The Wonderful World of Investments

A presentation by Lew Johnson

to Queens Commerce Trading Competition November 17, 2009

What is Investing?

Investing is giving money up today for (hopefully) more money tomorrow. Investments exist to facilitate growth in the real economy. Financial securities are the media through which investing takes place.

Types of Securities

Underlying securities
Bonds

Common

equity Preferred equity

Derivative securities
Options

Futures
Forward Swaps Synthetic

contracts securities

Types of Securities (continued)

Structured products/hybrids
Mutual

funds Hedge funds Income trusts Exchange traded funds Segregated funds
a

hybrid of insurance and mutual funds with a minimum guarantee

Principal
a

protected notes

fixed income security with a minimum guarantee and some equity participation through the use of derivatives CDOs, ABCP

Securitizations
E.g.,

Types of Market Participants

Fundamental analysts Comparables investors Technical analysts Arbitrageurs Day trippers Momentum

Indexers

Investors versus Traders

Investors tend to have a longer term goal

Investors

hope to gain from the economy

Traders usually are looking for a short-term profit

Traders

hope to gain from the market

What do traders provide?

An

orderly market Liquidity Price discovery

Investment Objectives And Constraints

Objectives
Return

Risk

Constraints
Liquidity

Time

Horizon Tax Considerations Legal And Regulatory Factors Unique Circumstances

Objectives

Return
Nominal

versus Real Pre-tax versus Post-tax Stated Return Desire Required Return

Risk
Investors

Willingness To Take Risk Investors Ability To Take Risk Risk Tolerance = Willingness + Ability

Investors Life Cycle

Accumulation Phase Early to middle years Low net worth Long time horizon Bearing risk for higher returns is reasonable Consolidation Phase Mid-point and later Earnings exceed needs Moderate risk to protect investments Spending Phase Earnings have mostly ceased Time horizon is shorter Protection of assets important Inflation an immediate concern

Investments in Practice

The tension of fear and greed

Want more return, dont want more risk

Diversification

Good Investment Principles

Buy low, sell high Sell high, buy low Dont get greedy Dont fall in love with a stock Look beyond the numbers Dont be afraid to make mistakes Dont be afraid to admit mistakes Think globally

Hot Topics

Regulation of the Financial System Income Trusts Hedge Funds Global Credit Crunch Financial Engineering Currency Volatility US Trade and Budget Deficits BRIC