Gathering Investment Information-Investment Managment And Portfolio-Lecture Notes, Study notes of Investment Management and Portfolio Theory

Download Gathering Investment Information-Investment Managment And Portfolio-Lecture Notes and more Study notes Investment Management and Portfolio Theory in PDF only on Docsity! y g ( ) Lesson # 19 GATHERING INVESTMENT INFORMATION Introduction: The business of choosing investments is an art rather than a science; there is no best way to do it, nor is there even a right or wrong way. Chapter seven and eight discussed the fundamental and the technical analysis school of though on stock selection. Chapter nine discussed market efficiency and why investor should be realistic with their expectations for the outcome of the investment research. Regardless of the stand investors taken on the matter of predicting the future, they need to organize their research efforts efficiently. This chapter provides a summary of some of the most popular reference material. Before using it though an investor needs a game plan. RESEARCH PHILOSPHY: Someone once said that it is hand to accomplish your goals until you know what it is you want to accomplish. This motto is a good one for the investment analyst to follow. The conduct of investment research should be a part of a boarder activity. As a preamble to the process of gathering information, an investor should ask two questions. 1. What kind of information do I want? 2. Why should this information be useful to me? Keeping these thoughts in mind will contribute to a more discipline and logical approach to investment research. Before conducting any research, formally decide what kind of information will be useful. Know Thyself: Most people have internal bases or preconceptions that are generally difficult to overcome. Perhaps some people are not even interested in trying to overcome all of them. Knowing their own attitudes towards various issues can be a big help in allowing investors to make productive use of their research time. 1. Fundamental Analysis: An investor needs to consider the following question: Are you a fundamental analyst at heart? Do you believe the financial statements provide useful information and that the marketplace focuses on them in determining investment values? If so, an investor will want to investigate these accounting records. The more someone explores and learn about accounting records, the more that person can learn from them. As shown previously, a firm can have rising net income at the same time its cash follow from operations is falling. The informed fundamental analyst knows that facts and will generally not be content with summary information of the type presented in some of the research sources described in this chapter. Anyone can do a cursory job of reviewing the numbers; the experts are going to work at it a lot harder than the hobbyist. docsity.com y g ( ) 2. Technical Analysis: A plethora of academic research exists showing the title relationship between some people technical indicators and subsequent stock market performance. Despite this discrepancy, many efficient market advocates are unwilling to dismiss technical analyst techniques; they routinely incorporate technical tools such as a chart into their decisions-making process. If some people truly believe technical analysis is of no value as the efficient market hypothesis indicates why would they read technical comments in investment advisory services or look at charts? There is nothing wrong, with considering a particular type of information. Investors act illogically, however, when they say something is worthless but still spend time studying it. Looking charts is not a crime; there is no need to study them in the dark of night when no one is around. To prove a thing is not enough; you must convince someone to accept it. 3. The Experts’ Approach: Some people would do well to realize that their investment decision are largely made on the basis of what someone else says and are seldom the result of their own research. Much of the research emanating from brokerage houses and investment advisory services is quite good. Investors should consider it carefully and give it substantial weight in security selection. Screening: Understanding personal attitudes toward the investment selection process is helpful in constructing a useful sector of the security universe. Screening is the term used to describe the process of sorting though the list of potential investments. The use of some type of screen is almost always necessary in security selection, because too many different alternatives make through investigation of them all impossible, even with the aid of a computer. Not only are thousands of potential investment listed on the New York NASDAQ Exchanges, thousands more are traded in the over-the-counter market. An investor who spent five minutes looking at each of 500 possible picks would need 2,500 minutes (a 40 hour work week) to check out this sample. The reminder of this chapter will look at some of the most important sources of information to both the individual investor and to the security analyst. Screening is the process of sorting through the list of potential investments. RESOURCES AT THE LIBRARY: Newcomers to the business reference section of the library quickly discover that two names dominate much of the stock market reference material on the shelves: Standard & Poor’s and Moody’s. These two companies are widely respected and, to a large extent, duplicate each other’s services. Many people eventually develop a preference for one company’s material over the other, becoming either an “S&P person” or a “Moody’s person”. Both companies provide excellent material. docsity.com y g ( ) Moody’s is a well-known statistical service that was recently acquired by Mergent Inc. These publications are likely to be known by both names for a number of years. 1. Manuals: While investors can satisfy most quickly information needs whit the stock reports, the stock guide on the Bond guide, on occasions they cannot find what they need in these sources. Moody’s manuals are a good place to turn next. This publication contains several sets of volumes: one each on industrial firms, municipals and governments, over-the-counter industrial, public utilities, transportation issues banking and finance, and international firms. An especially common problem is when an investor seeks information about a company that does not have publicity traded stock because the firm is subsidiary of another company or because the firm is privately held. The blue pages section in the Moody’s Manuals book contains a cross reference of subsidiaries. Look up Taco Bell for instance, and you will find that this firm is a subsidiary of Pepsi Co. Moody’s Manual also contain detailed news reports about a firm, more detailed financial statements, another relevant information that is not included in the S&P stock report because of space limitations. This information source is a heavy book, expensive to acquire, and not conveniently taken far from its shelf. Most quick information needs can be satisfied with the S&P Stock Report, Stock Guide, or Bond Guide. 2. Dividend Record: When it is necessary to investigate the recent dividend history of a company (payment dates, ex-dividend dates, etc.), Mergent Dividend Record is one of the most convenient place to get this information quickly. The reference room in most public libraries carries this weekly service. 3. Bond Record: Mergent Bond Record is a comprehensive document on virtually all aspects of debt securities. It provides the Moody’s bond rating, interest payment dates, sinking fund provisions, call dates, the historical high and low price of the bond, and the bond’s yield to maturity. It also contains a listing of municipal securities by state. 4. Handbook of Common Stock: Moody’s handbook of common stock is much like the S&P stock market encyclopedia. It is broader, though, covering about 950 stocks “with high investor interest”, according to the introduction. The stock report is a single page front and back, while the write up in the handbook is a single page that comes out quarterly. COMPANY INFORMATION: Numerous publications are required for publicly traded firms. Because the financial statements are audited, investors can generally place substantial reliance upon them. Company publications are usually free sources to anyone who requests them. Annual Reports: docsity.com y g ( ) Every publicly traded company issues an annual report. An annual report is a useful publication containing a statement from corporate management about results from the previous year and about prospects for the future. Financial statements appear here too. Readers will also find information about most of the firm’s principal activities including its subsidiaries. One of the first items in the annual report is the president’s letter to the shareholders. This document usually runs one page or it can run much longer and be annotated with graphs and tables. One of the traditional shareholder rights is the right to vote on matter of interest to the corporation. Whenever a vote is to be held, shareholders have the option of voting in person at a company meeting or voting by proxy (the choice made by most investors). Accompanying the announcement of a forthcoming vote is the proxy statement which outlines the matter to be decided and management’s position on them. In recent years an increasing number of shareholders proposals have been included in the proxy statement. Any shareholder has the right to arrange for a question to be included in the proxy statement. Shareholder initiatives usually fail but often make for the most interesting reading in the proxy statement. Many annual reports can be ordered by calling a toll-free number listed in the WSJ. SEC Filings: The Securities and Exchange Commission requires certain technical filing that may also be helpful to investors and analysts. 1. 10-K Report: The 10-K report is the Securities and Exchange Commission equivalent of the annual report. It contains more detailed financial information here than in the annual report. A shareholder is entitled to receive a copy of the 10-K report at no charge. Some firms will provide them to anyone who asks whether they are a shareholder or not. A full service brokerage firm will usually provide their customers any 10-K they request at little or no charge. 2. 10-Q Report: The 10-Q report is the quarterly equivalent of the 10-K report. It contains much less information than the 10-K but has the advantage of being the most current performance figures. Shareholders may receive these reports upon request. 3. Schedule 14A: Schedule 14A is the firm’s proxy statement for shareholders. It can be of interest to potential investors for two reasons. First it lists the company’s board of director’s and tells you something about them. Many investors find an impressive accomplished board of directors a reassurance that management’s decisions will be wise and not half cocked. The second piece of potentially useful information is the stock holdings of the corporate officers and directors. When these people have a substantial ownership interest in the firm stock. It docsity.com y g ( ) seems they would be less likely to put shareholders wealth in jeopardy by ill-conceived or un-usually risky ventures. 4. Form 144: Form 144 is another SEC document that investors often review. A corporate insider who intends to sell some of their personal share must file this “intent to sell” document. While insiders frequently sell to raise cash like anyone else it can be thought provoking if a number of insiders are reducing their holdings in their firm’s stock. The Prospectus: Corporations often issue new debt securities sell more stock acquire another firm or spin off a subsidiary. Actions of this sort usually require complete disclosure of the terms of the transaction and often shareholder approval. The prospectus is the document that outline the terms of the intended transaction. Sometimes the final details of a transaction are not known in time for the prospectus mailing. A preliminary prospectus is called a red herring because of its traditional red lettering around the front cover. Any investor considering the purchase of a newly issued security particularly from a firm with no other publicly traded securities should find the prospectus crucial. For one thing little else is likely to be available for study beyond news releases or stories in the financial press. The prospectus should provide a complete outline of the firm’s plans for the capital and a projection of future operating results an investor’s own analysis will help in deciding whether the projections are reasonable and if their present value is sufficient to justify the offering price. The prospectus tends to be written in a conservative fashion. Companies try to cover every risk in this document because our litigious society seems anxious to blame someone else when things go wrong. Companies are sometimes forces to reimburse someone’s investment losses because of “undisclosed risks” in the prospectus. INVESTMENT LETTERS: Besides company provided information and library reference material investors often consider publications that make investment recommendations or forecasts. These other publications generally fall into two categories. One category includes services that offer specific investment recommendations such as “buy, sell or hold”. Another category is more general although recommended investor behavior may still be suggested. Advisory Letters: 1. Value Line: One of the best known subscription services is the Value Line Investment Survey. This week publication follows about 1700 common stocks and rates each of them in two categories timelines and safety. The expanded version covers over 6000 stocks. The timelines ranking refers to precisely what you would expect the advisability of buying this stock now. The safety ranking refers to the confidence the Value Line analysis has in their forecast about the firm. docsity.com y g ( ) academic journals are inaccessible to the average investor; the FAJ is an exception and well worth its subscription price. It is a publication of the Association for Investment Management and Research and is well know to those involved with the Charted Financial Analyst program. International Investor is an expensive publication; current regular rates are $ 405 per year. This magazine is for seasoned money managers; its articles are not tutorial in nature. Rather, they deal with strategic investment issue, with the legal and regularity framework, and with complex institutional issues. Still, anyone interested in the capital market is likely to find something useful and interesting in virtually every issue. 7. Television: Louis Rukeyser and Frank Capiello, popular names in the investment community host a popular weekly television show called “Wall Street Week”. A public television production, it is 30 minutes of market analysis highlighted by an interview of prominent Wall Street Figure each week, complete with probing questions by the hosts. During the business day many county club snack bars, airport, kiosks and office waiting rooms tune to the Financial News Network. The exchange tickertape runs continuously across the bottom of the screen while commentators give updates on what is going on in the world markets. COMPUTER SERVICES: Computer services fall into groups. One group is primarily used for securities screening and is a static database with periodic updates. This type usually augments the result of the other security selection activities. Screening Services: 1. Value Line Investment Survey Windows: Both the basic and the expended versions of Value Line are available online with weekly updates. Users can screen the entire Value Line database by dozen variables and rapidly reduce the security universe to a workable number. Value Line provides a number of subjects of the database, including such handy groupings as timely stocks in timely industries and stock moving up in rank. The program also permits the preparation of statistical summaries and detailed tabular reports. This is a very handy tool by many investors and investment advisors. 2. Compustat: Academic researchers know the S&P Compustat tapes. There are both mainframe computer and microcomputer versions of this information source. Both types enable the screening of thousands of stocks for specific financial statement information. The screen can include anything from familiar statistics. Like the current ration or retained earnings, to less frequently used values such as unfunded pension liabilities. Accounting researcher use this service in conjunction with lest of the market’s response to accounting changes. At least 150 categories of information are available on more than 6,500 firms in the compustat database. 3. CRSP Tapes: docsity.com y g ( ) The University of Chicago’s Center for Research in Security Prices produces a set of computer tapes commonly known as the CRSP tapes, pronounced “crisp”. This data set contains data on all New York Stock Exchange stocks from 1926 to the present. Much of the academic research produced at leading research universities throughout the world relies on CRSP data. 4. Expended Academic Index: An increasing number of public libraries are establishing connections to large database. One particularly useful database for the investor is the Expended Academic Index. This index includes details on the articles in more than 2,500 journals. The user can screen through the entire database by title, author, subject, or key word For example, a recent search of the index for the subject “earning” produced 255 entries, ranging from the New York Times, PC Week, and a number of academic journals. Author search on “price earning ration analysis” produced 65 articles with these words in the title. 5. Disclosure: Disclosure, Inc. produces a CD-ROM disk containing a wealth of company information. For each covered firm, investor can obtain a company profile, its line of business, the exchange on which its stock trades, its five year growth in sales and net income, and many financial statement details. Investor can also search the database using their own criteria. For instance, in a search for electric utilities in the state of the New York, the system will find this information in a matter of seconds. Disclosure is particularly helpful when looking for other terms comparable to a particular firm of interest. Online Computer Services: 1. CompuServe, Yahoo and American Online: These services provide ready access to historical price database and to analyst’s estimates. Via CompuServe or Yahoo! For instance a subscriber can access historical price information on virtually any listed security and on most NASDAQ issues. The L/B/E/S database is also accessible to determine consensus growth rates or review company profile through S&P Online. These services provide price quotations that are usually delayed 15 or 20 minutes rather than real time prices. Delayed quotations are much cheaper to provide. SEMINARS: Brokerage Firms: In most communities, the local brokerage firms hold periodic educational seminars for their current and prospective customers. These seminars often feature one of their research stars from New York or one of the firm’s mutual fund managers. Even though such seminars always involve a bit of a sales pitch, they invariably are enjoyable and informative. Bank Trust Department: Band trust departments do the same thing as the brokerage firms. Evening seminars are an attractive way to motivate existing clients and to persuade other in the community to take docsity.com y g ( ) advantage of their bank’s trust department. The trust department has investment people in addition to legal people, and these seminars often include a blend of both investment issues and estate planning topics. Employee Relation Programs: Because financial security is associated with good employee moral, some firms make it a practice of providing investment information as part of the overall corporate benefits package. These information sessions may be during the day or evening, but are free benefit to the employee. Exchange Seminars: The securities exchanges also get into the act by offering, educational sessions throughout the year. Sometime the exchanges charge a free for these events; sometimes they are free. These sessions can range from basic information on how the stock market works to technical discussions on risk management at financial institutions. Summary: A research philosophy is helpful in marketing the best use of research time. Many analysis use a combination of fundamental, technical and wise man techniques. Regardless of the approach taken, analyst/investors need to decide upon what type of information they want to gather and to be clear why this information should be useful. Stock screening is necessary in order to reduce the huge number of possible investments to smaller number that can be investigated carefully. Standard & Poor’s and Moody’s are the two big names in investment sources found in libraries. These two services largely duplicate each other. Companies prepare annual reports to their shareholders and report to the SEC, all of which can be useful in forming investment decisions. Some companies make their annual reports available to WSJ readers via a toll-free call. Many investment letters that offer investment advice are available. The Value Line Investment Survey is among the best known of these. Many people are especially interested in Value Line’s timeliness and safety ranking of a stock. Earnings forecasts are the meat of the I/E/B/S and Zack’s services. A great many other sources of information are available through magazines, newspapers, or television shows. Computer services fall into two main groups: static services for security screening and dynamic, online services providing current information. Yahoo!, Disclosure, the Expanded Academic Index, and the Value Line Investment Survey for Windows are particularly popular. docsity.com