined period of time at a fixed interest rate

Options: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder)


Stocks

Ownership is determined by the number of shares a person owns relative to the number of outstanding shares

Stocks are the foundation of nearly every portfolio

Historically, they outperform most other investments over the long run


Bonds

The entity issues a bond that states the interest rate (coupon) that will be paid along with the funds (bond principal) after a certain time period (maturity date). Corporate bonds Municipal bonds U.S. Treasury bonds, notes & bills

(“Treasuries”) Two features of a bond:

Credit quality and duration Bond maturities range from 90-day to 30-year


Options

A sophisticated security with a tremendous amount of versatility and power

Options can be as speculative or conservative as you want

Can be very risky…usually carry a disclosure “Options involve risks and are not suitable

for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital”


Options

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a specific price on or before a certain date.

A Call gives the holder the right to buy an asset at a certain price (hope the stock will increase substantially)

A Put gives the holder the right to sell an asset at a certain price (hope the stock will decrease substantially)


Options

The total cost (the price) of an option is called the Premium and it is determined by several factors: Stock price Strike price (contract price) Time remaining Volatility

Called a derivative because they derive their value from an underlying asset


Options

Offer to buy a house for $200,000 3 years from now…for a premium of

$3,000

The house was discovered to be whereElvis used to live and is worth $1,000,000.

Profit = $797,000

The house is infested by micewho eat everything in site. House

Is worth $50,000

Profit = -$153,000

http://www.investopedia.com/university/options/#axzz2811oUpt


Stocks vs. Bonds vs. Options

Riskiness

Options > Stocks > Bonds

Accounting or Financial Analysis…


Why Accounting is Importantto Value Investors

Needed for… Ability to accurately and properly interpret

financial statement data

Use in valuation modeling Discounted Cash Flow Model, etc.

Understanding the health of a business


Why Accounting is Importantto Value Investors

Identifying past, current, and forecasting future performance Return on Equity, Free Cash Flow, other

ratios

How it affects the manner in which its components are reported Mark-to-market regulations, etc. This has become a major hotspot lately; if

you’re interested, do a Google search for “FAS 157”


Financial Statements

These are what publicly traded companies issue through the SEC and GAAP to report quarterly and yearly performance

Many sites (Yahoo, Google Finance, etc.) report semi-accurate data However, often times they are not the best

source for in-depth research Best to look at the actual filing

Sources? investing.businessweek.com sec.edgar-online.com


Financial Statements

What are the three (primary) financial statements?

Balance Sheet Also called Statement of Financial Position Snapshot

Income Statement Also called Statement of Earnings

Statement of Cash Flows


Balance Sheet

We talked about balance sheets last week… Reports a company’s assets, liabilities, and

shareholder’s equity at an exact point in time

Differs from the income statement and cash flow statements in this aspect; they cover a period of time whereas the Balance Sheet is a “snapshot”

Useful in determining the company’s structure


Balance Sheet

Important for analyzing the capital structure of the company

Do they have a lot of cash relative to their debt? If not, do they have a lot of liquid assets?

How do they finance their investments? Mainly through stock issuance or with bonds/borrowing?

Do they have a lot of intangibles (goodwill, patents, etc.)?


Income Statement

This statement lists all of the companies revenues, expenses, gains, and losses for a given period of time

Example: Apple, Inc.

Revenue = Sale from an iPod, iPhone, Macbook, etc.

Expense = Cost of goods sold (items needed to manufacture a product), salaries/wages, research & development, taxes etc.


Income Statement

Important to distinguish differences within each type of account

Is that revenue part of our normal operations or from interest/investments?

What type of expenses is the company incurring and in what volume?

Is this gain or loss occurring frequently or once in a lifetime?


Income Statement

What is depreciation/amortization?

When a company purchases an asset, it has a limited useful life (5 years, 20 years, etc.)

Depreciation is an annual expensing of the original purchase price of said asset

There are many methods available, but the principle remains the same

Key point: Depreciation in a NON-CASH expense


Income Statement

Net Income and Earnings Per Share

Ultimately, every company reports net income (or loss) for the given period It’s important to know everything to goes into

calculating this number

Earnings Per Share (EPS) =

Allows comparison of company profitability regardless of overall size



Similar to the Income Statement, as it provides information about a company during a given period of time

However, the Statement of Cash Flows only deals with what the company did with their CASH

A company may be profitable according to their Income Statement, but they may have trouble generating cash



The different components Cash flows from…

Operating activities

Investing activities

Financing activities



Useful for determining what the company did with its cash

Are they collecting a reasonable amount from their normal operations?

Are they spending a lot of their cash on new assets, prospects for expansion, etc.?

If they have an excess amount sitting around, are they paying out a dividend?



Free Cash Flow (FCF):

Operating Cash Flow Inflow or outflow from everyday operations

Capital Expenditures Outflow used to acquire or upgrade physical assets such as machinery, buildings, etc.

Good indicator of whether or not the company is expanding and still has cash on hand to pay its current debt obligations




Accounting Analysis

At a later date we will introduce more advanced concepts of accounting

Financial Ratios Profitability, Leverage, Solvency, Liquidity, Efficiency Comparison to other companies in the same industry

Valuation modeling Is the company’s equity more than its market cap?

Anything else you guys would like to learn more about


Additional Info

Visit www.wsj.com/semester for 75% off Luv Sherma will be speaking next week

about Technical Analysis and his new Educational Program!!


Membership

Cost is only $20 for the whole year! Benefits:

Member of a very beneficial and informative club that will inevitably be valuable in your future

A network of friends who share a similar interest in investing and personal finance

A virtual portfolio challenge that will strengthen your confidence in investing

$20


Membership

Make sure to check out our website for the presentations Monday night | ccig.osu.edu

Get on our Facebook page and like us!www.facebook.com/ccigosu


Questions?

Questions, comments or concerns?

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Documents

October 1 st 2012. Common Cents Investment Group October, 2012 Agenda Helpful hints Today in the Market Stocks vs. Bonds vs. Options Accounting