Understanding Investments

219 Pages·2012·2.705 MB·English

by  Connel Fullenkamp

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Professor Connel Fullenkamp
Duke University
Professor Connel Fullenkamp is Professor of the Practice
and Director of Undergraduate Studies in the Department
of Economics at Duke University. His many scholarly awards
include a National Science Foundation Graduate Research
Fellowship for his studies at Harvard University and Duke
University’s Alumni Distinguished Undergraduate Teaching
Award. In addition to his academic work, Professor Fullenkamp
is a sought-after consultant who works with the International
Monetary Fund to train central bankers and other government
officials from all over the world.
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Course No. 5724 © 2012 The Teaching Company. PB5724A k
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The Teaching Company.
Connel Fullenkamp, Ph.D.
Professor of the Practice,
Department of Economics
Duke University
P
rofessor Connel Fullenkamp is Professor of
the Practice and Director of Undergraduate
Studies in the Department of Economics at
Duke University. He teaches fi nancial economics
courses, such as corporate fi nance, as well as core
courses, such as economic principles. In addition
to teaching, he serves as a consultant for the Duke Center for International
Development. Prior to joining the Duke faculty in 1999, Professor
Fullenkamp was a faculty member in the Department of Finance within the
Mendoza College of Business at the University of Notre Dame.
Originally from Sioux Falls, South Dakota, Professor Fullenkamp earned
his undergraduate degree in Economics from Michigan State University. In
addition to receiving the Harry S. Truman Scholarship, he was named one of
the university’s Alumni Distinguished Scholars. He earned his master’s and
doctorate degrees in Economics from Harvard University, where he was also
awarded a National Science Foundation Graduate Research Fellowship.
Professor Fullenkamp’s areas of interest include fi nancial market
development and regulation, economic policy, and immigrant remittances.
His work has appeared in a number of prestigious academic journals,
including the Review of Economic Dynamics, The Cato Journal, and the
Journal of Banking and Finance. He also does consulting work for the IMF
Institute at the International Monetary Fund, training government offi cials
around the world. He is a member of the IMF Institute’s fi nance team, whose
purpose is to train central bankers and other offi cials in fi nancial market
regulation, focusing on derivatives and other new fi nancial instruments.
In recognition of his teaching excellence, Professor Fullenkamp has
received Duke University’s Alumni Distinguished Undergraduate Teaching
Award as well as the University of Notre Dame’s Mendoza College of
i
Business Outstanding Teacher Award. Along with Sunil Sharma, Professor
Fullenkamp won the third annual ICFR–Financial Times Research Prize for
their paper on international fi nancial regulation. ■
ii
Table of Contents
INTRODUCTION
Professor Biography ............................................................................i
Course Scope .....................................................................................1
LECTURE GUIDES
LECTURE 1
How to Stop Worrying and Start Investing ..........................................4
LECTURE 2
How Investors Make Money .............................................................13
LECTURE 3
Starting with Stocks ..........................................................................20
LECTURE 4
The Basics of Bonds.........................................................................28
LECTURE 5
Introduction to Mutual Funds ............................................................36
LECTURE 6
What Are Exchange-Traded Funds? ................................................44
LECTURE 7
Financial Statement Analysis............................................................52
LECTURE 8
P/E Ratios and the Method of Comparables ....................................60
LECTURE 9
Fundamentals-Based Analysis of Stocks .........................................67
iii
Table of Contents
LECTURE 10
Start-Up Companies and IPOs .........................................................74
LECTURE 11
Why Should You Care about Dividends?..........................................81
LECTURE 12
Using Leverage ................................................................................89
LECTURE 13
Choosing Bonds ...............................................................................96
LECTURE 14
Bond School ...................................................................................104
LECTURE 15
Picking Mutual Funds .....................................................................112
LECTURE 16
Investing in Foreign Assets.............................................................120
LECTURE 17
Options Are for Everyone ...............................................................128
LECTURE 18
Real Estate and Commodities ........................................................136
LECTURE 19
Cycles and Market Timing ..............................................................144
LECTURE 20
Deciding When to Sell ....................................................................152
LECTURE 21
Risk, Return, and Diversifi cation ....................................................160
LECTURE 22
Time Value of Money ......................................................................168
iv
Table of Contents
LECTURE 23
Financial Planning ..........................................................................175
LECTURE 24
Taking Charge of Your Investments ................................................184
SUPPLEMENTAL MATERIAL
Glossary .........................................................................................192
Bibliography ....................................................................................204
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vi
Understanding Investments
Scope:
J
ust about everyone can use some help when it comes to investing. There
are thousands of different investments to choose from—with more
appearing every day. The language of investing is full of technical terms
and jargon that make it diffi cult to get straight answers to even the most
basic questions. In addition, the fi nancial markets often behave in ways that
seem to defy common sense. Because of these reasons, it’s not surprising
that many people fi nd the prospect of investing their hard-earned savings
mysterious and intimidating.
This set of 24 lectures takes the mystery out of investing by giving simple
and clear explanations of investments and the process of investing. You’ll
learn practical lessons about how to choose the best investments for your
portfolio and how to plan for your fi nancial goals. As you learn about
investments, you’ll also learn some of the most important lessons about how
fi nancial markets work. This course will help you make sense of the fi nancial
headlines so that you can make good investment decisions—or simply be
better informed about what’s happening in the fi nancial markets.
In the fi rst lecture, you’ll learn about the important role that investing plays
in the economy, and you’ll encounter the main threats to investing success
that keep many people from making the most of their investing opportunities.
You’ll also learn that there are sensible and effective ways to mitigate the
main risks to your investments—even when one of the biggest threats to
success is human nature.
The second lecture complements the fi rst by asking one of the most important
questions in all of investing: How do investors make money? In this lecture,
you’ll learn about the effi cient markets hypothesis and its claim that it’s
impossible to beat the market. You’ll learn why many believe that it is possible
to earn market-beating returns, and you’ll explore what it takes in order to
achieve this. You’ll also learn how to tailor your investing strategy, depending
on whether you wish to match the market return—or try to do better.
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Equipped with a better understanding of what you can achieve with
investing, you will move on to learning about individual investments and
investing strategies. The next set of lectures introduces the 4 most important
investments that every individual investor should consider: stocks, bonds,
mutual funds, and exchange-traded funds (ETFs). In these lectures, you will
learn the basic characteristics of these instruments, how to invest in them,
and why they deserve a place in your portfolio. After this introduction, you
will take an in-depth look at how to choose the right stocks, bonds, mutual
funds, and ETFs for you. You’ll learn the main techniques—such as fi nancial
statement analysis and the method of comparables—that professional
investors use to choose investments for their portfolios.
You won’t just learn about the basic investments, however. Several additional
lectures will introduce you to other opportunities that you’ll want to consider.
You’ll learn why you should invest abroad, and you’ll learn the safest ways
to do so. Additionally, you’ll learn several ways to invest in real estate
without becoming a landlord, and you’ll be enticed to consider investing in
commodities like gold and oil. You’ll even learn about derivatives and how
call options can be used in surprisingly safe ways to increase the returns on
your portfolio.
This course also introduces you to the most important investing strategies
that all investors should understand, and it explains why some of these
strategies should be avoided. For example, you’ll learn how to use
leverage and market-timing techniques, but you’ll also learn why they are
dangerous temptations best left to the professionals. You’ll also learn why
diversifying your portfolio is critical, and you’ll discover how to make sure
your investments are well diversifi ed. Furthermore, you’ll learn that selling
off your investments can be diffi cult, but it’s another essential skill that all
investors should master.
In the fi nal 3 lectures of the course, all the lectures will come together to
focus on fi nancial planning and taking charge of your investment portfolio.
You’ll learn the basics of time value of money, one of the most important
tools in fi nance. Then, you’ll put these ideas to work by learning how to
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p do basic fi nancial planning, focusing on saving for retirement. You’ll learn
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