Introduction to Investments

Mutual Funds: Investments for the Masses

Mutual funds are truly Investments for the Masses. The probability is very high that at some time in your future, your employer will offer you an employer-sponsored retirement plan. That plan will almost assuredly have mutual funds as their primary investment vehicles. Your friends and family and co-workers will also likely be investing in mutual funds and they will need your help. As the Investment Guru for your family, friends, and colleagues, you need to know and understand mutual funds thoroughly. That includes knowing the major categories of mutual funds and the ways that investors are charged for mutual fund services. As you will see, both are complicated. You will help your family, friends, and colleagues. You will speak with authority. Dear Students, study hard and bring honor and glory to Udemy.com and Southwestern Community College when you tell them where you learned everything you know! (And oh, by the way, you are welcome.)

Please pay special attention to this chapter. Mutual funds are very important. In this presentation, you will be introduced to the definition of a mutual fund, a.k.a. an investment company, and review the growth of the mutual fund industry. Upon completion of this lecture, you should be able to describe the various components, characteristics, benefits, advantages, and disadvantages of mutual funds.

One of the most misunderstood aspects of mutual funds are the fees. Investors mutual fund investors know that they are paying for the services of the mutual fund. They just don't understand how. We will dig deep into the fees, expenses, and share classes, oh, my!

We are going to try to do the undoable. We want to get our arms around the 800-pound gorilla that is the mutual fund industry. To do this, we are going to work through the broadest categories of mutual funds and their investment strategies. Wish us luck! We will need it. Be sure to review this lecture many times. You are going to be the Investment Guru for your family, friends, and colleagues. You have to know this stuff cold! 

The past several years has seen great controversy over the value of active management in the mutual fund industry. Are the mutual fund investment managers who research, identify, choose, and monitor the investments in their mutual funds actually worth the high salaries they are paid? Let's explore the debate. Be prepared for some serious blasphemy!

"Choose a Family, not a Fund." This sound advice was given by Forbes in the mid-1990's. It still rings true today. Let's peruse a few of the mutual fund families as well as the important mutual fund services they provide. We then tackle the thorny question, “Okay, So How Do I Pick a Mutual Fund?!” By now, you are most likely feeling quite overwhelmed, yes? You are not alone. Let's focus on a single mutual fund and identify the characteristics that distinguish a good potential choice. We end our discussion of mutual funds by once again extolling the virtues and benefits of taking a long-term perspective.

It is time to begin our long march. There is much to learn about stocks, also known as equities. They are the best long-term financial investments. They are also very risky. We will do our best to help you learn how to eat reasonably well investing in stocks and sleep reasonably well investing in stocks. Stick with us!

Stocks are exciting! Stocks are sexy! Stocks are risky! Join us as we begin in our exploration of the world of stocks and stock markets. The news is good. We can build substantial wealth over the long term. However, the volatility is real, Dear Students! The volatility is real. (Have we mentioned how important it is to keep a long-term perspective? Yes? Good! It bears repeating.)

What exactly are we referring to when we say, "the stock market?" What is it? Where is it? Actually, the stock market is not just one entity. It is composed of many competing elements. Let's explore.

What are the basic types of stock transactions? How much does it cost to buy and sell stocks? (No, Dear Students, it is not free to buy and sell stocks, no matter what Robinhood tells you.) Where can we find stock quotes? We will answer these burning questions in this section.

How do brokers differ from dealers, also known as market makers? This presentation uses the Casas de Cambio money exchange kiosks that line the border between San Diego and Tijuana to show how brokers differ from dealers/market makers. Even if there are no commissions associated with your transaction, you are being charged, Dear Students!

How can we say that, "the stock market has returned 10% over the last 80 years?" The industry uses various benchmarks measures called averages and indexes. It is time to take a close look at these tools. We will then revisit volatility and see that, providing we take a long-term perspective, it ain't so bad.   

"Show Me the Numbers!" exclaimed Benjamin Graham, the author of The Intelligent Investor and Warren Buffett's mentor. We are going to learn how to calculate stock measures including earnings per share, dividend payout ratio, and price-to-earnings ratio. (It ain't hard. All you need is a 99¢ calculator.)

Are all stocks the same? No! We need to examine the major stock types and their risk/return aspects. We will also learn how about market capitalization, the Papa Bears, the Mama Bears, and the Baby Bears. 

In our final presentation, we will examine some stock investing strategies and their advantages and disadvantages. A few are worthwhile. Some others, not so much. You decide! (Psst. Keep a long-term perspective, Dear Students!)

This is it, Dear Rising Investment Gurus! This is the heart of our course!

In this chapter, we will learn techniques that should tilt the odds in our favor and help us become successful, prudent long-term investors. We will learn how to predict the future price of a stock. Are our predictions guaranteed? Yes, indeed! They are guaranteed to be wrong! They will almost always be very far away from the actual price one, two, three, or four years from now. However, our predictions should help us identify companies that will allow us to build wealth slowly over time. Most of the companies that we identify with these techniques won't make us rich overnight. But on the other hand, they will help us to avoid large losses when the markets hit a downturn, a correction, a bear market, a crash, etc. We want you to eat reasonably well and sleep reasonably well.

How do we measure the value of a stock? What is a stock worth? Can we even attempt to assign a value to a stock? We are going to do our best but as we will see, it ain't easy! However, the techniques we learn in this chapter should help tilt the odds in our favor for choosing prudent, long-term oriented, successful investments. Stick with us, Rising Investment Gurus!

Welcome, Dear Rising Investment Gurus! You are about to be initiated into the mysteries of the Dividend Discount Models. Everything you have done up to this point has prepared you for your acceptance of this most sacred knowledge. Enter the temple and be enlightened.

This is it, Dear Students. You are about to become Official, card-carrying, full-fledged Investment Gurus. Rise up! Learn how to use the Discounted Cash Flow Model to identify prudent, long-term oriented businesses to invest in. We are so proud of you!

And just where will we get all the data we need for our valuation models? Hmmm? From The Value Line, of course! All the Financial News that is Fit to Print!

Ratio Analysis Rounds Out the Investigation of Our Potential Stock Investments

In the previous chapter, we learned some powerful techniques that give us a “yes/no, continue researching/don’t continue researching” kind of answer, even though we know that we should never place much credence in the result. In this chapter, we learn how to compute and analyze many financial ratios using the financial statements that a public company must publish quarterly. Financial ratios do not give us a “yes/no” answer about an individual stock. Rather, we treat financial ratios like a stew of information that gives us a more rounded analysis of our potential investment and allows us to compare our stock with its competitors and the market as a whole. The financial statements that we utilize to compute our financial ratios are also very handy whenever we are experiencing a bit of sleeplessness. Just ask any accountant's spouse!

Every publicly-traded corporation must publish their financial statements every three months. The three financial statements are the Balance Sheet, the Income Statement, and the Cash Flow Statement. Luckily, the accountants are tasked with creating the financial statements. We investors just need to learn how to read them and pick out the important elements. We use the financial statements to create financial ratios that help us "round out" our research into our potential stock investments.

We continue our discussion of financial ratios by introducing and analyzing the profitability ratios, liquidity ratios, activity ratios, and leverage ratios. Always remember to compare and contrast your potential stock investments with their competitors and the stock market as a whole, Dear Risen Investment Gurus.

Are Markets Efficient? Can Investors “Beat the Market?”

This chapter discusses the various theories about market efficiency. The proponents of the efficient market theories believe that no one can “beat the market.” The fly in their ointment is that there are many investors who have beaten the market over statistically significant periods of time. We will take a look at just a few of those successful investors who have proven that the efficient market theories are wrong. We will also review some of the research from behavioral finance and what it says about us as investors and as human beings as well as revisit the controversy over active versus passive management. We end with a few famous market myths and stupid sayings. Enjoy!

Are markets efficient? Are investors rational? Let's take a quick look the efficient and rational market theories and their influence on investors. We will also discuss the difficulties in "beating the market." We will end with a discussion of manias/bubbles and crashes. The reality, Dear Investment Gurus, is that markets are anything but efficient and rational!

In the presentation, we will describe some unproductive behaviors and common weaknesses that typical investors exhibit. We will counter those unproductive behaviors with the characteristics of intelligent, long-term oriented investors during manias and crashes. We also revisit the great debate between passive (a.k.a. index) investing versus active management. We end with a discussion of some of the more famous investors and their characteristics. If you want to learn how to something well, study those who already do it well! Last, we review various famous market myths and stupid market sayings and do our best to learn what not to do when investing.

And Now for Something Completely Different!

Your Humble Instructor is a big fan of Monty Python’s Flying Circus and all things silly. In the previous chapter, we saw how the Efficient Market Theorists were engaging in some silliness when they wrongly claimed that no one can beat the market. In this chapter, we reach the pinnacle of silliness! In our humble opinion, choosing stock investments using Technical Analysis is right up there with scanning tea leaves, palm reading, interpreting chicken entrails, and practicing voodoo. However, an attractive aspect of Technical Analysis is that anyone can practice Technical Analysis without really knowing what they are doing because no one else really knows what they are doing either. That means that you, too, can become a Technical Analyst without knowing what you are doing! Could a $500,000 per year salary (plus bonuses!) be waiting for you on Wall Street as a Technical Analyst? Hmmm?

Technical Analysis is the third and last major stock analysis technique that we will investigate. It appears to be better than tea leaf reading, throwing tarot cards, or interpreting chicken entrails, but not that much better. Get ready for some real silliness!

It is time to turn our attention to bonds. Stodgy bonds. Boring bonds. Reliable bonds!

Please accept our apologies. After immersing ourselves in the world of stocks, bonds are going to seem very bland and unexciting. However, we need to ask ourselves, do we want to eat well or do we want to sleep well? Unlike stocks, bonds allow us to sleep well at night. There is something to be said for that, right? 

Stodgy bonds. Boring bonds. Reliable bonds. We start our investigation of bonds with a discussion of the various components, characteristics, benefits, advantages, and disadvantages of bonds and bond investing. We then focus on the trickiest part of bonds, namely the inverse relationship of bond prices and interest rates and how a bond could be selling at a premium or a discount to its par value (a.k.a. face value).

Let's review the various types of bonds from the least riskiest (Treasury bonds) to the most riskiest (non-investment grade, a.k.a. junk bonds) and explore the methods by which bonds are rated on the basis of their probability of default.

Let’s continue with stodgy, boring, reliable bonds

What is our bond paying us? What is the yield? What is our bond worth? What is its valuation? We will learn how to compute the various bond yields and how to use a bond valuation technique that will be very familiar. We will see that the fixed-income nature of bonds makes predicting bond prices much more reliable than predicting stock prices. We will also discuss the yield curve and some final aspects of bond investing.

What is our bond paying us? What is the yield? What is our bond worth? What is its valuation? We will explore the various bond yield and valuation calculations as well as discuss some other final aspects of bond investing. Get out your 99¢ calculator! 

We finish our discussion of bond by investigating bond spreads and the bond yield curve and what an inverted bond yield curve typically signifies for the near-term future state of the economy. We also learn how to calculate bond valuations using a variation of the Discounted Cash Flow Model. Finally, we identify and explain various bond investment strategies and how to construct a bond ladder investment program.

Hybrid Securities: The Best and Worst of Both Worlds

In a backwater of the investment universe rarely visited by retail investors lives a group of instruments known as hybrid securities. It is very unlikely that you as an individual retail investor will choose hybrid securities as part of your investment portfolio but you never know. You may be drawn to these instruments. At the very least, you need to be able to explain the inherent problems with these choices for retail investors to your brother-in-law who is all excited about buying preferred stock instead of just plain old common stock.

Hybrid securities such as preferred stock and convertible bonds give us the best of both of the worlds of stocks and bonds. Ah, they also give us the worst of both worlds. They are truly a hybrid with the advantages and disadvantages of stocks and bonds.