Richard J. Bocchinfuso

Discussion Post

Given your risk tolerance, and your need to diversify, explain how the Selected Realized Returns (1926–2013) page 269 and the Effects of Portfolio Risk for Average Stocks will impact your future investment decisions and why

I don’t consider myself risk adverse, but I do consider myself a prudent long-term investor who likes to balance principle protection with reasonable and consistent gains.

Having been in the technology space for the last 25+ years and lived through the dot.com bomb I learned my lessons in the late 1990s and early 2000s regarding the difference between a high-risk investment and a foolish investment. The days of reading Red Herring and making investments based on pure market speculation with the expectation of a combinatorial explosion are long gone, at least for me. Today I am a long investor, who follows a very Warren Buffet’esqe investment strategy.

1. I invest for the long haul.
2. I keep speculation away and focus on proven business.
3. I dollar-cost average into the market.

I’ve been investing using DRIP plans for 20+ years, buying stock directly from companies and avoiding brokerage fees. The days of having to buy and read
The Moneypaper are behind us; now long investors can use services like Capital One’s Sharebuilder to dollar-cost average into the market.

I am a big fan of SPDR (spider) ETFs (exchange-traded funds) like SPY and IYY. SPY and IYY are SPDR ETFs that track the S&P 500 and DJIA. Buying equities like SPY and IYY allows investors to diversify by buying a sock that is a fund made up of other stocks.

Outside of the above rules, I have a simple investment strategy, never invest money in the market that you need back in the short-term. The market is speculatory by nature, so I always keep the perspective that I am gambling. With this said there is also a lot I/you can do to swing the odds in my/our favor. While investing is a different type of gambling than going to Vegas, it’s important never to lose sight of the fact that the bottom is still $0 (assuming your not trading on margin in which case the bottom may be below $0). When the market became depressed in 2008, my strategy was to double down. Why?

1. I didn’t have money in the stock market that I needed; thus I didn’t need to accept my loses and take my cash.
2. Increasing my positions in what were solid business hit by the depressed economy allowed me to lower my cost basis. This dramatically decreased my time to recovery.

Here is an example:

Desc                            Stock          Position (# of shares)    Avg cost / share       Current cost / share   Cost Basis         Value                  Proft / Loss
Starting Position           XYZ            100                                   $100.00                      $50.00                          $10,000.00          $5,000.00             -$5,000.00
Buy 1                            XYZ            100                                   $50.00                        $50.00                          $5,000.00            $5,000.00                     $0.00
Buy 2                            XYZ            100                                   $51.00                        $60.00                          $5,100.00            $6,000.00                 $900.00
Ending Position            XYZ            300                                   $67.00                        $62.00                          $20,100.00          $18,600.00           -$1,500.00

It’s essential to have a balanced portfolio, balancing small-company stocks which are more volatile (highest risk) but hold the potential for more significant gains with investments like U.S. Treasury Bills which are low risk but deliver much lower potential returns. Balancing returns and principal protection should be key criteria in determining portfolio distribution.

References

Brigham, Eugene F., and Joel F. Houston. Fundamentals of financial management. Boston, MA, Cengage Learning, 2016.

Frankel, Matthew. “3 Pieces of Warren Buffett Wisdom for an Expensive Stock Market.” The Motley Fool, The Motley Fool, 4 Sept. 2016, www.fool.com/investing/2016/09/04/3-pieces-of-warren-buffett-wisdom-for-an-expensive.aspx.

“Recent Articles.” DRIP Investing – Direct Investment Plans & Dividend Reinvestment DRIPs | Moneypaper, www.directinvesting.com/.

Assignment

[google-drive-embed url=”https://docs.google.com/spreadsheets/d/1FOFhw3r8cYohttnAtRrS3SCy5fF3QCkcA_m9pqVOVfo/preview?usp=drivesdk” title=”FIT – MGT 5002 – Wk 5 Assignment” icon=”https://drive-thirdparty.googleusercontent.com/16/type/application/vnd.google-apps.spreadsheet” width=”100%” height=”400″ style=”embed”]

Directions
Plot the current yield curve from the interest rates of U.S. Treasury securities as found in WSJ or IBD, or examine the chart WSJ or IBD provides. Do not send the curve, but do describe and define it (Normal or Inverted).

Instructions

1. Describe the trend of interest rates over the last several years.
2. Give me your best educated estimate of where interests are headed over the next year and justify your answer.
3. Determine the approximate percentage appreciation or depreciation of the NASDAQ Composite, Dow Jones Industrial Average, and the S&P 500 for the last 12 months and provide these figures.

Discussion Post

The current (12:43 PM EST 11/17/17) U.S 10 Year Treasury Note yield is 2.338%. With a 52-week yield range of 2.016% (low) to 2.641% (high).  The current U.S. Treasury yield curve is “normal” (upward-sloping) although when compared with the yield curve from a year go (2016) the slope has flattened.

Interest rates from 2008 to 2017 have risen incrementally after falling in the midst of the 2007 financial crisis.

• Dec 16, 2008 U.S, Prime Rate: 3.25%
• Dec 17, 2015 U.S, Prime Rate: 3.75%
• Dec 15, 2016 U.S, Prime Rate: 4.00%
• March 16, 2016 U.S, Prime Rate: 4.00%
• June 15, 2017 U.S, Prime Rate: 4.25%

The current U.S. Prime rate remains at 4.25. On Dec 13, 2017 the FOMC will meet again, it is likely that interest rates will slightly increase.

Long-term rates follow the 10-year Treasury yield. We have already established that the 10-year Treasury Yield is “normal” (upward-sloping) so I would expect that interest rates will also rise.

In addition, the October 2017 jobs report showed the addition of 261,000 jobs, indicating an expanding economy. When the economy is strong demand for Treasuries falls, as this occurs prices on U.S. Treasuries fall while yield increases along with interest rates.

[google-drive-embed url=”https://docs.google.com/spreadsheets/d/1G7zmcmRq4ELRFCJuabFJMTSjHZeOnb2HsFnf1j1gv1k/preview?usp=drivesdk” title=”DOW-NASDQ-S&P_Analysis” icon=”https://drive-thirdparty.googleusercontent.com/16/type/application/vnd.google-apps.spreadsheet” width=”100%” height=”200″ style=”embed”]

References

Amadeo, K. (n.d.). Where Were the 261,000 Jobs Added in October? Retrieved November 17, 2017, from https://www.thebalance.com/jobs-report-monthly-employment-growth-statistics-3305732

Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management. Boston, MA: Cengage Learning.

Kenny, T. (n.d.). See How Economic Growth Changes Affect Bonds? Retrieved November 17, 2017, from https://www.thebalance.com/bonds-and-the-economy-417070

Kenny, T. (n.d.). Learn Why Bond Prices and Yields Move in Opposite Directions. Retrieved November 17, 2017, from https://www.thebalance.com/why-do-bond-prices-and-yields-move-in-opposite-directions-417082

Prime Rate History. (n.d.). Retrieved November 17, 2017, from http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm

U.S. 10 Year Treasury Note. (n.d.). Retrieved November 17, 2017, from http://quotes.wsj.com/bond/BX/TMUBMUSD10Y

What is the Prime Rate. (n.d.) Retrieve November 17, 2017, from https://www.moneycafe.com/personal-finance/prime-rate/

WSJ Graphics. (n.d.). Retrieved November 17, 2017, from http://www.wsj.com/graphics/yield-curve-explainer/

Week 4 Exam (#2): 100%

Problems

4-1 DAYS SALES OUTSTANDING Baker Brothers has a DSO of 40 days, and its annual sales are $7,300,000. What is its accounts receivable balance? Assume that it uses a 365-day year.

4-2 DEBT TO CAPITAL RATIO Bartley Barstools has a market/book ratio equal to 1. Its stock price is $14 per share and it has 5 million shares outstanding. The firm’s total capital is $125 million and it finances with only debt and common equity. What is its debt-to-capital ratio?

4-3 DuPONT ANALYSIS Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its total assets turnover? What is its equity multiplier?

4-4 MARKET/BOOK RATIO Jaster Jets has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in common equity. It has 800 million shares of common stock outstanding, and its stock price is $32 per share. What is Jaster’s market/book ratio?

4-5 PRICE/EARNINGS RATIO A company has an EPS of $2.00, a book value per share of $20, and a market/book ratio of 1.2×. What is its P/E ratio?

4-6 DuPONT AND ROE A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it has total assets of $50 million. What is its ROE?

Assignment

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Description
Construct a personal retirement problem and solve it. The purpose of this exercise is to use the chapter’s concepts of future values, annuities, and compounding to your personal financial planning.

Instructions

• • Determine the amount of investment funds you currently have available in all personal investments and self-directed and vested retirement accounts
  • Then, determine how much you will be adding to your investments a year in the future
  • Next, decide at what age you plan to retire. Determine what annual investment return you expect to earn on your investments
  • Calculate the future value of your investments at retirement
  • Justify your return rate by explaining what you plan to invest in and its historic returns
  • After determining your nest egg at retirement, adjust the variables at least three times as a means of increasing the retirement account. For example, change the age you will retire, change the expected return rate, and change the amount you save annually. Try to adjust the variables in order that you can develop a retirement value that you are happy with

Guidelines

• Post your answer to this week’s discussion board
  • You can either use real numbers and base your discussion upon these real numbers, or if uncomfortable with providing personal info, use hypothetical numbers

Discussion Post

[google-drive-embed url=”https://docs.google.com/spreadsheets/d/1lEIlnBz1pDw0dB60FRDTgL9siA4Cl_xhzQEoUcomgVM/preview?usp=drivesdk” title=”FIT – MGT 5002 – Week 2 Discussion Post” icon=”https://drive-thirdparty.googleusercontent.com/16/type/application/vnd.google-apps.spreadsheet” width=”100%” height=”400″ style=”embed”]

Week 2 Exam (#1): 100%