Stocks

Lecture 7

This lecture is part of Chapter 4:Investing in the Company

Today’s Lecture

What are Stocks

How can we find information about Stocks

How can we use Excel to keep track of our Stocks

Why Stocks

In order to setup a business or invest into new business one needs money!

Don’t we all ….

The natural question is of course: Where can we get that money for our earth-shattering idea.

One option would be to go to a bank …

Why Stocks

… but two problems are immediate.

A) Banks do not really like promises, they like solidityB) Banks charge interest, and that can be very

significant.

Would there be any better ways to get money?

Why Stocks

If you would want to set up a small company, you could ask some friends or family members to take a stake in return for partial ownership of your company.

Hey. That’s quite a good idea! You get money on a promise and you will not have to pay any interest. In return, if you are successful, your ‘stakeholders’ will get a share of the profits.

Great! A somewhat more formal implementation of this is the issuance of stock.

Why Stocks

When a company is setup, one can issue a certain number of Stock certificates. These certificates represent the partial ownership of the company.

The certificates then can be sold to investors who hope that the company (and thus the stock certificate) will increase in value.

Naturally, the detailed process is quite tricky and there are many laws governing this but the principle is very simple.

Why Stocks

Often the founder of a company buys all or a big part of the issued stock certificates.The founder then owns the certificates, but the company has the money.

There’s an important issue here. Companies that issue stocks are considered legally independent entities. They therefore act and are treated like they were a thinking person.

We are quite used to this. We e.g. say: “I bought this from Creative” (Of course you didn’t, you bought it from the sales person).

Why Stocks

Just being able to buy the stock certificates when they are issued is not very practical.

Hence the Stock market was invented so that investors can trade (or sell/buy) stock certificates. To do so a stock needs to be ‘listed’ and fulfill certain conditions (hence this is only done for not-so-small companies).

Trading on the stock market can be difficult though which is why there are brokers who help you do the trading for a commission.

Why Stocks

It’s interesting to note that stock certificates are actual pieces of paper. In principle, when you buy a stock certificate you are entitled to get this piece of paper.

When the company whose stock you are buying is not listed on any stock market, you will get the certificate.

For listed companies, however, the moving around of the physical certificates is a big hassle so most investors will never ask for them and leave them stored in a central place.

Why Stocks

As always, a great place to find info is on the web:

Exchanges:

• http://www.nyse.com• http://www.nasdaq.com• http://www.simex.com.sg/

Brokers:

• http://www.etrade.com• http://www.poems.com.sg/

Stocks and Excel

Now let us assume that somehow you can buy and sell stocks and that you want to keep track of your investments.

Let’s start simply.

Stocks and Excel

A B C D E F G H23 My 1st portforlio Transactions Year 2000456 Date Action Stock Quantity Stock Price Total Price Total78 03/01/00 Buy YHOO 2 216 432 4329 28/02/00 Buy YHOO 2 158 316 74810 17/04/00 Buy MCD 10 35 350 109811 10/10/00 Sell YHOO 3 60 -180 91812131415

=IF(C11 = "Buy",E11*F11,-E11*F11)

=SUM($G$8:G11)

Stocks and Excel

A B C D E F G H23 My 1st portforlio Transactions Year 2000456 Date Action Stock Quantity Stock Price Total Price Balance78 03/01/00 Buy YHOO 2 216 432 4329 28/02/00 Buy YHOO 2 158 316 74810 17/04/00 Buy MCD 10 35 350 109811 04/09/00 Sell MCD 5 28 -140 95812 10/10/00 Sell YHOO 3 60 -180 77813

=IF(OR(C8 = "Buy",C8 = "Sell"),IF(C8 = "Buy",E8*F8,-E8*F8),"error")

This is nice, but what if we make a typo in column C?Fortunately the formula can be improved.

What a Monster! No, actually it’s quite straightforward.

Stocks and Excel

I guess buying Yahoo during the internet bubble was not such a good idea. This reminds me of:

A reporter asks Richard Branson (the flamboyant founder of Virgin):“How do you become a Millionaire?”

What do you think?

And he replies ……….

Stocks and Excel

“Start as a Billionaire and buy an Airline!”

Perhaps I should paraphrase …“Start as a Billionaire and become an Investor”

Stocks and Excel

The spreadsheet we just made can neatly keep track of our transactions but of course it doesn’t reflect at all the current value of our portfolio. In that sense it’s a rather useless spreadsheet.

So, let’s add a second sheet to keep track of this.

Stocks and Excel

A B C D E F G H I J K23 My 1st portfolio Valuations45 Total6 Date Qty Price Value Qty Price Value78 03/01/00 2 216 432 4329 28/02/00 4 158 632 63210 17/04/00 4 123 492 10 35 350 84211 04/09/00 4 104 416 5 28 140 55612 10/10/00 1 60 60 5 28 140 200131415

YHOO MCD

On this sheet we can enter the valuation of the portfolio.

This hurts!!!But how much?

Stocks and Excel

On the one hand we can of course say it hurts by 778 – 200 = 578 dollars.

True … but since we’ve been buying and selling stocks, the absolute amount doesn’t necessarily mean much.

Somehow, it would be good if we could keep track of our performance more accurately so that we can compare ourselves to others. May be we didn’t do so badly…

Stocks and Excel

Solution:

We could treat our portfolio like a mutual fund and work with ‘virtual shares’.

Sounds complicated! But as previously, perhaps with Excel, taking things step by step it won’t be so bad.

Let’s start.

Stocks and Excel

A B C D E F G H I J K L M N23 My 1st portfolio Valuations45 Total6 Date Qty Price Value Qty Price Value Qty Value78 03/01/00 2 216 432 432 1000 0.4329 28/02/00 4 158 632 63210 17/04/00 4 123 492 10 35 350 84211 04/09/00 4 128 512 5 28 140 65212 10/10/00 1 60 60 5 28 140 2001314

YHOO MCD V-shares

Virtual Shares: Cool!

The beginning is easy: Let’s assume we have 1000 v-shares

The key thing to realize is that if we add or withdraw money, the value per v-share should remain the same.

Stocks and Excel

A B C D E F G H I J K L M N O23 My 1st portfolio Valuations45 In/Out Total6 Date Qty Price Value Qty Price Value Qty Value78 03/01/00 2 216 432 432 432 1,000.00 0.4329 28/02/00 4 158 632 316 632 2,000.00 0.31610 17/04/00 4 123 492 10 35 350 350 842 3,422.76 0.24611 04/09/00 4 128 512 5 28 140 -140 652 2,817.73 0.23112 10/10/00 1 60 60 5 28 140 -180 200 1,483.02 0.1351314

YHOO MCD V-shares

Let’s try this…

= N10+(K11*N10)/(L11-K11)

Wait a moment! Why are O8 and O9 not the same?

Stocks and Excel

A B C D E F G H I J K L M N O23 My 1st portfolio Valuations45 In/Out Total6 Date Qty Price Value Qty Price Value Qty Value78 03/01/00 2 216 432 432 432 1,000.00 0.4329 28/02/00 2 158 316 316 1,000.00 0.31610 28/02/00 4 158 632 316 632 2,000.00 0.31611 17/04/00 4 123 492 492 2,000.00 0.24612 17/04/00 4 123 492 10 35 350 350 842 3,422.76 0.24613 04/09/00 4 128 512 10 28 280 792 3,422.76 0.23114 04/09/00 4 128 512 5 28 140 -140 652 2,817.73 0.23115 10/10/00 4 60 240 5 28 140 380 2,817.73 0.13516 10/10/00 1 60 60 5 28 140 -180 200 1,483.02 0.13517

YHOO MCD V-shares

Perhaps we should do this in two steps. One line for the valuation of the portfolio before the transaction and one line for the value after the transaction.

Indeed, the value of the v-shares before and after the transaction are the same

Stocks and Excel

Excellent, but this formula ….

= N10+(K11*N10)/(L11-K11)

the current number of v-shares.

The current value of the portfolio

the current value of the v-shares

= N10 + K11 / ( (L11-K11) / N10 )

divided by

equals

Stocks and Excel

Excellent, but this formula ….

= N10+(K11*N10)/(L11-K11)

the current value of the v-shares

= N10 + K11 / ( (L11-K11) / N10 )

The added amountdivided by

the additional number of v-sharesequals

Stocks and Excel

Phew… you’re right, this is actually quite difficult!

The point I’m making is:

It’s neither the math nor the programming of Excel that’s a problem here. We all can multiply and add. The problem is: we have to know what we want to do.

This is very typical of financial analysis so focus on understanding of the problem and don’t be scared by the prospect of complicated math since usually it isn’t!

Now back to our portfolio:

From the transactions sheet we know that we lost778 – 200 = 578 dollars or 74%

From the v-shares we know that we lost0.432 – 0.135 = 0.297 per v-share or 68%

Relief, like a good financial commentator I’ll now claim that I exceeded expectations by a whopping 6%!

Message: be critical – always know what the numbers say!

Stocks and Excel

2

3 My 1st portfolio - Performance45

6 Date Value V-shares7

8 03/01/00 432 0.439 28/02/00 632 0.3210 17/04/00 842 0.2511 04/09/00 556 0.2312 10/10/00 200 0.14131415

0

200

400

600

800

1000

03/01/00 28/02/00 17/04/00 04/09/00 10/10/00

0

0.05

0.1

0.15

0.20.25

0.3

0.35

0.4

0.45

0.5

03/01/00 28/02/00 17/04/00 04/09/00 10/10/00

On this sheet we can enter the valuation of the portfolio.

Indeed! These two graphslook completely different.

Stocks and Books

There are all kinds of books … be aware of their quality!

On a related note. Financial Planners are all the rage now. It is surprising to see how many (intelligent) people entrust their money to often poorly qualified individuals.

In case of doubt, always go with ‘simple’, ‘big’, ‘well-known’, ‘trustworthy’ like e.g. NTUC, DBS, Schroders.

The following three books represent certain types of books. That doesn’t mean I recommend them.

Stocks and Books

This is quite a good book I think.

Stocks and Books

Another good book. Though, it looks quite flashy.

How do you know that this one is OK?Make your own judgment!

Stocks and Books

Well, this book looks similar to the one by Lynch.

The topics appear sound enough!

Stocks and BooksThe book reads reasonable enough… until you consider what he doesn’t tell you. But this gives him away!

Stocks and Books

But here’s a book I fully recommend!

Stocks and Books

The best and worst performance of stock, bond, T-bills for various holding periods.

Stocks and Books

Be aware! This is the nominal chart. I.e. inflation and taxes are not accounted for.

Stocks and Books

While less than the nominal numbers, the difference between the various classes is clear.

Key Points of the Day

Stocks play a key role in business

Excel is a great tool to keep track of financial data

Be critical of data as presented – know what they mean

You’d better not let me manage your money!