Investment Education for the People (1)

Prosperity, ECONtrepreneurs! By popular demand I'm privileged to present The Delasol Group's Investment Education for people who talk themselves out of investing. "That's only for the rich." "One day I will..." "I'm too busy paying bills." "I don't know anything about investing." My hope is that you will be briefed with high quality information to enlighten even the casual investor. No investing experience necessary.

**You will, however need access to either Google Finance or Yahoo! Finance. It's free and you dont' even need to sign up! This is personal, practical economics, so you know it's hands-on. Throughout the Investment series we'll reference these applications (also available for your smartphone) for you to get used to using them for yourself.

A proper introduction to investing demands an understanding of risk. Straight up, risk is the possibility that you will lose; in this case, your personal investment of the Almighty dollar. Which brings us to our first rule of investing:

• Don't invest more money than you can stand to lose.

There's no such thing as a free lunch, and investing should not be viewed as the pathway to getting rich quick. Substantial returns are available to smart investors who take substantial risks. And what makes a smart investor? One who is armed with both common sense...

• If it seems too good to be true, it probably is. Suckers and their money are easily separated. Bernie Madoff's hedge fund promised double digit returns a year with grossly insufficient information as to how the money was invested. It was all just smoke and mirrors.

B. Money & his role model, Ponzi.

...and information (enter Delasol). Take a closer look at risk: there's Perceived Risk and Actual Risk; and their definitions are literal.

• The risk we perceived last week when Congress was fighting over the debt ceiling was based on what we were feeling: uncertainty, anger, regret, ambiguity, confusion.
• Actual risk works opposite it's counterpart (...usually..) and is measurable. Although the Dow Jones Industrial Index displayed all of our perceived risk (the market has been extremely volatile), the actual risk was much less severe.

What measure(s) you choose to determine how much risk you can stomach is up to the individual. To help, I present some valuation variables that budding ECONtrepreneurs may adopt to kickstart their research. For this part let's keep it simple and focus only on one stock, say McDonald's. Risk should be assessed for all types of investments, however, not just stocks.

• Profits: Also called Gross Profits, also called Earnings. It's the benefit of a business making more money than it needs to run itself. After accounting for expenses (overhead costs, taxes, et cetera) what's left over is the good stuff that Wall Street and Fox News go nuts about every quarter. Here's an exercise. Let's research profit for McDonald's. Using Google or Yahoo! Finance, enter in the ticker for McDonald's stock. The ticker symbol is MCD. Both services offer you the option to look at additional Key Statistics. Follow this to Mickey D's profits. What is the amount?*
• Price per Earnings Ratio: Aka Price Multiple, aka Earnings Multiple. If a company issues stock, the P/E ratio can be another useful resource Calculating it is unnecessary, as it's normally given as a stock's Key Statistic. Generally speaking, the higher the P/E ratio, the better. Warning: comparing P/E across industries is not wise...so compare MCD's P/E ratio to say, Wendy's (WEN) and not Toyota (TM).
• The 52-week High/Low: The highest and lowest point at which a stock has closed (at the end of the trading day which is from (9:30A - 4:00P Monday thru Friday). A good perspective when making a decision on what you feel the intrinsic value of a stock is. Google and Yahoo! also give the daily high and low as a show of the stocks volatility.
• Beta: The standard measure of a stock's volatility. A beta of 1 indicates a stock's price is in tandem with the overall market of stocks (the Dow or the S&P, for example). A beta of less than 1 means a stock will be less volatile than the market; and a value greater than 1 means, you guessed it, more volatility and fluctuation. Shop around with this one: Yahoo! says MCD has a calm beta of .36. Google says it's more rowdy and gives a value of .48. You be the judge.
• Earnings per Share (EPS): Another lovely measure of profitability that is misleading if not examined closely. Company A and Company B have identical EPS. But Company A achieves this by taking on debt. Company B uses it's profits more efficiently and takes on more (if smaller) investment without the debt. Knowing this can help you make a more informed decision on whether to invest in Company A and B.

Try this over the next week: think of companies you like and search within Google or Yahoo! Finance and see if they have a ticket symbol. Then, think of a competitor. Compare and contrast the two companies on the basis of profitability, volatility, and type of business (what they make, if they're any good at selling it). Consider the value you'd place on the stock (in dollars) and see if it's comparable to the market price. You may (not) be surprised!

After you've had a chance to digest this, our series will continue focusing on Types of Investment Securities available besides stocks.

Have comments? Please post them!
Have questions? Check out www.investopedia.com or send me an email!

prosperity,

dls




*McDonald's profit as of 13August2011 is $9.64 billion.

Notes on a Scandal: Oil Spill Monsters

Rumor has it that the Global North - rich in human resources and ingenuity - has systematically exploited the Global South - rich in natural resources - for personal gain. This is not entirely true.

"Global South" and "Global North" are alternative designations for developing countries and developed nations, respectively. It's a nod to the United Nation's Human Development Index; a low score (<0.5) indicates there's room for economic and social improvement. The geographic location of said countries, however, is approximate: e.g., Nigeria (0.4) is technically in the Northern Hemisphere, as New Zealand (0.9) and Australia (0.9) are in the Southern.

The truth is that nations of the Global North have natural resources as do their Southern counterparts. However, an economic principle called Comparative Advantage allows some countries (in the Global North) to exploit the benefits of world trade (globalization), albeit often at the expense of each other (read: the Global South). So Florida becomes a major producer of oranges, although the citrus treat is indigenous to Asia. New agricultural methods, technology and lower costs can remarkably make "Florida oranges" a household name.

Oil doesn't make one think of the United Kingdom, but believe it or not, it's rich in it! Because of comparative advantage, it's cheaper for a country rich in applying the human resource to technology to import it from say, the Persian Gulf or the Niger delta. Since the early 1900s, the UK has had a presence in the global oil industry. Through a series of mergers & acquisitions over the years, we have present-day energy conglomerates BP and Shell. The two UK energy firms have had their share of ups and down in the global markets, including anathema to Big Oil: a spill. Or worse yet, an environmental catastrophe.  Volatile stocks, environmental damages and consumer confidence have left both firms humbled. Or has it?

BP:

• Most recently claimed culpability in the Deepwater Horizon oil rig disaster last April. The Consequence: BP has to cough up $20 billion to compensate residents and businesses for the damaged coastline. The Rub: The claims & distribution process for victims is slow and unjust. Only 25% of the BP compensation fund has been paid out in the last year! Delasol filmed on location this Spring alongside a Native American community in Louisiana.
• Profits: Up 21% from the previous quarter. Consider that rising commodity (gas) prices is a boon for BP; though this is only part of the story.
• Production is down 11% from the same time last year. The company said the damage to its reputation as a result of the Gulf Oil Spill could hurt global business prospects now and in the future. Nonetheless, a new joint venture in India in is the works.
• Share Price (BP) as of August 8th closed nineteen cents above $38 on the New York Stock Exchange (NYSE), hovering closest to it's 52-week low of $34.82 last August. Not a good indicator of investor confidence.

this ad does not reflect the position of the delasol group, but it was both effective and apt.

Shell:

•  After considerable pressure from the United Nations and a lawsuit on behalf of a Nigerian king, the Royal Dutch Shell company has accepted liability for two oil spills that devastated a community's freshwater supply in 2008. At least 7,000 oil spills have occurred in the area since Shell first discovered the Niger delta oil in 1956.
• Profits (for the second quarter) are up 97% from a year ago, again highlighting the industry's heavy dependence on retail oil prices.
• Production is down year-on-year, but relative to its competitors, prospects are looking up for Shell. Although many oil-producing nations restrict the movement of Big Oil, there is hope in the profitability of the $20B Pearl project in the Persian Gulf state of Qatar.
• Share price (RDSA) is doing relatively (to itself and other oil stocks) well and trading within an acceptable range for the stock on both the NYSE and the FTSE 100 index in the UK.

So are oil spills a cause for shame or the impetus to fame? Shell has fared well while BP has struggled, but what's the end game for these firms? More production leads to higher profits and a greater number of environmental incidents. If handled ethically (and what is that?) Big Oil can bring the change we want to see. It seems to be a good start for Shell to own up to the land and it's people before its own bottom line.

your comments are welcomed!
dls