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.