October 1 st 2012

Common Cents Investment Group October, 2012 Agenda  Helpful hints  Today in the Market  Stocks vs. Bonds vs. Options  Accounting Analysis  Additional Info

Common Cents Investment Group October, 2012 Helpful Hints  There’s an app for that…  Investopedia  Bloomberg  Yahoo! Finance  Morningstar Access 

Common Cents Investment Group October, 2012 Today in the Market  The fourth fiscal quarter starts today  Value Investing Congress  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  the-finish-HN5q~W2AQDqfMeFGbFGRbw.html the-finish-HN5q~W2AQDqfMeFGbFGRbw.html

Common Cents Investment Group October, 2012 Today in the Market  Facebook reveals a new focus  Moving towards E-Commerce 

Common Cents Investment Group October, 2012 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)

Common Cents Investment Group October, 2012 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)

Common Cents Investment Group October, 2012 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

Common Cents Investment Group October, 2012 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

Common Cents Investment Group October, 2012 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”

Common Cents Investment Group October, 2012 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)

Common Cents Investment Group October, 2012 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

Common Cents Investment Group October, 2012 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 where Elvis used to live and is worth $1,000,000. Profit = $797,000 The house is infested by mice who eat everything in site. House Is worth $50,000 Profit = -$153,000

Common Cents Investment Group October, 2012 Stocks vs. Bonds vs. Options

Accounting or Financial Analysis…

Common Cents Investment Group October, 2012 Why Accounting is Important to 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

Common Cents Investment Group October, 2012 Why Accounting is Important to 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”

Common Cents Investment Group October, 2012 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

Common Cents Investment Group October, 2012 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

Common Cents Investment Group October, 2012 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

Common Cents Investment Group October, 2012 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.)?

Common Cents Investment Group October, 2012 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.

Common Cents Investment Group October, 2012 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?

Common Cents Investment Group October, 2012 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

Common Cents Investment Group October, 2012 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

Common Cents Investment Group October, 2012 Statement of Cash Flows  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

Common Cents Investment Group October, 2012 Statement of Cash Flows  The different components  Cash flows from…  Operating activities  Investing activities  Financing activities

Common Cents Investment Group October, 2012 Statement of Cash Flows  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?

Common Cents Investment Group October, 2012 Statement of Cash Flows  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

Common Cents Investment Group October, 2012 Statement of Cash Flows

Common Cents Investment Group October, 2012 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

Common Cents Investment Group October, 2012 Additional Info  Visit for 75% off  Luv Sherma will be speaking next week about Technical Analysis and his new Educational Program!!

Common Cents Investment Group October, 2012 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

Common Cents Investment Group October, 2012 Membership  Make sure to check out our website for the presentations Monday night | ccig.osu.edu  Get on our Facebook page and like us!

Common Cents Investment Group October, 2012 Questions?  Questions, comments or concerns?