Georgia Council on Economic Education

Georgia Council on Economic Education w w w . g c e e . o r g

Gary W. Tapp, Ph.D.gt454bb@hotmail.com

Investor EducationFinancial Fitness for Lifeand

Why Invest?You can earn income by receiving dividends.

Owning stock can supplement your job income.Rewards last a lifetime.Investing provides assets that grow over time.

Why Invest?Be a part owner of America’s economic growth.

Investing helps companies to grow and provide more jobs and income.Investing helps create new goods and services for consumers.

POWER OF COMPOUND INTERESTHuge Advantage From Starting Early (Saving $100/month at age 25, assumes 8% return/year vs. starting at age 35)

Source: Massena Education

Keys to Investment SuccessUse the Incredible Power of Compound Interest: (Be an investor, not a trader).

PLAN Ahead: Identify your goals and risk tolerance.UNDERSTAND the risk/return trade-off.DIVERSIFY your holdings: Rebalance your portfolio regularly.Participate in GLOBAL GROWTH.

Be DISCIPLINED! (Not emotional.)Don’t underestimate the power of the U.S. economy to regenerate itself!

IV. Intro to Markets: Basic Kinds of Investment Assets

Stocks (Equities)

Mutual Funds, index funds (one way to diversify)Exchange Traded Funds (ETFs: another way)Individual StocksBonds (Fixed Income)GovernmentCorporateHigh YieldCommodities

Mutual funds, ETFs

Real Estate

Direct Investment

ETFs, REITs

Cash

Not A Gamble: U.S. Stock Market History

Stock Prices Reflect Earnings and Dividend Growth

How the company makes money52-week price rangeProjected 3-5 year earnings growth rateForward P/E and P/E to growth rateDividend yield and when dividends are paid

Date and consensus estimate for next quarterly earnings reportChief competitors and their valuations on P/E and PEG. Research:

Before you buy an individual stock, know as many of these as you can:

Mutual funds: A portfolio of stocks (some include bonds) run by a manager who tries to beat the market (fee is about 1.0-1.5%). You get the end of day price. Only 25-30% of mutual funds beat the market average. Exchange Traded Funds (ETFs): a basket of stocks that replicates a market index (S&P 500, S&P 400 Midcap index, Russell 2000 Small cap index, etc.): Fees typically are 0.15%-0.50%. You can buy or sell during the trading day and get intra-day prices.

Two Ways to Diversify in Stocks

Projected Long-Term Returns and Risk (assuming 3% inflation)

Framework: We live in an interdependent world economyA doubling of world labor force has lowered the returns from low wage labor and boosted returns from knowledge-based jobs.

China and other developing countries need U.S. spending to keep their exports growing. With its dollars, China buys U.S. securities, which offer superior safety and comparable rates. U.S. borrows China’s surplus savings to help finance U.S. growth at rates lower than they would be without China

.Result: a symbiotic world economy, with a higher premium on education than ever before. Biggest risks are likely to come from this global linkage.

Emerging Countries Outpacing Developed Countries

Real GDP, percent change

Developing countries

High-income countries

One Way to Participate: Largest U.S. Companies Are Already Global (pct of employees abroad)

Coca-Cola: 81%United Technologies: 67%Alcoa: 65%Hewlett-Packard: 62%Johnson & Johnson: 60%

McDonald’s: 58%Procter & Gamble: 57%American Express: 56%IBM: 54%Citigroup: 53%3M: 52%Merck: 52%Exxon Mobil: 50%Intel: 50%

General Electric: 49%

US Industries with Most Foreign RevenuesElectronic equipment: 72%Energy equip/services: 69%

Personal products: 61%Computers & periph.: 55%Chemicals: 54% 71% of Fortune 100 CEO’s have Tobacco: 51% experience working overseas.Communic.Equip.: 51%Household Prods.: 50%

Leisure products: 47%Office electronics: 47%Auto components: 45%Industrial conglomerates: 44%Beverages: 43%Pharmaceuticals: 43%Machinery: 41%Healthcare equipment: 40%

A Global Economy: 47% of the Revenues of S&P 500 Companies Come from Overseas

Source: Factset, Baseline, U.S. News & World Report

Where Are We Now? Buy Low, Sell High?

Georgia Council on Economic Education w w w . g c e e . o r g

The Wall of Worry: Secular RisksGovernmental Disputes Could Threaten Financial System

Global Markets Linked More Than EverU.S. Current Account and Budget Deficits Increase Vulnerability to Shock from Foreign MarketsInternet + Increased Global Capacity Pressuring Profit MarginsSince 9/11/01, New Risk of Catastrophic EventsSince October ‘08, New Risk of Financial System Disruption

Seven Keys to Investment Success

Use the Incredible Power of Compound Interest: (Be an investor, not a trader).PLAN Ahead: identify your goals and risk tolerance.UNDERSTAND the risk/return trade-off.DIVERSIFY your holdings: Rebalance your portfolio regularly.

Participate in GLOBAL GROWTH.Be DISCIPLINED! (Not emotional.)Don’t underestimate the power of the U.S. economy to regenerate itself!

Georgia Council on Economic Education w w w . g c e e . o r g

Rules for Improving Your Financial Life

Get a good educationWork long, hard, and smartLearn money-management skillsLive below your meansBuy a home (you can afford)

Save early and often

Invest in common

stocks for the

long term

(diversify)

Gather information

before making

decisions

Get married and stay married

Georgia Council on Economic Education w w w . g c e e . o r g

Register at www.smgww.org

V.

Georgia Council on Economic Education w w w . g c e e . o r g

V. Stock Market Game: The Basics

You can: Buy Stocks, Mutual Funds, Exchange-Traded Funds, Bonds; You can short-sell Stocks.What is a stock? An ownership share, or shares of ownership, in a corporation.What is a bond? You lend the company money in return for its promise to pay you a set rate of interest for the life of the bond.

Georgia Council on Economic Education w w w . g c e e . o r g

Can You Buy Stock in

or

What is an ETF (Exchange-Traded Fund)?

A basket of stocks that tracks an index; you get a diversified portfolio.Examples: SPY: (S&P 500)XLE: S&P Energy SectorXLK: (S&P Technology Sector)EEM: (Emerging Markets Index)EWJ: Japan Index

FXI: China IndexEWZ: Brazil IndexGeorgia Council on Economic Education w w w . g c e e . o r g

Georgia Council on Economic Education w w w . g c e e . o r g

The Different Markets

New York Stock Exchange The oldest stock exchange in the United States, founded in 1792 and stocks are still traded on the floor. Traditionally for large corporations with large volumes of shares.

Georgia Council on Economic Education w w w . g c e e . o r g

NASDAQ An electronic marketplace enabling buyers and sellers to get together via computer to trade stocks. Traditionally high-tech firms that are very active. Created in 1971.

Georgia Council on Economic Education w w w . g c e e . o r g

American Stock Exchange (AMEX) Located in New York, handles about 10% of all securities exchange. Has mostly small-cap stocks, exchange-traded funds and derivatives.

Georgia Council on Economic Education w w w . g c e e . o r g

National Rules

$100,000 to Invest for 10 WeeksNYSE, AMEX, NASDAQMust Purchase Minimum of 10 SharesMinimum Share Price of $3Margin Line of Credit is $50,000So your buying power is $150,000. 4 pm Closing Price (not real-time)

Georgia Council on Economic Education w w w . g c e e . o r g

Georgia 3x3x3 Rules

Purchase a stock before end of third weekMust purchase at least three stocksMust hold three stocks for 3 weeksSUGGEST DOING THIS RIGHT AWAY!

Georgia Council on Economic Education w w w . g c e e . o r g

Game Transaction Fees

Game Transaction Costs:.75% Interest (annual rate) Earned on Unspent Cash1% Transaction Fee (all transactions)7% Interest Charged on Margin Loans>>>>>>>Hardest thing to do? <<<<<<<<

Get them to spend the $100,000!

Georgia Council on Economic Education w w w . g c e e . o r g

VI. How to Play: Buying, Selling, Selling Short

Buy ↑ Sell [Long position]Short Sell ↓ Short Cover[Short position]

What is a Short Sale?What is a Short Sale?

Your friend loans you this-

Georgia Council on Economic Education w w w . g c e e . o r g

Georgia Council on Economic Education w w w . g c e e . o r g

You immediately turn around and sell the thing for $200.00.(the $200.00 goes in your pocket)

Georgia Council on Economic Education w w w . g c e e . o r g

What do you owe your friend at this point?

Georgia Council on Economic Education w w w . g c e e . o r g

Georgia Council on Economic Education w w w . g c e e . o r g

You expect leather briefcases to be on clearance sale at Macy’s for $150.00

Georgia Council on Economic Education w w w . g c e e . o r g

When they go on sale, you buy your friend a new briefcase for $150.00. She gets her briefcase back and you just made $50.00!

Georgia Council on Economic Education w w w . g c e e . o r g

Your broker loans you this- 100 shares

Georgia Council on Economic Education w w w . g c e e . o r g

You immediately turn around and sell it for $50.00 per share.(the $5,000 goes in your pocket)

Georgia Council on Economic Education w w w . g c e e . o r g

What do you owe your broker at this point?

Georgia Council on Economic Education w w w . g c e e . o r g

100 shares of Coca-Cola

Georgia Council on Economic Education w w w . g c e e . o r g

You expect the CDC to announce that Coke causes cancer…Coke can clean a car battery!

…so you wait.

Georgia Council on Economic Education w w w . g c e e . o r g

Instead, the CDC announces that Coke cures cancer!What happens to the price of Coke stock?

Georgia Council on Economic Education w w w . g c e e . o r g

The Risk of Short Selling?

If the price of the stock goes up before you return the stock to your broker, you will lose money. (Remember the Market’s Long-Term Trend!)

Georgia Council on Economic Education w w w . g c e e . o r g

VII. Practice: How to Research and Trade

Georgia Council on Economic Education w w w . g c e e . o r g

SIA_2_A206

COMK8131

Georgia Council on Economic Education w w w . g c e e . o r g

Let’s Select a Stock and Make a Trade!Research:

Yahoo Finance (See Summary page, Profile, Key Statistics, Analyst Estimates, Competitors) CNBC, Bloomberg, Buy or Short-Sell?Why do we think it is a buy or a sell?How much will 10 shares cost us? 100 shares?

How many shares to buy?Georgia Council on Economic Education w w w . g c e e . o r g

Research Activities: See HandoutsFor ticker symbols: www.marketwatch.com/tools/quotes/lookup.asp

For most other info:Use Yahoo Finance web site. Georgia Council on Economic Education w w w . g c e e . o r g

Two Basic Valuation MeasuresP/E: Current price per share/TTM earnings per share (EPS): What earnings per share are we getting for our price?If price is $20 and TTM EPS is $2.00, P/E is ______?

P/E/G: P/E to Growth: Forward P/E/Projected 3-5 Year EPS GrowthIf fwd P/E is 20 and projected growth is 10%, the PEG is ____?

Current price and 52 week range (are we buying high or low?)Forward P/E and PEG ratioNOTE: Many co’s will report 3rd quarter results in October or November. Know the reporting date and estimate

! (Yahoo Finance: Analysts’ estimates)Projected earnings growth rate (you can calculate from forward P/E and PEG ratio)Chief competitors, their earnings growth rates, and their valuations on P/E and PEG.Another source: www.investeens.com/ 10 steps to evaluating corporations.html

Research: Before you buy, know as many of these as you can (use Yahoo Finance):

Resources:www.finance.yahoo.com

http://data.cnbc.com/quotes/ibmwww.morningstar.comwww.bloomberg.com

http://fortune.com/fortune500/2013/www.investeens.comCompany websites

High School Projects: Compare Rivals

BASIC COMPARISON SHEET

HD

LOW

PRICE

81.3

48.36

52 WK RANGE

62-82.50

34-52

MKT CAP

114.4B

50.5B

TTM P/E

22.08

23.11

FWD P/E

18.4

18.23

PEG RATIO

1.23

1.24

PRICE/SALES

1.45

0.97

PRICE/BOOK

8.11

4.06

REVENUE

79.36B

52.8B

PROFIT MARGIN

6.80%

4.30%

EPS

3.69

2.09

PROJECTED EPS

GROWTH/YR

14.95%

14.70%

(fwd p/e/peg ratio)

Source: Yahoo Finance; calculate projected Eps growth from fwd P/E and PEG ratio

Georgia Council on Economic Education

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Georgia Council on Economic Education

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HD

100

Play SMG on iPad!

Georgia Council on Economic Education w w w . g c e e . o r g

Georgia Council on Economic Education w w w . g c e e . o r g

VIII. Managing the Project in Class

Teams of 3 or 5 (recommend friends)Rankings posted weeklyDo not liquidate portfolio on the last dayGrade activities, not profit/lossAwards by region and state – luncheon for GA county winners in MayInvestWrite: Essay contest with awards and certificates (all grades)

How Much Time?Some teachers spend one class period before game starts (explain basics, set up teams). Others take 2-3 periods to set up. (Many allow ten minutes at end of period once or twice a week.)

Students can then work outside of class, in computer lab, or in class free time. (Best time to make trades is during the day before 4:00.)Monitor to make sure they follow Georgia rules.Use another whole period 5-6 weeks into the game to review portfolios or possibly make presentations for projects.Use a third period at end of game to review and have teams present what they learned.

Georgia Council on Economic Education w w w . g c e e . o r g

Suggested Team RolesSome teachers let the kids choose their teams; others assign teams. Roles can be rotated every two weeks.

3 or 5 on a team works best (for votes)Director (see Teacher’s Guide for roles)Lead ResearcherLead Portfolio CoordinatorLead TraderLead Reporter

Georgia Council on Economic Education w w w . g c e e . o r g

More General SuggestionsLessons and Activities: Use the Teacher Support Center on SMG Site!

(Log in; click on “Explore Teachers”; click on “Teacher’s Guide”): Lessons, Class Projects, Resources Competition gets them interested (some teachers post team rankings each week).Grade on project assignments, NOT on portfolio results!Don’t tell them what to buy.

They are free to be aggressive or conservative.Georgia Council on Economic Education w w w . g c e e . o r g

Georgia Council on Economic Education w w w . g c e e . o r g

How to Win (or Lose) BigSelect stock kids are familiar with;

NKE (Nike)Buy at $100/share1000 shares with $100,000Price rises to $101/shareAccount increases by $1,000Select stock with a lot of volatility; XYZ

Buy on margin

Buy at $10/share

10,000 shares with 100,000

Price rises to $11/share

Account increases by $10,000

How Most Students Play

Sample Projects for ElementaryWhat are the largest public companies (by revenues) headquartered in Georgia?

Make a table showing their closing stock prices at the end of 2012, the end of 2013, and the current price. Look up its sales for each of last three years and show on graph. (Yahoo or Google)Show the number of shares outstanding for each and multiply by current stock price to get the market capitalization of each stock.

Georgia Council on Economic Education w w w . g c e e . o r g

Sample Projects for MS and HS AssignmentsMarket: What are the major news items coming in the next ten weeks?

Quarterly earnings, legislative events, economic news (GDP, job growth), Federal Reserve movesMarket: What are the major risks over the next ten weeks?Russia/Ukraine? debt ceiling/shutdowns? Q3 earnings?Companies:New product cycles, upcoming earnings reports

Where are the Excessive Highs or Lows?Check new high and low lists on http://www.barchart.com/stocks/low.phphttp://www.barchart.com/stocks/high.php

More MS and HS ProjectsWhat public companies are headquartered in Ga.? (Or top ten)

List their market caps, dividends per share, earnings per share, P/E ratioWhat was their earnings growth rate in 2013 (over 2012)? Rank the ten largest companies by earnings (income in dollars).Georgia Council on Economic Education

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MS and HS Presentation ProjectsEach person selects one stock to recommend and submits a short paper, slide show, or video explaining why the stock was selected. Include company profile, its industry, major competitors. How fast is the company growing?

Each team submits a report on the valuation of at least three companies, including price/earnings, price/sales, and PEG. Georgia Council on Economic Education

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Communication SkillsEach team member (or each team) researches and presents a portfolio of five stocks to a client. You can add variety by assigning three different kinds of clients:

young person with first job, a couple in their ‘30s with young children, and a couple in their 60’s. Presentation can be in a skit, a slide show, a paper, or a video.

Georgia Council on Economic Education w w w . g c e e . o r g

Georgia Council on Economic Education w w w . g c e e . o r g

What are Your Questions?

Not A Gamble: U.S. Stock Market: 1926-July 2014