Guide to Investing _______________________________________________________ Overview Interested in investing but haven’t the foggiest idea as to where to begin? If you’re like the average person, your understanding of the market is tenuous at best. And the technical “know-how” (including all that seemingly nebulous business/investor jargon) necessary to successfully select and follow a company, eludes and frustrates you only further. But you needn’t worry. The following provides the general procedure of steps required to get you on the road to success and financial security. And in time, alongside enthusiasm, investor prowess will naturally evolve. Note: There are three distinct markets in which one may choose to invest: stocks, bonds, & commodities. For the sake of simplicity and popularity, this Guide to Investing will focus on the stock market. Procedure 1. “Which company should I invest in?” 2. Getting information on companies 3. Understanding financial statements 1. “Which company should I invest in?” (the 5 i’s) a. Industry Page 1 Guide to Investing _______________________________________________________ In the world of investing, you’ll often hear, “Stay away from what you don’t understand.” Therefore, don’t get in over your head, pouring your time and money into a business whose inner workings are alien to you. The less you understand what drives a company and its competitors, the less you should be inclined to invest in it. Conversely, if your grasp of a business (its product & services, competition, profits, losses, prospects etc.) is fair and has room to develop, feel free to cheerfully commit yourself. So how might you avoid the common mistake of selecting a company through blind bias? Exploit the environment you’re already in! Bet on that! If you work in a local pharmacy, scour the myriad pharmaceutical companies (the majority of them in NJ), from Johnson & Johnson to Bristol Myers Squibb to Novartis to Colgate and the like. If you’re waiting tables in a restaurant, go online & get a hold of that restaurant’s financial statements (assuming they’re publicly traded) and those of their competitors. So how might you begin to invest? By considering your own industry! b. Interest It may very well be the case that the industry in which you work isn’t as inspiring as what you do off the job – your own private interests and pastimes. Peter Lynch, the renowned investment banker, is a strong believer in investing according to your enthusiasm of the company product. So if you’re an aviation aficionado, perhaps Boeing is the pick for you. With the coming of the first all-composite aircraft, Boeing stands to gain huge, so why shouldn’t you? Or if you’ve an embarrassing case of halitosis and find that those delectable Altoids mints truly do help to combat your not-so trifling ailment, you might consider Wrigley, the 105 yr. old confectionary company which recently bought Lifesavers and the Altoids candy lines. It’d be foolish to dismiss such an investment simply because of the underestimated perception of the product. Hey, it may be just chewing gum, but for every stick of gum sold, it’s a 50/50 chance they’re chewing Wrigley’s. That’s a fact. Invest in what interests you, and you’re that much more likely to be involved, and subsequently, successful. c. Insight Observe for yourself the overall health of the economy. What’s going on today? What are various industries up to? What’s the latest craze? What’s the buzz? For instance, Microsoft’s supposedly poised to deliver their latest operating system, Vista, at the start of next year. Sony intends to unveil their latest video game system, PS3, in the coming months. Celera Genomics is working to decode the human genome. Imagine the effects. Page 2 Guide to Investing _______________________________________________________ Learning to intuitively put two & two together and reap the rewards is quite the gift few possess. So just keep your eyes peeled, your ears open, and deduce the possibilities. d. Investigation Acquaint yourself with a financial daily, specifically its earnings page. Although some publications like the Wall Street Journal or the New York Times have weight to their names, a more preferable newspaper would be the Investor’s Business Daily (IBD). Why? The IBD offers more useful financial data and displays it in such a way that assists the reader in locating growth and income stocks while weeding out weaker ones. For example, the IBD’s earnings page divides itself into two groups, the “Ups” and the “Downs.” The former indicates positive earnings growth as compared to its previous year, and the latter indicates - you guessed it - negative earnings growth as compared to its previous year. Simply making it a habit to peruse the earnings page on a daily basis will turn up a number of qualified companies new to the market. e. Integrity Succinctly put, “Know thy company.” After doing all the research it is up to you, in the final analysis, to assess the integrity of the firm. At the core of all lucrative business is good management. Are you (the principal) willing to entrust your money to management (the agent)? 2. Getting information on companies a. Investor relation’s department A fine point at which to begin would be to call up the company itself and get in touch with the investor relations department. Ask them to send you an investor information packet. Included in the packet is the annual report, the 10-K, the 10-Q, all recent press releases, financial statements, and possibly analysts’ reports. Note: If the analysts’ reports are not available (they’re often reserved for clients alone) you may have to visit multex.com and pay for the reports. Page 3 Guide to Investing _______________________________________________________ b. SEC filings Every quarter (3 months) U.S. companies file a report with the SEC (Securities & Exchange Commission). As seen above, this is the 10-Q report. Furthermore, at the end of the business year comes the 10-K report, which is much more comprehensive in scope. These documents provide a break-down of the company, including such things as a description of operations, competition, internal compensation, and business risks. Often times, you can find these SEC filings on the company’s website or from the SEC at freeedgar.com c. Online The internet has revolutionized the business world, serving as a more efficient tool at a more becoming cost than the near-antiquated, traditional financial publications. Why pay more and get less? Nowadays, much of what you would normally do in person, can be accomplished with a few keystrokes over your computer. So visit the company website! Unless they’re living in the stone-age, they’ll be found online. 3. Making sense of financial statements Upon obtaining the information packet from either the investor relations department or online, you’ll want to review the financial statements within. A financial statement is a summary of all a business’s transactions that have taken place over a period of time. Essentially, it tells a story about a firm’s health and stability. For this reason, stockholders, bondholders, banks, the IRS, and naturally, the company itself, are all very much interested in the company’s financial statements. And so, you, as a potential investor, should be too. The three key financial statements are as follows: Income statement, Balance sheet, and Cash flow statement. Note: The financial statements can be found on the web at Yahoo.com. (See Figure 1 & 2) o In the upper left hand corner, click Finance o Type in the company’s ticker (its abbreviated textual symbol) o Press enter and scroll down to the bottom left o Beneath Financials are listed the three statements Warning: It is imperative that you not only compare the data in the financials to the firm’s previous years, but that you compare it to other firms within the same industry. Page 4 Guide to Investing _______________________________________________________ Click “Finance.” These are a company’s 3 financial statements! Figure 1 Figure 2 a. Income statement Page 5 Guide to Investing _______________________________________________________ This shows the firm’s net income after costs, operating expenses, and taxes are deducted. . Keep this following in mind when evaluating a company at the end of its fiscal year: The top shows revenue (the top line) & the bottom shows net income (the bottom line). Well managed companies grow BOTH their top line and their bottom line! The following shows the mathematical flow of the income statement: Revenue – Cost = Profits Profits – Op. Expenses = NI before taxes NI before Taxes –Taxes = Net Income Notice the growth of the top line (revenue) over past 3 years! Notice the growth of the bottom line (NI) over past 3 years! Figure 3 Page 6 Guide to Investing _______________________________________________________ b. Balance sheet This shows a firm’s financial condition on a specific date. It’s comprised of three parts: assets, liabilities, and owner’s equity. Assets = Liabilities + Owner’s Equity. Make sure the company’s assets exceed its liabilities! Otherwise they’re in debt! The total assets exceeds the total liabilities. Good things! To reiterate, the total liabilities fall short of the total assets. So they’re not in debt! Figure 4 Note: Assets are what the firm OWNS. Liabilities are what the firm OWES. And, therefore, Owner’s Equity is the NET WORTH of the firm. So by rearranging the above equation, you compute the net worth of the firm. c. Cash flow statements Page 7 Guide to Investing _______________________________________________________ Cash flow is the difference between cash coming in and cash going out of a business. Positive cash flow is good! Negative cash flow is bad! This reports cash receipts and disbursements related to a firm’s 3 major activities: operations, investments, and financing. Cash transactions associated with running the business Cash used in or provided by the firm’s investment activities Cash raised from the issuance of stocks and bonds or cash used to pay business expenses, debt, or dividends Figure 5 The following are some questions the Cash flow statement helps to answer: o How much cash did the business take in from operations (from buying & selling goods & services)? o How much cash, if any, was used to buy stocks, bonds, or other investments? o Were any investments sold that brought in cash? o How much cash did the company take in from issuing stock? Page 8
"investments for dummies"