1. The Investment Setting 2002/2/20

2. What does investment mean? Whenever we decide to forgo current consumption or pleasure in order to enjoy more consumption in the future. No matter your belongs or borrowing

3. Time is the center of investment decision Time converts apparent “ uncertainty” into the actuarial “ near certainty”. (probability or risk) Outcomes accurately described in their specific probability of occurrence.

4. Time scale Short term investment needs to deal day-today fluctuations and changes. Invest on the most fluctuating assets. Long term investment needs to unrelenting the destructive power of compounding inflation. Invest on the maximum long-term return. Rule of 72: 72/annual interest rate = the year to double your money.

5. Investment differs Real investment Financial investment: liquidity, duration

6. liquidity Liquidity determines the investor’s ability to sell-or buy-in large volume in a short period of time without causing a significant change in price.

7. What cause the liquidity to be high Active and sizable buyers and sellers Existence of information on price as well as value that is accurate and is both widely and quickly distributed toall active and potential active market participants. High degree of confidence among market participants that the market is free and fair.

8. Good or bad things about liquidity You can easily change your mind to correct any errors. Offset by all-too-human behavioral reality. Write down your goals and policies.

9. Fewer decisions, hold to policy Rate of return S&P 500(1982-1990)18% Less 10 biggest days12% Less 20 biggest days8% Less 30 biggest day5%

10. Hold to policy Effects of particular years on return Cumulative value of $1 S&P 500(1928-1990)$332 Less one year:1933$215 Less two year:1933 and 1954$141 Less three year :1933,1954 and 1935$96

11. Using risk You can’t control returns; You can control only the risks that, in turn, drive returns. How do you use risk and riskiness productively?

12. Tversky & Kahneman’s experiments (fear of loss) Toss a coin Game AHead: win $150Tail: loss $100 Game BHead: win $150,000Tail: loss $100,000

13. Tversky & Kahneman’s experiments (fear of regret, or shame) We avoid risk too much-giving up rather large opportunities for profit in order to avoid rather smsll risks of loss.

14. Tversky & Kahneman’s experiments (exaggerate the importance of very unusual events) Game Awin $300,000 and be a winner in 2% Game Bwin $600,000 and be a winner in 1%

15. Tversky & Kahneman’s experiments Overreaction to recent information

16. Defining risk Risk means that we do not know what is going to happen, even though we occasional have a good idea of the range of possibilities that we face. Systematic risk: These are the risks that you cannot avoid if you are going to invest at all. (risk premiums) Specific risk: Stock-picking

17. Changing markets 20% professional, 80% individual 80% professional, 20% individual

18. Efficient markets All that can be known is known. Stock-picking is a zero sum game. Regression to the mean.

19. Understanding Policy The setting of investment policy for the long term – cash flows, available funds, level of funding, amount of reserve money. The ability to adhere to investment policy throughout whatever positive or negative.

20. Contribution versus Benefit Savings or investment Safety from market fluctuation but not corrosion of purchasing power by inflation

21. Client-Manager Communication The client lead and control the process of discovery and resolution of the policy. The manager assure the implementation of the investment decision after they have been made.

22. Measure results Precise Accurate

23. Implementing policy Staff Senior committee Investment manager Time History has much to teach us