The Wonderful World of Investments

A presentation by

Lew Johnson

to

Queen’s Commerce Trading CompetitionNovember 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 securitiesBondsCommon equityPreferred equity

Derivative securitiesOptionsFuturesForward contractsSwapsSynthetic securities

Types of Securities (continued)

Structured products/hybridsMutual fundsHedge fundsIncome trustsExchange traded fundsSegregated funds

a hybrid of insurance and mutual funds with a minimum guarantee

Principal protected notesa fixed income security with a minimum guarantee and some equity

participation through the use of derivatives

SecuritizationsE.g., CDOs, ABCP

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 goalInvestors hope to gain from the economy

Traders usually are looking for a short-term profitTraders hope to gain from the market

What do traders provide?An orderly marketLiquidityPrice discovery

Investment Objectives And Constraints

ObjectivesReturnRisk

ConstraintsLiquidityTime HorizonTax ConsiderationsLegal And Regulatory FactorsUnique Circumstances

Objectives

ReturnNominal versus RealPre-tax versus Post-taxStated Return DesireRequired Return

RiskInvestor’s Willingness To Take RiskInvestor’s Ability To Take RiskRisk Tolerance = Willingness + Ability

Investor’s 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, don’t want more risk

Diversification

Good Investment Principles

Buy low, sell high Sell high, buy low Don’t get greedy Don’t fall in love with a stock Look beyond the numbers Don’t be afraid to make mistakes Don’t 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