road map to investing

8.5 Exercise #4

You inherit $100,000 and decide to invest it. Make a spreadsheet with the headings: Type of Demand, Demand Risk Requirements, Demand Liquidity Requirements, Demand Yield Requirements, Stage of Business Cycle, and Initial Choice of Type of Investment. (Use the following for reference.

After you have completed the plan go to the web and research 5 funds and 5 stocks that will meet your investment requirements. Submit a spreadsheet with the same heading as those used in the examples.

Let us add a new wrinkle to this example. In December of that same year another
person saw what the broker had done and anticipated the price of corn would
increase to $4 so he offered the original broker $3 for the corn.
The original broker sold the contract for $15000 which he bought for
$10000. The original broker then repays the bank the $9500 he or she borrowed.
There is a net profit to the original broker of $5000 less a small interest
charge. Thus, the yield to the original broker on his or her $500 investment is
$5000 divided by $500 or 1000%.
The new broker has what is termed “open Interest”. That means he has a contract
that he has bought but not sold or one that he has sold but not bought.
Be sure you understand that this is a very risky type of investment.
7.5 Options
Options is another type of investment that you should lay down until the
thought goes away if you are not going to eat, sleep, and live options 24 hours a
day. Here is how options work.
In this is a game where the owner of a stock offers to sell the stock he or she
owns at a given or strike price. Another person then takes that bet and buys an
option to buy the stock at that strike price within a given period of time.
The option price is generally a fraction of the stocks price. For example,
suppose the current stock price is $40. The owner agrees to sell the stock if it gets
to $50 within the next 6 months for an option price of $1.
The person who buys the option is gambling $1 that the price will go to $51
within the next 6 months.
If it does not the person who bought the option will not “exercise” the option
and lose $1 and the person who owns the stock will keep the dollar option price
and the stock.
If the price were to go to say $60 the option holder would “exercise” the
option and the stock holder must sell the stock for $50.
The investor should take extreme caution in investing in options. Both
options and commodities are very risky.
This is generally one of those “lay down until the thought goes away investments.
Options
Options
Advise
Advise when
when considering
considering options
options is:
is:
D.
Caution:
Caution:Options
Options can
can be
bevery
veryvolatile
volatileand
and risky
ris ky
This
This isis how
how itit works:
works:
1.
1.
This
This isis aa game
game where
where the
the owner
owner of
of aa stock
stock offers
offersto
tosell
sell the
the stock
stock he
he
or
she
owns
at
a
given
or
strike
price.
or she owns at a given or strike price.
2.
2.
Another
Anot he rperson
personthen
then takes
takesthat
that bet
bet and
and buys
buysan
an option
optionto
to buy
buythe
the
stock
stoc kat
at that
th at strike
strike price
price within
withinaa given
given period
period of
of time.
time. The
The option
option
price
price is
is generally
generally aa fraction
fraction of
of the
the stocks
stocksprice.
price. For
For example,
example,
suppose
the
current
stock
price
is
$40.
The
owner
suppose the c urrent stock price is $40. The owner agrees
agrees to
to sell
sell the
the
stock
if
it
gets
to
$50
within
the
next
6
months
for
an
option
price
stoc k if it gets to $50 within the next 6 mont hs for an option price
of
of $1.
$1.
3.
3.
The
The person
personwho
whobuys
buysthe
the option
option isis gambling
gambling $1
$1 that
thatthe
the price
pricewill
will
go
to
$51
within
the
next
6
months.
If
it
does
not
the
person
go to $51 within the next 6 months. If it does not the person who
who
bought
bought the
the option
optionwill
will not
not“exercise”
“exercise”the
the option
option and
andlose
lose$1
$1 and
and
the
the person
personwho
whoowns
owns the
the stock
stock will
will kept
keptthe
the dollar
dollar option
option price
price
and
and the
the stock.
stoc k. If
If the
the price
price were
were to
to go
goto
to say
say $60
$60 the
theoption
option holder
hol der
would
“exercise”
the
option
and
the
stock
holder
must
sell
the
would “exercise” the option and the stock holder must sell the
stock
stoc kfor
for $50.
$50.
The Road Map to Investing
8. Steps along the Route to a Successful
Investment Plan
Ok, potential investor, let’s summarize the things we have discussed about
mutual funds, stocks, bonds, and other types of investment instruments. Now we
have to develop a road map of steps to easily determine which stock, bond, or other
investment fits our individual preferences for risk, liquidity, and yield.
8.1 Step #1: The Plan: Determine the type of money, Risk, Liquidity, and
potential yield
Every individual must determine the type of money demand they are considering
for the investment. In reality every dollar you spend is an investment decision.
For this example let us assume the demand is for retirement which you
consider a transactions demand. This means the risk you are willing to take is low
to moderate. The Hill investment cube shows this is low liquidity requirements
since you do not need the money until you retire. That means yield will be
moderate according to the cube.
Step
Step #1:
#1: Determine
Determin ethe
theType
Type of
of Money
Money and
and Risk,
Risk,Liquidity,
Liquidity, and
andYield
Yi eld
Type
Typeof
of
Demand
Demand
Demand
Demand Risk
Risk
Requirements
Requirements
11
Retirement,
Retirement,
Transactions
Transactions
Demand
Demand
Demand
Demand
Liquidity
Yield
Liquidity
Yield
Requirements
Require me nts Requirements
Requirements
22
33
Moderate
Moderate
to
to low
low
Low
Low
1.
1.Type
Type of
of
Demand:
Demand:
Retirement,
Retirement,
Transactions,
Transac tions,
Source:
Source :
Individual
Individual
Investor
Investor
(You).
(Y ou).
2.2. Demand
DemandRisk
Risk
Requirements:
Requirements:
Moderate
Mode rate to
tolow
low
(Since
(Since this
this isisaa
long
long run
run
investment
investment we
wecan
can
accept
some
accept somerisk)
risk)
Source:
Source:Hill
Hill
Investment
Investme nt cube.
c ube.
44
Moderate
Mode rate
3.
3. Demand
Demand
Liquidity
Liquidity
Requirements:
Requirements:
Low
Low
(Assuming
(Assumingyou
you
are
are young
young
adult),
adult), Source:
Source:
Hill
Hill
Investment
Investment
Cube.
Cube.
4.4. Demand
DemandYield
Yield
Requirements:
Requirements:
Moderate,
Moderate,Source:
Sour ce:
Hill
HillInvestment
Investment
Cube.
Cube .
8.2 Step #2: Determine the Stage of the Business Cycle and Potential
Investment Instrument.
Now we must consider the stage of the business cycle. Let us assume we are
in a recession. Of course, you can find the price, employment, and GNP numbers
in these listed sources. The Investment cube and logic indicates to us that low to
moderate risk is required, liquidity is long term, and therefore the yield will be
moderate.
Currently let us say our research finds raising unemployment, falling prices,
and two quarters of falling GNP. Clearly, the economy is in a recession.
The investment chart shown in the business cycle topic indicates our
investment choices are: Utilities, Financial Services, Bonds, and High Dividend
stocks.
Investments
Investments at
atDifferent
DifferentStages
Stages of
of the
theBusiness
Business Cycle
Cycle
Creeping
Creeping Inflation
Inflation
Investments:
Investments:
Hyperinflation
Hyperinflation Investments
Investments
Health
Health Care
Care
Leisure
Leisure
Service
Service
Blue
Blue Chips
Chips
Technology
Technology
Energy
Energy
Natural
Natural Resources
Resources
Utilities
Utilities
Depression
Depression Investments:
Investments:
Recession:
Recession:
Utilities
Utilities
Gold
Gold
Bonds
Bonds
Cash
Cash
Utilities
Utilities
Financial
FinancialServices
Services
Bonds
Bonds
High
High Dividend
Dividend Stocks
Stocks
Step
Step#2:
#2: Determine
Determin ethe
theType
Type of
of Investment
Investment Instrument
Instrument for
for the
the Stage
S tageof
of the
the Business
BusinessCycle
Cycle
Type
Typeof
of
Demand
Demand
Demand
DemandRisk
Risk
Requirements
Require me nts
11
Retirement,
Retirement,
Transactions
Transactions
22
33
Moderate
Mode rate
to
tolow
low
1.
1.Type
Type of
of
Demand:
Demand:
Retirement,
Retirement,
Transactions,
Transactions,
Source:
Sour ce:
Individual
Individual
Investor
Investor
(You).
(You).
2.2. Demand
DemandRisk
Risk
Requirements:
Requirements:
Moderate
Moderateto
tolow
low
(Since
(Since this
thisisis aa
long
longrun
run
investment
investment we
we can
can
accept
acceptsome
some risk)
risk)
Source:
Source: Hill
Hill
Investment
Investmentcube.
cube.
Demand
Demand
Stage
Demand
D emand
Stageofof Initial
InitialChoice
Choice
Liquidity
Yield
Business
of
Liquidity
Y ie ld
Busine ss ofType
Typeofof
Requirements
Investment
Require me nts Requirements
R equireme nts Cycle
Cycle
Inve stme nt
Low
Low
44
55
Moderate
Mode rate
3.3. Demand
Demand
Liquidity
Liquidity
Requirements:
Requir ements:
Low
Low
(Assuming
(Assumingyou
you
are
areyoung
young
adult),
adult),Source:
Source:
Hill
Hill
Investment
Investment
Cube.
Cube .
4.4. Demand
DemandYield
Yield
Requirements:
Requir ements:
Moderate,
Moderate,Source:
Source:
Hill
HillInvestment
Investment
Cube.
Cube .
Recession
R ecession
8.3
66
Bond,
Bond,Utility
Utilitystock,
stock,
Financial
FinancialServices,
Services,and
and
High
HighDividend
DividendStocks
Stoc ks
5.5.Stage
Stageofofthe
the
Business
BusinessCycle:
Cycle:
Recession,
Recession,Source:
Source:
Individual
IndividualInvestor
Inve stor
search
se archof
ofwww.
ww w.
whitehouse,.gov,
whitehouse,.gov,
www.Doc,gov,
www.D oc,gov, etc.
etc .for
for
consumer
consume rprice
price
index,
inde x,GNP
GNPgrowth,
gr owth,
and
andUnemployment
Unemployment
statistics.
statistics.
6.6.Initial
Initialchoice
choiceof
of type
typeof
of
investment:
investment:Business
BusinessCycle
Cycle
Chart
Chartin
inHill’s
Hill’sBook
Book
Step #3: Determine the Potential Specific Investments Using Stock Screeners
MSN.COM Stock Screener
There are many stock screeners on the WEB and you can get a list of them
by typing STOCK SCREENER into www.Google.com. The one this author prefers
is found on msn.com. To find the screener go to www.msn.com and click on the
money heading and then click on investing. Along the left side panel you will see
STOCK RESEARCH and you should click on that. The next screen on the left
panel you will see Stock Screener and you should click on that.
The drop down arrow on the industry tab has lists of all sorts of financial and
utility options. The other options can be left blank or you can set the parameter
according to the following suggested defaults. This author would set the dividend
rate at 5% so all firms with dividends of 5% or higher are displayed. The MSN
screen option is as high as possible.
The price/earning ratio is defined as the price of a share of the company
stock divided by the earnings (profits) per share of stock. The market average is
generally between 15 and 20, so this author would set the P/E ratio at 20 or less on
most screeners. The MSN site option is as low as possible.
Click on research and a list of stocks that match criteria appear. In a recent
screener test FE or First Energy Corp was among those displayed. You can now
click on the symbol FE which is highlighted and get the specific information on the
company.
FirstEnergy Corp. (FirstEnergy) is principally a holding company that holds, directly or indirectly, eight principal electric
utility operating subsidiaries: Ohio Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison
Company, Pennsylvania Power Company, American Transmission Systems, Inc., Jersey Central Power & Light Company,
Metropolitan Edison Company and Pennsylvania Electric Company, and its generating and marketing subsidiary, FirstEnergy
Solutions Corp. The Company’s revenues are primarily derived from electric service provided by its utility operating
subsidiaries and the revenues of its other principal subsidiary, FES. In addition, FirstEnergy holds all the common stock of
other direct subsidiaries, including FirstEnergy Properties, Inc., FirstEnergy Ventures Corp., FELHC, Inc., FirstEnergy
Facilities Services Group, LLC, FirstEnergy Fiber Holdings Corp., GPU Power, Inc., GPU Nuclear, Inc., MARBEL Energy
Corporation, and FirstEnergy Service Company.
Stock Activity
Last Price
37.06
52 Week High
47.82
52 Week Low
33.57
Volume
NA
Average Daily Volume (13wk) 3.31 Mil
50 Day Moving Average
37.09
200 Day Moving Average
40.02
Volatility (beta)
0.54
Institutional Statistics
Analyst Consensus
Hold
Institutional Ownership 72.70%
Now I know what businesses the company owns and from the 52 week high
and low I can tell what the fluctuations in the stock price has been over the last
year.
Another indication of risk is the beta. The beta coefficient is an important
measure of stock’s volatility in relation to the Standard and Poor’s index, which
has a reference point beta of 1.00. A beta coefficient that is higher than 1.00
implies greater volatility than the overall market. In other words a stock with a beta
value of 1.50 is going to go up and down 50% more than the average stock.
Generally, if you do not like risk than the beta coefficient should be below one.
Beta Coefficient is a measure of a Stock’s Risk
The Beta coefficient is an important measure
of a stock’s (or a portfolio’s) volatility in
relation to the Standard & Poor’s 500, which
by definition has a beta of 1.0.
A beta higher than 1.0 implies greater volatility
than the overall market. Thus, a stock with a beta
of 1.5 will move up 15 percent when the market
rises 10 percent
In good times, high betas imply high returns,
since a beta above 1.0 amplifies the market’s
movements and the market is rising.
In bad times, of course, a beta below 1.0 is
desirable, since you wouldn’t want your
portfolio to magnify downward movements
in the market.
Ideally, you want a low beta and high returns, which
is hard to get. You can lower the overall beta of your
portfolio by adding lower beta stocks to the mix, in
effect diversifying away some of the volatility.
Another tool in determining risk is the Stock Scouter number located on the
left side of the web page. Click on it and you will get MSN’s estimation of whether
this stock is a timely good buy. A Scouter of 10 is the best and one is the worst
rating. Clicking the Scouter tab will also reveal a page that has risk and return
estimations for the stock.
One more thing should be checked to give you an idea of the volatility or
risk of the stock is the charts. Click on charts and the history of the stock price will
appear graphically. You can investigate the price fluctuations and dividend history
with the charts and do at the very bottom of the page you can click on view price
history dividends/splits and it will give you a table of the data. If the stock has a
history beyond 2008 check to see what the stock price was in June 2008 through
March 2009. This is the period when the market died and is a good reference point
for your maximum chance of loss.
You can click on the analysts tab on the left side to see what the stock
analysts are currently advising on the stock. If they are recommending selling the
stock you can guess the stock price will fall.
MSN.com also provides a free fund screener. Go to the second line from the
top and click on Funds. Then go to the left hand side and click on research wizard.
Then you can click on Fund screener.
The funds screener has various parameters too. Set the Morningstar rating at
4 or 5 stars and the risk at average or lower for this case. Morningstar is a rating
company for mutual funds and a 5 star rating is the best and 1 star is the worst. Of
course, we want to click no load as well. In a recent trail the resulting list included
the symbol for an American Century fund AAAIX. Click on that one or any
symbol to see the results.
Here again you can obtain the risk, company overview, and information you
need to make your decisions.
To check out bonds you can click the down arrow on Investment focus and
click the category you want to look at.
Use other Sites to Refine and Confirm Your Research
Generally, it is a good idea to research the stocks and bonds, etc. on two
screeners. This author likes www.fidelity.com. Click on the header Research, then
stocks, then stock screener, and then start a screen. Next you will want to click on
criteria and initially the author suggests clicking: Dividends, greater than 5%,
volume greater than .05 millions, a P/E ratio that is less than 20, price of the stock
greater than 5, and the beta less than one. You can see this is a much more detailed
set of criteria.
Note, setting the dividends at 5% or greater is determined by each investors
estimation of what the return should be. A benchmark perfectly riskless investment
is a U.S government short term rate which can be found on the
www.treasurydirect.gov by clicking research data on the right side list. In August,
2010 a 2 year bond has a little over a half percent rate. Now you have to decide
what return you want for taking on risk.
Using a stock price of greater than $5 eliminates all the penny stocks which
can be manipulated by large investors.
A beta less than one gives you some comfort in knowing that if the market is
dying others are hurting more that you.
The Stock Scouter of 7 or above gives you some comfort in knowing that
others value this stock and think it is going to increase in price in addition to your
dividend.
Do not forget to check and see if the firm has consistently paid the dividend
especially in 2008 and 2009 when corporations were really hurting. That checking
point simply gives you a measure of comfort.
A recent test resulted in NI or NIsource listed. You can again click on the NI
symbol to obtain further information on the stock. Clicking on detailed quote will
also give you a wealth of information including the yearly high and low of the
stock price.
You should take the stock symbol and place is in the box on MSN.com
Investment page and see if the data and incites you have are validated.
8.4 Choosing the best investment for your requirements
Make a list of possible choices and compare the risk and yield for each
choice to all others. Earlier you have decided the type of money, risk, and yield
objectives to set for this investment. The Speculative Investment has to have a
return between 5% and 7% given the investors assumed yield goal and it should
have the least tolerable risk among the possible investment alternatives. We
screened for a beta less than 1, and over 50,000 shares average 90 day volume. The
P/E ratio was set at less than 20. You have also checked the analyst ratings on
MSM.com. A rating of 3 means the recommendation is to hold the stock. A less
than 3.00 means the average analyst is recommending a buy. You are checking
Utilities because the stage of the business cycle suggested that form of investment.
Your stage of life will help you determine the amount of risk you want to take.
Those persons who are 65 are going to want less risk if they need this money to
live on.
The following table reviews three electric utility stocks. Comparing EXC
and FE shows they both have nearly the same volatility in price currently and in
the June, 2008-March, 2009 range. (To compute the volatility over the time periods
simply subtract the lower price from the higher and divide the difference by the
higher price.) In fact all the characteristics are nearly the same, but the FE stock is
paying a dividend one percent greater than EXC and analysts are indicating they
believe it is a better buy. So we eliminate EXC.
Comparing AEE and FE indicates they have essentially the same risk but FE
pays a higher dividend and more analysts think it is a buy.
Obviously, the FE stock is the best buy given all your criteria.
Current Jun-08
Investment
Possibility Current Dividend P/E
Symbol
EXC
FE
AEE
Yearly Yearly Mar-09 8-Jun Year
Mar-09 Analyst
Name
Price Yield
Ratio Beta Volume High Low low High Range Range Ratings
Exelon
$41.26 5.08% 10.8 0.1 5.1M
$52.23 $37.24 $38.41 $91.84 28.70% 58.18%
3.17
FirstEnergy $36.88 5.94% 12.6 0 3.3M
$47.82 $33.57 $35.63 $84.00 29.80% 57.58%
2.60
Ameren
$27.60 5.51% 11.3 0 2.1M
$28.60 $23.09 $19.51 $43.16 19.27% 54.80%
3.22
A similar table can be developed for mutual funds. Using the MSN.com
fund screener with no load, Morningstar ratings of 4 or 5, average or below risk,
and an investment focus of high yield bonds several funds are returned. In a recent
query three prospective funds included: Buffalo High Yield fund (BUFHX), Iron
Strategic Income fund (IFUNX), and Principle High Income C Fund (CCHIX).
Clicking on the symbol bring up the snapshot page for the fund and clicking
on the right column tab quotes results in a detailed picture of the fund being
presented. To get the prices of the funds at the various time periods click on the
historical, set the chart to max, and click at the bottom of the page: view price
history/dividends/splits. To get the low price for the current year you will have to
review each month for the current year to determine the figure.
Filling in the following spreadsheet allows the researcher to make an
informed investment decision. In this case, three potential funds were chosen.
Buffalo High income fund has a NAV of $10.97 and is currently paying
6.19% dividend. That means if there is no price appreciation in the future this
investment will return $6.19 on every $100 invested. Morningstar rates it low risk
and above average return. It has appreciated 15.72% in the last year and nice
returns three and five years ago. When the March 2009 NAV is subtracted from the
June 2008, it can be seen there is a theoretical maximum twenty-five percent
volatility but this year the range is only 4.57%.
When Iron Strategic Income Fund is compared to Buffalo High Income
fund, it can be seen that Buffalo has a 2+% advantage in dividends and has
appreciated more on average than Iron over the last 5 years. Buffalo has more
potential for volatility as shown by the 2008-2009 range but this year has varied
the same as Iron.
Although we are accepting a bit more potential risk in selecting Buffalo
were will gain more potential appreciation and a significantly higher dividend.
When we compare Principle High Income Fund and Buffalo, they appreciate
about the same and appear to have the similar volatility but Principle pays a higher
dividend.
There is a sleeper in this analysis. Note the Principle fund has a 1% deferred
load. That means when we sell it they will take one percent. Thus, the advantage of
1% more in dividends is wiped out when the investor sells it.
Relatively the two funds are equal in potential for appreciation and
volatility, so either one will fit the investment criteria. This author would probably
pick the Buffalo fund since he has an aversion to paying load fees.
Investment
Possibility
current current
Current Dividend Mstar Mstar Mstar 1yr 3 yr 5 yr
8-Jun Mar-09 YR YR
Mar-09 Year Deferred
Price (NAV) Yield Risk Rating Return return return return High Range High Low Range Range load
Name
Buffalo High
Income
$10.97 6.19% Low
5 Above Average15.72% 7.43% 6.29% $ 10.67 $ 7.99 11.16 10.65 25.12% 4.57%
Iron Strategic
Income
$11.84 4.04% Low
5 High
12.45% 10.43% na
$ 9.94 $ 9.16 12.01 11.47 7.85% 4.50%
Principle High
Income Yield
$7.97 7.47% Low
5 Above Average16.23% 7.22% 7.56% $ 8.17 $ 5.76 7.97 7.67 29.50% 3.76%
Summary of choosing the Investment that suits your needs.
8.5
0%
0%
1%
Let us summarize the suggested method for determining our investments
Step #1: The Plan: Determine the type of money, Risk,
Liquidity, and potential yield.
In this step the person decides exactly what type of
money they are going to invest. Is it Transactions,
Precautionary, or Speculative?
The investor then consults the Hill Investment Cube to
determine the requirements for risk, liquidity and yield for this
money.
Step #2: Determine the Stage of the Business Cycle and
Potential Investment Instrument.
In this step the investor determines the current stage of
the business cycle and consults the investment table to
determine the type of investment that is appropriate.
Step #3: Determine the Potential Specific Investments Using
Stock Screeners.
In this step the investor uses the stock and fund screeners
to find stock and bond funds that match the required risk and
yield for the potential investment.
8.5 Exercise #4
You inherit $100,000 and decide to invest it. Make a spreadsheet with
the headings: Type of Demand, Demand Risk Requirements, Demand
Liquidity Requirements, Demand Yield Requirements, Stage of Business
Cycle, and Initial Choice of Type of Investment. (Use the following for
reference.
Step
Step #4:
#4: Fill
Fill in
in the
the actual
actual investment
investment choice
choice and
and data.
data.
Type
Type of
of
Demand
Demand
Demand
DemandRisk
Risk
Requirements
Requirements
11
22
Retirement,
Retirement,
Transactions
Transactions
Demand
Demand
Stage
Demand
Demand
Stageofof Initial
InitialChoice
Choice
Liquidity
Yield
Business
of
Liquidity
Yield
Bus iness ofType
Typeof
of
Requirements
Investment
Requirements Requirements
Requirements Cycle
Cycle
Inv estment
33
Moderate
Moderate
to
tolow
low
1.
1. Type
Type of
of
Demand:
Demand:
Retirement,
Retirement,
Transactions,
Trans actions,
Source:
Source:
Individual
Individual
Investor
Investor
(You).
(You).
2.
2 .Demand
Demand Risk
Risk
Requirements:
Requirements:
Moderate
Moderateto
tolow
low
(Since
(Since this
this isis aa
long
longrun
run
investment
investmentwe
wecan
can
accept
acceptsome
s omerisk)
risk)
Source:
Source: Hill
Hill
Investment
I nvestment cube.
cube.
44
Low
Low
55
Moderate
Moderate
3.3.Demand
Demand
Liquidity
Liquidity
Requirements:
Requirements:
Low
Low
(Assuming
(Ass uming you
yo u
are
areyoung
young
adult),
ad ult),Source:
Source:
Hill
Hill
Investment
Investment
Cube.
Cube.
4.4.Demand
DemandYield
Yield
Requirements:
Requirements:
Moderate,
Moderate,Source:
Source:
Hill
HillInvestment
Inv estment
Cube.
Cube.
66
Recession
Reces sion
Bond,
Bond,Utility
Utilitystock,
s tock,
Financial
FinancialServices,
Services ,and
and
High
HighDividend
DividendStocks
Stocks
5.5.Stage
Sta geof
ofthe
the
Business
Busines sCycle:
Cycle:
Recession,
Recession,Source:
Source:
Individual
IndividualInvestor
Investor
search
searchofofwww.
www.
whitehouse,.gov,
whitehouse,.gov,
www.Doc,gov,
www.Doc,gov,etc.
etc.for
for
consumer
price
consumer price
index,
index,GNP
GNPgrowth,
growth,
and
and Unemployment
Unemploy ment
statistics.
statistics.
6.6.Initial
Initialchoice
choiceofoftype
typeof
of
investment:
investment:Business
Busines sCycle
Cycle
Chart
Chartin
inHill’s
Hill’sBook
Book
After you have completed the plan go to the web and research 5 funds and 5
stocks that will meet your investment requirements. Submit a spreadsheet with the
same heading as those used in the examples.
Investment
Possibility
Name
Buffalo High
Income
Iron Strategic
Income
Principle High
Income Yield
current current
Current Dividend Mstar Mstar Mstar 1yr 3 yr 5 yr
8-Jun Mar-09 YR YR
Mar-09 Year Deferred
Price (NAV) Yield Risk Rating Return return return return High Range High Low Range Range load
$10.97 6.19% Low
5 Above Average15.72% 7.43% 6.29% $ 10.67 $ 7.99 11.16 10.65 25.12% 4.57%
0%
$11.84 4.04% Low
5 High
0%
$7.97 7.47% Low
5 Above Average16.23% 7.22% 7.56% $ 8.17 $ 5.76 7.97
12.45% 10.43% na
$ 9.94 $ 9.16 12.01 11.47 7.85% 4.50%
7.67 29.50% 3.76%
1%
Current Jun-08
Investment
Possibility Current Dividend P/E
Symbol
EXC
FE
AEE
Yearly Yearly Mar-09 8-Jun Year
Mar-09 Analyst
Name
Price Yield
Ratio Beta Volume High Low low High Range Range Ratings
Exelon
$41.26 5.08% 10.8 0.1 5.1M
$52.23 $37.24 $38.41 $91.84 28.70% 58.18%
3.17
FirstEnergy $36.88 5.94% 12.6 0 3.3M
$47.82 $33.57 $35.63 $84.00 29.80% 57.58%
2.60
Ameren
$27.60 5.51% 11.3 0 2.1M
$28.60 $23.09 $19.51 $43.16 19.27% 54.80%
3.22
E. Protecting your Money
6. Starting your own Business
9.1 Summary of Steps
Let us talk about owning your own business next. Follow these easy steps to
starting your own business. Some Economists my add others or subtract some this
is only a generic list.
Step 1 Remember, Always stick to basics. Profit equals Total Revenue minus Total
Cost.
Step 2 Total Revenue = Price times Quantity and Total cost = the factor price times
the amount of the factor used.
Step 3 Estimate your future sales (1 month, 3 months, 6 months, 1 year, 2 year, 5
years, and 10 years.)
Step 4 Estimate the competitive price you can charge for your product.
Step 5 List each costs (includes Start up costs), you anticipate in the first month, 3
months, 6 months, year second year, and fifth year, and 10th year.
Step 6 Compare the revenues and costs for each period.
Step 7 Determine if the business is viable. If the revenues are always less than the
costs the business is not viable. If revenues eventually cover the costs you must
determine if the business is viable in your own mind.
Step 8 Determine the investment that is required before a profit is achieved. (Can
you afford this?)
Steps
Steps in
in starting
starting your
your own
own business
business
1.
1. Stick
Stick to
to the
the Basics:
Basics: Profit
Profit == Total
Total Revenue
Revenue minus
minus Total
Total Costs
Costs
2.
2. Remember
RememberTotal
Total Revenue
Revenue== Price
Price times
timesQuantity
Quantity and
and Total
Totalcost
cost == the
thefactor
factorprice
price
times
times the
theamount
amount of
of the
the factor
factor used.
used.
3.
3. Estimate
Estimate your
yourfuture
future sales
sales (( 11 month,
mon th,33 months,
months,66 months,
months,11 year,
y ear,22year,
year,55years,
years, 10
10 years.)
years.)
4.
4. Estimate
Estimate the
t hecompetitive
competitive price
price you
you can
can charge
charge for
for your
yourproduct.
product.
5.
5. List
Listeach
eachcosts
costs (includes
(inclu desStart
St art up
u pcosts),
costs),you
youanticipate
ant icipate in
in the
the first
fir stmonth,
month,33months,
months,66
th
months,
months, year
yearsecond
second year,
year,and
andfifth
fifthyear,
year, and
and10
10 thyear.
year.
6.
6. Compare
Compare the
therevenues
reve nuesand
and costs
costsfor
f or each
each period.
p eriod.
7.
7. Determine
Det ermineififthe
the business
business isisviable.
viable.
8.
8. Determine
Det erminethe
the investment
investmentthat
thatisisrequired
requir edbefore
beforeaa profit
prof it isis achieved.
achieved.
(Can
(Canyou
you afford
afford this?)
this?)
Caution:
Caution: All
All estimates
estimates must
must be
be realistic!
realistic!
conservative estimates.
9.2 The steps
Make
sure you
are true
to
yourself
and
make
realistic
but
Steps in starting your own business (Steps 1 and 2)
1. Stick to the Basics: Profit = Total Revenue
minus Total Costs.
When push comes to shove the bottom line
is: Is this business going to bring in more
money than it spends.
2. Remember Total Revenue = Price times Quantity
and Total Cost = the price of the factor times the
amount of the factor used.
Accurately determining and forecasting the
price and quantity of the product sales and
resources used is the key to a successful start up.
Caution: All estimates must be realistic!
Let us take a look at the steps in more depth.
First, Profit equals Total Revenue minus Total Cost. When push comes to
shove the bottom line is: Is this business going to bring in more money than it
spends.
Second total Revenue equals Price times Quantity. Accurately determining
and forecasting the price and quantity of the product sales and resources used is the
key to a successful start up.
Step 3 is a very hard step. You must accurately as possible Estimate your
future sales in 1 month, 3 months, 6 months, 1 year, 2 year, 5 years, 10 years. You
must gather all the information and data you can to get a realistic view of the
potential revenues of your enterprise. This can be done using several methods
including but not limited to the following methods.
The first method is the Delphi which is an independent query of selected
experts on the subject.
The second method is the market survey which is a questionnaire format for
potential customers and others to complete for you.
The third method is the visionary or scenario based forecasting technique.
The fourth method is the Historical Analogy which references your product
to a product history of a like product. Step Four requires an estimation of the
competitive price you can charge. The previously described technique can be used
to
Steps
Steps in
in starting
starting your
your own
own business
business (Steps
(Steps 33and
and4)
4)
3.
3. Estimate
Estimate your
your future
future sales
sales(( 11month,
month, 33 months,
months,66months,
months,11year,
year, 22
year,
year, 55 years,
years, 10
10 years.
years.
You
Youmust
mustgather
gath erall
allthe
t heinformation
informationand
and data
d ata you
youcan
canto
to get
get aa realistic
r ealisticview
viewof
of
the
potential
revenues
of
your
enterprise.
This
can
be
done
using
several
methods
the poten tial revenues of your ent erprise. Th is can be done using se veral methods
including
inc luding but
but not
notlimited
limited to:
to:
Delphi
Delphi which
which isis aa independent
independent query
query of
of
selected
experts
on
the
subject.
selected experts on the subject.
Market
Market survey
survey isisaa questionnaire
questionnaire format
format for
for potential
potential
customers
customers and
and others.
others.
Visionary
Visionary method
method which
which isis aa scenario
s cenario based
based format.
format.
Historical
Historical Analogy
Analogy which
which references
references your
your product
product to
to aa
product
product history
history of
of aa like
like product.
product.
4.
4. Estimate
Estimate the
the competitive
competitiveprice
priceyou
you can
cancharge
chargefor
for your
your product.
product.
The
The above
abovemethods
methods can
can also
also be
be used
usedto
to determine
de termine aarealistic
realistic competitive
comp etit iveprice.
price.
Caution:
Caution: All
All estimates
estimates must
must be
be realistic!
realistic!
estimate the variables for this step too.
Next, List each costs (includes Start up costs), you anticipate in the first
month, 3 months, 6 months, year second year, and fifth year, and 10th.
Steps
Stepsin
in starting
startingyour
yourown
ownbusiness
business(Step
(Step5)
5)
5.
5. List
List each
each costs
costs (includes
(includes Start
Start up
upcosts),
costs),you
youanticipate
anticipate in
inthe
thefirst
first
month,
month, 33 months,
months,66months,
months, year
yearsecond
secondyear,
year, third
thirdyear,
year, fourth
fourth year,
year,
and
and fifth
fifthyear,
year, and
and 10
10ththyear.
year.
11 Month
M onth 33 Months
M onths 66Months
M onths 11Year
Year
Costs
Costs
Cable
Cable
Commission
Commission
Cleaning
Cle aning
Management
Management Fee
Fe e
Security
Sec urityFee
Fe e
Electric
Electr ic
Association
AssociationFee
Fee
Work
Work Order
Order
Phone
Phone
Insurance
Insurance
Taxes
Taxes
..
..
..
20
20
360
360
100
100
100
100
30
30
40
40
150
150
50
50
30
30
120
120
100
100
Total
Total Cost
Cost
1100
1100
22Years
Years
55Years
Years
10
10Years
Yea rs
Steps
Steps in
in starting
starting your
your own
own business
business(Step
(Step6)
6)
6.
6. Compare
Compa re the
the revenues
revenues and
a nd costs
costs for
for each
each period.
period.
11 Month
Month
Revenues(Price
Revenue s( Price (10)*
(10) *
Quantity
Quant ity
Sold
Sold Estimate(1000))
Estimate( 1000) )
Minus
MinusCosts
C ost s
Electric
40
Elect ric
40
Phone
40
Phone
40
Insurance
120
Insuranc e
120
Taxes
100
Taxes
100
Mortgage
11000
Mort gage
11000
..
..
33Months
Months 66Months
Months
11Year
Yea r
33Years
Yea rs 55Years
Years
10
10
Years
Y ears
10000
10000
Total
Tot al Cost
Cost
11300
11300
Profit
Prof itor
or Loss
Loss
(Estimated)
(Estimated)
1300
1300
Now subtract the costs from the estimated revenues. When do you make a
profit?
Given the above analysis can you determine if the business can make a profit? In
step 8 you must determine the investment dollars needed until you can make a
profit.
Steps
Stepsin
in starting
startingyour
yourown
ownbusiness
business (Steps
(Steps77and
and8)
8)
10.
7.
7. Determine
Determineifif the
the business
businessisisviable.
viable.
Referring
Referring to
to step
step 66determine
determinewhen
whenor
or ifif the
thebusiness
businesswill
willmake
makeaaprofit
profit
and
and ifif and
andwhen
when the
thebusiness
businesswill
will be
beprofitable.
profitable.
8.
8. Determine
Determinethe
the investment
investmentthat
thatisisrequired
requiredbefore
beforeaaprofit
profit isis
achieved.
(Can
you
afford
this?)
achieved. (Can you afford this?)
Software
Software
Computer
Computer
Incorporation
Incorporation fees
fees
Copyright
fees
Copyright fees
Building
Building Lease
Lease
Furniture
Furniture
Equipment
Equipment
Estimated
EstimatedLosses
Lossesin
inYear
Year 11
..
Total
Total
Life Skills: Money and Safety Protection Tips
It would be nice to cover some common sense tips on how to protect the wealth
you have accumulated and how to protect yourself and your money when you
leave home on a trip.
10.1 What and Where to Carry your valuables when you are Out and
About.
First, do not carry valuables in a backpack or fanny pack. Anyone can reach
into a backpack without you seeing or feeling them.
Next, if you do have a fanny pack, make sure the buckle is near the pouch
and in front of your body.
Fanny packs, if worn, should only be worn in the front.