Tuesday, April 25, 2006

ANOTHER LESSON

WITH THE CRASH OF MY OTHER COMPUTER I LOST MANY OF THE NOTES THAT WERE INTENDED TO BE POSTED OVER A PERIOD OF TIME. AT THIS POINT I AM TAKING A DIFFERENT TACK TO MAKE USE OF SOME CURRENT RESEARCH THAT I AM DOING. TO THAT END I AM BEGINNING A SUMMARY AND COMMENTARY ON A VERY POPULAR INVESTMENT BOOK. THIS BOOK WAS WRITTEN FOR A 6 YEAR OLD AND AN 11 YEAR OLD SO I ASSUME THAT ALL YOUR READING AND MATH SKILLS ARE UP TO THAT LEVEL. SINCE I USE MUCH OF THE MATERIAL EXACTLY AS IT IS IN THE BOOK, YOU WILL FIND A NUMBER OF TIMES THE AUTHOR USE VERY BASIC, OR CUTESY, DESCRIPTIONS. OTHER TIMES THE PROSE MAY SEEMS STILTED BECAUSE I AM INJECTING MY THOUGHTS FROM VARIOUS NOTES AND SOME ANALYSIS WITHOUT REGARD TO GOOD GRAMMAR. IF YOU WANT LITERATURE READ SHAKESPHERE IF YOU WANT TO MAKE MONEY READ THIS CRITICALLY(IF YOU LOOK CRITICALLY YOU WILL SEE WE STAR WITH CHAPTER II- WHAT WAS IN CHAPTER I THAT I DON’T WANT YOU TO KNOW?) .
THIS PROJECT WILL REQUIRE A NUMBER OF POSTINGS AS I WORK THROUGH THE CHAPTERS AND REFINE MY NOTES. "ALL IS FLUX" AS HERACLITUS OBSERVED.
SUMMARY AND COMMENTARY ON
"THE LITTLE BOOK THAT BEATS THE MARKET" BY JOEL GREENBLATT, 2006
GOOD STUFF IS JOEL’S BAD STUFF IS MINE BUT YOU WON’T KNOW WHICH IS WHICH SO READ CRITICALLY.
CHAPTER II
1. YOU CAN STICK YOU MONEY UNDER THE MATTRESS.
2. YOU CAN PUT YOUR MONEY IN THE BANK OR BUY BONDS FROM THE U.S. GOV'T. YOU WILL BE GUARANTEED AN INTEREST RATE AND YOUR MONEY BACK WITH NO RISK.
-IF GOVERNMENT BONDS ARE PAYING 5% WITH NO RISK, AS THEY ARE AS OF MAY 2006, YOU MUST RECEIVE MORE THAN 5% IN ANY OTHER INVESTMENT TO COMPENSATE YOU FOR TAKING ADDITIONAL RISK.
3. YOU CAN BUY BONDS SOLD BY COMPANIES OR OTHER GROUPS. YOU WILL BE PROMISED HIGHER INTEREST RATES THAN YOU COULD GET BY PUTTING YOUR MONEY IN THE BANK OR BY BUYING GOVERNMENT BONDS - BUT YOU COULD LOSE SOME OR ALL OF YOUR MONEY, SO YOU BETTER GET PAID ENOUGH FOR TAKING THE RISK.
4. YOU CAN INVEST IN COMMON STOCK WHICH HAVE MORE RISK THAN BONDS BUT ALSO HAVE THE POTENTIAL FOR MUCH HIGHER PROFIT.
5. YOU CAN DO SOMETHING ELSE WITH YOUR MONEY.
POINTS 1,2,3 AND 4 MOVE FROM PRESERVING YOUR MONEY TO ACTUALLY TAKING SOME RISK AND HAVING YOUR MONEY GROW. POINT 5 IS GIVING UP YOUR MONEY FOR A SHORT-TERM BENEFIT, ICE CREAM, COAT OR A CAR.
CHAPTER III.
1. BUYING A SHARE IN A BUSINESS MEANS YOU ARE PURCHASING A PORTION OR PERCENTAGE INTEREST OF THAT BUSINESS. YOU ARE THEN ENTITLED TO A PORTION OF THAT BUSINESS'S FUTURE EARNINGS.
- IF A COMPANY HAS 100 SHARES AND YOU OWN 1 SHARE YOU OWN 1/100TH OF THE COMPANY OR 1% AND YOU ARE ENTITLED TO 1% OF IT’S PROFITS.
2. FIGURING OUT WHAT A BUSINESS IS WORTH INVOLVES ESTIMATING - GUESSING - HOW MUCH THE BUSINESS WILL EARN IN THE FUTURE.
EXAMPLE: WE WANT TO KNOW WHAT "COMPANY A" IS WORTH?
HAS 1,000,000 SHARES
SALES $10,000,000
COST OF GOODS $- 6,000,000
GROSS PROFIT $ 4,000,000
BUSINESS EXPENSES $- 2,000,000
INCOME BEFORE TAXES $ 2,000,000
TAXES (40%) $ -800,000
NET INCOME $ 1,200,000
EACH SHARE IS WORTH $1.20 ( $1,200,000 ./. 1,000,000). THEREFORE, HOW MUCH SHOULD WE PAY TO GET $1.20 BACK EACH YEAR? IF A SHARE SELLS FOR $12.00 AND WE GET BACK $1.20 WE HAVE A 10% RETURN ON OUT INVESTMENT ($1.20 ./. 12 + 10%).
3. THE EARNINGS FROM YOUR SHARE OF THE PROFITS MUST GIVE YOU MORE MONEY THAN YOU RECEIVE BY PLACING THAT SAME AMOUNT OF MONEY IN A RISK-FREE 10-YEAR U.S. GOVERNMENT BOND. 6% AS YOUR ABSOLUTE MINIMUM ANNUAL RETURN WHEN GOVERNMENT BOND RATES FALL BELOW 6 PERCENT.