Common Stock Investing Appendix B, Part VI

Are Stock Market Indices and Stock Prices Leading Economic Indicators?

Is this Information Useful?

Here’s what you get when Here’s what you get when buying Stockbuying Stock

Committee on Uniform Securities Identification Procedures

Ownership isFreely Transferable

How are Stock Prices reported?

Indexes: DJIA, NASDAQ and S&P 500

The Dow30 Largest and

Most Widely Held Public Companies

Standard & Poor’s (S&P)500 Large-Cap (>$3B) Companies traded on NASDAQ and NYSE

National Association of Securities Dealers Automated

Quotations3,000 US/Foreign

Growth/Technology Stocks

How is a Stock’s Price reported?

ttm = Twelve Trailing Months

EPS = Earnings (Net Income) Per SShare

Why is a Stock’s Price/Value* what it is?

Efficient Market Hypothesis says Stock Prices “Reflect All Publically-Available Information”

In theory (?), Stock Prices are Never Under- or Over-Valued – Can’t Beat the MarketMarkets get “Beat” all the Time: Isn’t it all about “Interpreting” Information?

How does Information effect a Firm, its Industry and the Economy?

** PRICE = What Market (Seller) Thinks it’s Worth

VALUE = What YOU (Buyer) Think it’s Worth

RISKS of If, When and How Much Cash will be Received affect Value

Expected Rate of Return reflects Risk Aversion – Low Risk/Low Rate versus High Risk/High Rate

What’s an Asset (Stock) Worth? Future Cash to be Received while

Owning Asset Stockholders own Company -

Future Cash = Net Income

3.3. Net Income (EPS)Net Income (EPS)

Expected Rate of Return Expected Rate of Return =

Value

1.1. Forecast Future Net Forecast Future Net IncomeIncome

2.2. Develop Expected Rate of Develop Expected Rate of Return Return (Risk Measure)(Risk Measure)

Risk-Free Rate of Return (2 Yr. Treasury)

+ Systematic Risk (Inflation – CPI Change)

+ Equity Risk Premium (Firm Specific Risk)

Total = Rate that Compensates for All Ownership Risks

If Expected Rate of Return measures Risk, How to Calculate it?

Compare Your Value of Stock with Market’s Price

If Market Price less* than Value, Consider Purchase

* How much Less? Factor in Margin-of-Safety (Contingency)

Life should NOT be a Journey to the Grave where You Arrive Safely in One Pretty, Well-Preserved Piece…

Bill McKenna, Professional Motorcycle Racer (Cycle Magazine, February 1982)

GERONIMO!!!GERONIMO!!!

Instead, Don’t You want to Skid Broadside over the Finish Line, Thoroughly Used Up, Worn Out, Leaking Oil, Shouting as Loud as you can…

http://www.youtube.com/watch?v=yjjkprPZDCM