Mathematics of Investing

How you can bring appreciable growth to assets

over time ?

Wilson B. GräbForsyth Technical CCWinston-Salem, NCwgrab@forsythtech.edu

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Key to Investing

“Buy Quality and Diversify”

John Woodard

Woodard & Company

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Why Invest ?

Inflation Rate – 1.7%

Money Market Rate – 1.0%

Savings Rate – 0.75%

Losing Purchasing Power at Rate of 0.7% per Year

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Why Invest ?

To grow your assets over a specified period of timeTo provide for your retirementTo provide for your children's educationTo participate in future product developmentTo protect and preserve items of interest to you – historic sites, etc.

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Where to Invest

Real EstateDomestic Stock Market (Stocks – Bonds – Securities)International Stock Market (Stocks – Bonds – Securities)Antiques - CollectablesAutomobilesEducation (Self or Others)Whatever is of interest to you

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Markets ServedDepending on the item selected from the previous slide, one needs to understand the applicable market and its cycles, drivers, risk and reward potential, and volatility.

One also needs to consider Market Segmentation – Are there sub-markets that should be considered as being separate from the Main Market – Antiques – Glassware – Frackturs - Coins

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Basic Terms and DefinitionsStock – ownership in a company

Bond – loan to a companyMutual Fund – grouping of stocks, bonds or bothGrowth Stock – Stock whose earnings

are expected to grow above average rate

Dividend Stock – Stock that pays a dividend but whose growth is less than a growth stock

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Basic Terms and Definitions cont’d

Large Cap Stock - market capitalization value of more than $10 billion

Mid Cap Stock -market capitalization between $2 and $10 billion Small Cap Stock - market capitalization of between $300 million and $2 billion

Penny Stock - stock that trades at a relatively low price and market capitalization, outside major market exchanges. Extremely HIGH Risk

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Basic Terms and Definitions cont’dMutual Funds - No Load - A mutual fund in which shares are sold without a commission or sales charge

Mutual Fund – Loaded - A mutual fund that comes with a sales charge or commission. The load is either paid up front at the time of purchase (front-end load), when the shares are sold (back-end load), or as long as the fund is held by the investor (level-load).

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Basic Terms and Definitions cont’dMunicipal Bonds -A debt security issued by a state, municipality or county to finance its capital expenditures, usually triple tax free

Junk Bonds - Term for a high-yield or non-investment grade bond, fixed-income instruments that carry a low rating because of their higher default risk in relation to investment-grade bonds.

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Basic Terms and Definitions cont’dDividends - Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued.

Can be expressed as a % or a figure

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Basic Terms and Definitions cont’d

DPS can be calculated by using the following formula:

DPS = (D – SD)/S

D - Sum of dividends over a period (usually 1 year)SD - Special, one time dividendsS - Shares outstanding for the period

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Basic Terms and Definitions cont’d

EPS – Earnings per Share - The portion of a company's profit allocated to each outstanding share of common stock.

Earnings per share serves as an indicator of a company's profitability.

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Basic Terms and Definitions cont’d

EPS = (Net Income – Dividends on Preferred Stock)/Average Outstanding Shares

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time.

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Dividend Performance

Item 1 YR 3YR 5YR 10YR

Item A 15% 10% 10% 8%

Item B 5% 4% 3% 2%

Item C 2% 3% 4% 5%

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52 Week Performance

52 Week High $80.00/Share

52 Week Low $40.00/Share

Current Price A $60/Share

Current Price B $50/Share

Current Price C $70/Share

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Growth Rate For Specific Stock

Industry Growth RateHistorical – you select the time periodProjected – Based on analyst or company estimates

Contributing Factors – Laws, economy, resources, etc.

Use Excel for Regression Analysis, Graphing, and R2 Value

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Bond Basics and Types

Government Bonds

Municipal Bonds

Corporate Bonds

Zero Coupon Bonds

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Bond Basics and TypesFace Value/Par Value The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures.

When a bond trades at a price above the face value, it is said to be selling at a premium. When a bond sells below face value, it is said to be selling at a discount.

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Bond Basics and Types

Maturity The maturity date is the date in the future on which the investor's principal will be repaid.

Issuer The issuer of a bond is a crucial factor to consider, as the issuer's stability is your main assurance of getting paid back.

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Bond Basics and TypesThe bond rating system helps investors determine a company's credit risk. Think of a bond rating as the report card for a company's credit rating.

Bond Rating Grade Risk Moody\'s S&P/ Fitch

Aaa AAA Investment Highest Quality

Aa AA Investment High Quality

A A Investment Strong

Baa BBB Investment Medium Grade

Ba, B BB, B Junk Speculative

Caa/Ca/C CCC/CC/C Junk Highly Speculative

C D Junk In Default

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Morningstar Ratings - Mutual Funds•Is a descriptive, backward-looking measure of historical performance

•Is strictly quantitative--there is no analyst input or opinion

•Combines return and risk (volatility)

•Is calculated once per month

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Morningstar Ratings - Mutual Funds

•Compares funds with their peers in specific investment categories

•Has a fixed distribution of stars--10% of funds within each category receive 5 stars, 22.5% receive 4 stars, 35% receive 3 stars, 22.5% receive 2 stars, and 10% receive 1 star

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Morningstar Ratings - Stocks•Is a measure of whether or not the stock is over- or undervalued based on forward-looking estimates

•Is risk adjusted

•Is based on both quantitative and subjective inputs--it includes analysts' opinions, which are embedded in their estimates of future cash flows

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Morningstar Ratings - Stocks

•Is calculated daily

•Does not divide stocks into comparison groups, nor does it have a fixed distribution of stars--the percentage of stocks receiving 5 stars will fluctuate daily.

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Math Tools Utilized For Evaluation

•Regression Analysis – evaluate trends•Ratios – Proportions•Probability•Statistics – Mean – Median•Allocation

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Free Internet Linkswww.Fidelity.comwww.Morningstar.comwww.Pimco.comwww.putnam.comwww.Scottrade.comwww.thestreet.comwww.transamerica.comwww.TRowePrice.comwww.Vanguard.comwww.TDAmeriTrade.com