Overview of Investment Universe

Frank Paiano – “Paco”

Southwestern Community College

www.wonderprofessor.com

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BUS-121, Principles of Money Management

BUS-123, Introduction to Investments

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First – A Perspective

“It is a gloomy moment in history. Never has the future seemed so dark and incalculable. The United States is beset with racial, industrial and commercial chaos, drifting we know not where. Of our troubles, no one can see the end.”

Harper’s Magazine, 1847

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What is an Investment?

• An investment is any vehicle into which resources can be placed with the expectation that it will generate positive income, or that its value will be preserved or increased, or both
• “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” – Benjamin Graham
• Investment returns (a.k.a. investment rewards)
• Income – interest, dividends, rent
• aka cash flows
• Increased value / Decreased value
• aka capital gains, capital appreciation (Yippee! Hurray!)
• aka capital losses (Boo! Hiss!)

Investments come in all shapes, flavors and sizes

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Major Investment Alternatives

• Stocks Dividends & Capital Gains – 8%-10% – long-term
• Bonds Interest & Principal – 3%-6% – long/intermediate
• “Cash” Interest & Principal – 1%-4% – short-term
• aka Short-term investments – guaranteed, safety of principal
• Annuities Fixed 1%-4%, Variable 2%-6% – BOHICA!
• Real Estate Rent & Capital Gains – 7%-8%? – long-term
• Other Investment Alternatives…
• …That I hope you will avoid …
• Unless you know exactly what you are doing or are willing to lose a good chunk of your money or, preferably, both
• Derivatives (options, futures, etc.), hard assets, precious metals, art & collectibles, etc. and now cryptocurrencies!

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Growth of $1 Investment

1926 – 2023

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Growth of $1 Investment

1801 – 2023

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Rolling 10-Year Period Returns

Source: The unmanaged Dow Jones Industrial Average, based on average annual compound returns over 10-year periods.

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“So What Is Your Choice?”

• If the goal is long-term (example: retirement), then my choice is high-quality stocks
• Although some people prefer bonds because they are less risky than stocks (or a combination of both)
• If the goal is intermediate-term, then bonds make sense
• If the goal is short-term, you have no choice but to use a guaranteed short-term “cash” investment such as a savings account
• The “Others” never make sense except for a small percentage of the population

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“So I am buying stocks and bonds. Great! How do I get started?”

• Well, actually, you don’t…
• Buy the stocks and bonds, that is…
• For the vast majority of people, the best financial investments are mutual funds that buy the stocks and bonds for them
• Professional money management
• Diversification

“But you got me all excited about buying stocks and bonds all by myself! Besides, in their commercials on TV, Robinhood shows everyday, hard-working Americans just like me happily and profitably buying and selling stocks all the time.”

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Let me ask you a few questions…

• Do you have the discipline, courage and brains to buy when everyone else is selling and sell when everyone else is buying?
• Do you have a strong background in finance, business, marketing, economics, politics and history?
• Are you a part of a global research team stationed all around the world?
• Do you have the time and resources to visit in person the companies you intend to invest in?
• Plus their customers, competitors and suppliers?
• Do you have enough money to buy at least 20 or more stocks representing various sectors of the economy?
• Most importantly, do you have a knack or intuition for recognizing unrecognized value?

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Your results?

• If the answer to two or more of the previous questions is, “No” (especially the last two: money for 20 or more stocks & an intuitive eye for value)
• Stay away from individual stocks!
• Bonds are also difficult since bond traders usually deal in tens of thousands of dollars per trade
• (The exceptions are government bonds bought directly from www.treasurydirect.gov)
• Mutual Funds are your Best Bet
• And if it means anything to you, virtually all of my family’s financial investments (and my clients’) are in mutual funds (>99%)
• I certainly can’t answer “Yes” to all those questions

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Mutual Funds �(aka Investment Company)

STOCKS BONDS “CASH”

Professional Money Management

Diversification

Stock mutual funds

Bond mutual funds

Money market mutual funds

Balanced mutual funds

a “mutual” fund

(investment company)

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“So, How Do I Pick a Mutual Fund?”

• Pick a Mutual Fund that…
• Invests in high-quality stocks or bonds
• Is well-diversified across several industries and sectors of the economy and countries of the world
• Has a long-term perspective and a manager or (better yet) a management team with many years of experience
• Avoid companies that “shuffle” their managers every few years (which used to be almost all!)
• Has been around for decades and performed consistently well in both good and bad markets

We spend two weeks on mutual funds in BUS-123.

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“How Do I Purchase a Mutual Fund?”

• Normally, a little bit at a time
• Virtually all mutual funds will allow you to start an automatic investment plan with as little as $25 to $50 per month
• Either through your employer (401k, 403b, etc.)
• Or from your checking or savings accounts (Traditional IRA, Roth IRA)
• The ones that won’t are specialized funds that you normally don’t want to deal with anyway
• Minimum purchases of $1,000 to $25,000 or more

Investing a fixed amount ($50, $100, etc.) periodically is called “dollar cost averaging.”

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Dollar Cost Averaging

• A system of buying an investment at regular intervals with a fixed dollar amount
• $50 per month, $100 per month, etc.
• With Dollar Cost Averaging, there is always “Good News”
• “The market is up! Good News!”
• Your account is worth more
• “The market is down! Good News!”
• Next month, you will get more shares at a lower price when the $50 or $100 comes out of your paycheck or checking account

Yippee!

Huh?!

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“But Now It All Sounds So Boring…”

• In the investment world, Boring is Good!
• After you have built a solid foundation of high-quality stock or bond investments through mutual funds, then you can “play the market”
• I used to call it my “Vega$ Fund”
• Take no more than 5% to 10% of your financial assets and choose your own stocks
• Be prepared for “volatility”
• “Volatility” is the investment world’s euphemism for large losses – Buy a stock for $12, sell it for 30¢
• I kept my “Vega$ Fund” to no more than 1% of our total portfolio, by the way

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Investments: What are ___?

Investment companies that pool investors' money and invest in a diversified portfolio of securities. Investors get diversification and professional money management.

1. short-term securities (aka “cash”)
2. stocks
3. bonds
4. mutual funds

The correct answer is (D). Investment company is the legal term; mutual fund is the popular term.

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Investments: What are ___?

Represent ownership in a corporation. Investors receive dividends and capital gains (or capital losses).

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1. real estate
2. stocks
3. bonds
4. short-term securities (aka “cash”)

The correct answer is (B). Stock investors are part-owners of corporations.

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Investments: What are ___?

Fixed-income securities that represent loans to corporations, municipalities (state & local governments & agencies), and the Federal government. Investors receive interest and a promise to repay the loan.

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1. real estate
2. stocks
3. bonds
4. short-term securities (aka “cash”)

The correct answer is (C). Bonds are “fixed-income” investments.

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Investments: What are ___?

Investments with very little risk, and correspondingly, very little return. They are usually guaranteed or pretty darned close. There is a huge opportunity cost if you leave your money here for the long-term.

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1. real estate
2. stocks
3. bonds
4. short-term securities (aka “cash”)

The correct answer is (D). Low risk, low return.

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What are Reasonable Expectations?

What are reasonable expectations of returns from the following investments?

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1. stocks
2. bonds
3. short-term securities
4. real estate
5. mutual funds
6. the “others”

8% - 10%

3% - 6%

1% - 4%

?

-?

7% - 8%

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Hope For Your Future

As of December 31, 2023

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Lastly – A Perspective

“It is a fortunate moment in history. Never has the future seemed so bright and promising. The United States is the most racially diverse, industrially strong and commercially prosperous nation in the history of the world. Of our continued success, no one can see the end.”

Me, 2024

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Thank You!

If the world of investments interests you, please consider taking BUS-123, Introduction to Investments. With that class (and maybe one or two others including BUS-121 and BUS-290), you would be ready for an internship at a financial services company.

www.wonderprofessor.com

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