Applied Investing

1. Applied Investing The alternative guide!

2. Mission Statement • Build Better Business Leaders. • Produce knowledgeable but deeply skeptical investors.

3. Introduction • PJ King • Fund Manager – Hermes Pension Fund • Research Analyst – JP Morgan, Merrill Lynch • Civil Engineer – British Telecom • 3 times voted No1 Small Cap Team in Asia • CV on BB

4. Getting the Admin sorted out. • Class Reps. • Time & Place. • Groups. • Course breakdown - marks • Assignments Individual – marking scheme • Assignments Group – marking scheme • JiFi – marking scheme • Choose the companies • Prizes • StockTrak & Marking Scheme • Last Lecture.

5. Course Marks • A) Class Participation – 10% • B) Individual Assignments – 25% • C) Group Assignments – 15% • D) Exam – 50% • NOTE: you must pass B+C combined as well as D to pass the course. Pass mark is 50%.

6. Individual Assignments • I1 to I7. – go to Assignments. • Each worth 3% except for JiFi – worth 7% • 6 essays and 1 JiFi note. • What I am looking for – ability to analyse the question and put up a coherent and well researched argument and counter argument. • Presentation to be of a professional standard. • Scoring 0 is an option – I have no heart!!

7. Group Assignments • G1 to G3 • Each worth 5% • G1 is an in-depth analysis of a US company • G2 is an analysis of a commercial property • G3 is the report on your usage of StockTrak – How to score this? • Depth and range of analysis is what I will be looking for. • Presentation to be of a professional standard. • Scoring 0 is an option!!

8. Prizes • Best Student Overall – $200 from University Bookshop. • StockTrack + Report (60% + 40% - my suggestion?!?) – best scoring group wins $500 • Commercial Property – best report wins $100 of petrol vouchers.

9. Class Participation • Marks given for the quality of your questions to outside speakers. • Dumb and time wasting questions score 0. • “Good Question” – score 100%. • Cookie questions score high! • State your name before asking a question. • 1 question per person.

10. JiFi marking • Every line • Every page • Negative scores. • % difference. • Closest to ideal scores highest. • Example

11. What you will learn • How to analyse assets as possible investments – with special reference to Equities. • How to value assets. • The problems of managing a portfolio. • Managing your own money as apposed to managing others. • That most of the financial theory you have learned is misleading and probably wrong! • Presenting Financial Ideas.

12. How you will learn • Using the JiFi Note • Using Case Studies • Using Team Work • Listening to lectures • Playing with a Portfolio – Stock Trak • Reading suggested background material – yes it is part of the course. NOTE: I consider it fair game to take exam questions from this material!!

13. Why does this course need so much work?

14. Why does this course need so much work? • …cause I believe that it is the most important course that you will do! • Why do I think this?

15. The last thing on your mind?

16. The last thing on your mind? - 2 • Who is going to pay your pension! • ….but this is important.. • Why?

17. Demographics are against you! • The numbers of those aged over 65 will grow from 12 per cent of the population to 27 per cent in the next 50 years • leading to a massive increase in pension and health costs with fewer younger people to pay for it. • The issues are raised in a report presented to retirement commissioner Diana Crossan by the Periodic Report Group 2003, which suggests they must be dealt with before the end of the decade.

18. Demographics - 2 • The report shows workers under 55 will likely work longer, get their pension later and receive less when it comes through. • Treasury papers show the benefits of increasing the eligibility age for the pension to 68 over six years, starting in 2013, and the benefits to the economy of workers retiring at 70, starting in the next five years. • The full impact of the changes would hit people aged 20 to 40, while the measures would have a lesser effect on those aged 40 to 55. The rest of the working population can expect to enjoy today's retirement age and pension.

19. Your future - 1 • Large student loans and dropping home ownership will cause problems for younger New Zealanders. • Middle New Zealand's living standards will fall. • Cullen's NZ Super Fund will not solve the problem, simply ease it. • Healthcare costs will almost double to $13 billion, a jump from 6.3 per cent of GDP to 11.1 per cent. • Crossan (retirement commissioner) said it was essential New Zealanders realised they must make changes to the way they saved and support the government in making difficult choices.

20. Your future - 2 • The government needed to get a clearer message to New Zealanders about the current pension. • "Quite frankly, politicians are misleading us. . . Are we as individuals quite happy to exist on $12,000 a year? • "If we don't do something and we are forced to increase tax on younger people to support the expanding number of people receiving NZ Superannuation, those young people will say, `blow this, I'm going to Australia' and this country will go backwards at a faster rate,"

21. Your future - 3 • While the political parties do not have comprehensive solutions sketched out 50 years into the future, Act finance spokesman Rodney Hide said a change to the pensions politicians received might produce action. • Hide said the numbers had an "honesty" that would make liars out of politicians who promised the earth. • Putting MPs on the same pensions as other New Zealanders "might focus parliament's mind on the problem".

22. Can you believe it?!? • From a 2003 Industry in NZ survey: • Only 6% of the 1,500 interviewed thought business or the economy were factors likely to ensure their “ideal” standard of living! • 50% thought it was more important for the Government to do the right thing socially than the right thing economically. • Few people initially identified growth industries as likely to lead to a good performing economy. • 46% consider business a “necessary evil” not realizing where the tax money that supports the country comes from.

23. 3 ways to get rich • Inherit it • Marry it • Make it yourself.

24. How to make it yourself? • Spend less than you earn and invest the rest.

25. What to invest in? • Property • Own your own business • Shares • Savings accounts (the magic of compounding!)

26. Survey of the successful • In a survey by a US brokerage firm of its successful clients; • 9 out of 10 had made their fortune because they had been long term investors in a successful private operation. • The rest because they had ample buying power at the rare but repetitive times when bargains were available

27. The successful strategy • These people did not try to sell when their businesses looked expensive in the hope of buying them back at a cheaper price in the future. • They were locked into something good – more or less permanently. This is why they became rich. • Why not apply this approach to stock investing?

28. Portfolio Dissection • The performance of the best portfolios can be boiled down to the continuous holding of one, two or three stocks whose price has multiplied many fold. • It is more important to hold on to winners than to weed losers. • Losers have increasingly less influence on a portfolio than winners if both are maintained – as long as one does not commit the sin of cutting back the successful one and buying more of the losing one.

29. Guessing stocks or the market • Much effort has been expended in this area. • …but attempting to guess the market with respect to timing and direction is …. • …still a gamble. • Hence ten times as many fortunes have been made through selection as through timing. • What to do?

30. Speculate? • Sure…but in speculation …. • …when to buy (and sell) is much more important than what to buy. • Mathematically more speculators must lose than can profit.

31. What to invest in? • Too much effort into cyclical approach. • Trend well progressed before we recognise Bull or Bear. • Few buy at the bottom and sell at the top – but many lose money trying. • If a person owns a business or a farm or a property s/he does not worry about how much it is worth today compared to yesterday. • One looks at it as a function of earning power, growth or long term value.

32. What to invest in - 2 • Yet if one owns Microsoft or ANZ – less risky and more substantial businesses they look upon themselves as richer or poorer on a daily basis almost! • The very fact that liquidity exists makes people over-emphasise the price.

33. What to invest in – 3 - Buffett • Better to buy a good business at a fair price than a poor business at a bargain price. • When a management with a reputation for brilliance tackles a business with a reputation for poor returns…guess whose reputation remains intact?

34. Sure?! • But you need to be a professional with access to all the information to make money out of stocks & shares! • The professionals do make money….but not the way you think.

35. What information to use? • More is not better in information. Studies have shown that increasing the information to expert decision makers does not improve their judgment. • Investment houses put a lot of emphasis on detailed analysis by its experts. They turn out thousands of thousands of reports. • Yet they lost a fortune for their clients in the bubble – which bubble – any bubble!! • In depth information does not mean in depth profits.

36. Information - 2 • Because the psychology of information is not understood by Investment Banks, investment experts put down their failure to lacking those extra facts. If only we had…. • Hence they overload themselves with information which increases the cost but not the effectiveness of their decision making.

37. Information - 3 • Simplicity or singleness of approach (i.e. understanding your strengths) is a very much underestimated factor of market success. • Multiplicity of factors, even though each has a justification, leads one to become lost in maze of contradictory implications…. • ….leading to nothing better than a snap judgment anyway.

38. Information - 4 • Under conditions of anxiety and stress, the market becomes a huge inkblot.. • …and people just see what they want to see. • Not only can experts analyse information incorrectly, they also tend to find false correlations. • The complexity of the market leads to an attempt to simplify and rationalise. They find false correlation and if they are rewarded by a positive result they come to believe that there is such a correlation in reality. • A chartist summed it up well – If I had not made money some of the time, I would have got market wisdom sooner. What does he mean?

39. Information - 5 • People can become very quickly overloaded as a configural reasoner and information processor. • Under conditions of information overload we no longer process information reliably. • Confidence rises as our input of information increases…but our decisions are not improved… • …in fact, if the stock market is anything to go by, they deteriorate!

40. The Capital Market - who needs it? • Just a lottery? • Destroys pensions and savings • Lurches from one crisis to another. • Is there another way of structuring things?

41. The Capital Markets-1 • The Capital Markets are not perfect – but the best we have got. • China a superb example of the power of the market. Is Deng Xiao Ping a saint? • Corporate Scandals a strength! – boom times and self correcting mechanism. • Closed or highly regulated systems have shown to be ineffective in dealing with these problems • Problems of the market are human problems not system problems

42. Capital Markets -2 • Function to Fund Innovation • Innovation improves living standards…. • …directly through new products and services • ….or indirectly through driving up productivity.

43. Capital markets -3 • Large, efficient, transparent markets….. • …enable investment in innovation …. • …lead to faster development than would otherwise be possible. • Efficient allocation of capital is the core of capitalism • People invest money for one reason – to get something back (that something may not be money …) • Does the Capital Market allocate labour resources efficiently?

44. Who should allocate the capital? • Government? • What problems arise? • Individuals? • What problems arise? • Group discussion.

45. Adam Smith • …in the pursuit of self interest the individual is led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it has no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

46. Why do I think that this course is the most important one you will do?

47. Why do I think that this course is the most important one you will do? • Because it will show you how to think about money in a way that improves your ability to get it and use it wisely for the benefit of yourself, your family and society as a whole.

48. An investment approach… • Superior results come from acquiring part ownership in progressive companies with the intent of profiting from the long range contributions to the growth of the economy, rather than trading stock certificates in the hope of outwitting thousands of others engaged in the same game (Guidelines to successful investing by Babson & Babson).

49. The trick is to …. • …consider oneself a part owner of the companies whose stocks have been carefully selected, to plan to retain such ownership as long as you are satisfied that they will progress at or above the rate of industry as a whole and to place your faith in the continuation of the country’s dynamic growth, decade to decade. • ..see also…the miracle of compounding!

50. So.. • ..invest in a given company NOT because you think the price is going up but because you have faith in the future of the products manufactured or services offered, the research done and the ability of the management of that company compared to others. • If one is thorough in this analysis one has a much better chance than 50:50 of making the correct selection.