Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl
-
Upload
reynolds-center-for-business-journalism -
Category
Career
-
view
1.107 -
download
0
description
Transcript of Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl
![Page 1: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/1.jpg)
Decoding Financial
Statements
Strictly Financials
Friday January 4, 2013
![Page 2: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/2.jpg)
Strictly Financials 2
Donald W. Reynolds National Center for Business Journalism at Arizona State University
![Page 3: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/3.jpg)
Strictly Financials 3
n Gary Trennepohl, Ph.D. n ONEOK Chair and President’s Council Professor of Finance n Oklahoma State University n Trustee, Oklahoma Teachers Retirement System n Member, OSU Foundation Investment Committee
![Page 4: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/4.jpg)
Topics n Wednesday:
n 8:30 am to 3:00 pm – Decoding Financial Statements and Company Analysis.
n 3:15 pm to 5:00 pm – Investing in a Time of Uncertainty
n Thursday: n 8:30 am to 11:15 am – Financial Markets in 2012:
Where are the Stories?
Strictly Financials 4
![Page 5: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/5.jpg)
I. Decoding Financial Statements
1. Financial Ratios – what they tell us 2. Profitability Model – how the firm generates profits
Strictly Financials 5
![Page 6: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/6.jpg)
Strictly Financials 6
Ratios to Measure Financial Health n Liquidity
current ratio =
quick ratio =
Current assets Current liabilities
Current assets - inventory Current liabilities
![Page 7: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/7.jpg)
Strictly Financials 7
Another View of Liquidity: Net Working Capital Total Assets = Liab.+Net Worth
Current Assets
Fixed Assets
Current Liabilities
Common equity
Long Term Debt +
Net Working Capital
![Page 8: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/8.jpg)
Strictly Financials 8
Ratios (cont’d.) n Profitability
net profit margin = return on assets = total asset turnover =
net profit after tax sales
net profit after tax
total assets
sales total assets
![Page 9: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/9.jpg)
Strictly Financials 9
Profitability Ratios (cont’d.) n Factors affecting profitability
inventory turnover =
accounts receivable collection period =
cost of goods sold
inventory
accounts receivable
(sales/365 days)
![Page 10: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/10.jpg)
Strictly Financials 10
Ratios (cont’d.) n How is the firm financed?
debt ratio =
debt/equity ratio =
equity multiplier =
total debt total assets
Total debt total equity
total assets common equity
![Page 11: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/11.jpg)
Strictly Financials 11
Ratios (cont’d.) n What return is generated for common
stockholders?
return on equity = EACS common equity
![Page 12: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/12.jpg)
The Profitability Model
![Page 13: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/13.jpg)
Strictly Financials 13
Evaluating a Company Using The Profitability Model
n The profitability model is useful because it separates return on equity (ROE) into three components - n financial leverage (equity multiplier), n operating efficiency (net profit margin) n asset utilization (total asset turnover).
n ROE is a function of all three factors
![Page 14: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/14.jpg)
Strictly Financials 14
The Profitability Model (cont’d.) n Return on equity =
NPM X total asset turnover X equity multiplier ROE =
net profit sales
X sales total assets
X common equity
total assets
![Page 15: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/15.jpg)
Understanding Basic Principles of Financial Markets and Investing
1. Drivers of Stock and Bond Prices 2. The Historical Perspective 3. Market Efficiency 4. Diversification Is Critical 5. Market Risk – the “VIX”
![Page 16: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/16.jpg)
Economics of Stock and Bond Prices
n Stock Prices over the long term are driven by the earnings they provide to shareholders n Dividends n Growth in earnings and dividends n P/E ratio is a measure of relative value
n Bond Prices and yield are driven by interest rates and credit quality n Bond prices move inversely to interest rates. n Bond investors must predict future interest rates
and economic activity to determine proper price. Strictly Financials 16
![Page 17: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/17.jpg)
History of U.S. Stock and Bond Returns Provides a Perspective
for the Future
Strictly Financials 17
![Page 18: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/18.jpg)
Strictly Financials 18
![Page 19: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/19.jpg)
Strictly Financials 19
![Page 20: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/20.jpg)
Strictly Financials 20
![Page 21: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/21.jpg)
Bonds as an Investment
Strictly Financials 21
![Page 22: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/22.jpg)
Strictly Financials 22
![Page 23: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/23.jpg)
“The Bond Buyer’s Dilemma” By Burton Malkiel in the WSJ, Dec 7, 2011 n The yields on long-term U.S. Treasuries will likely fall
below inflation for the next several years. Long-term Treasuries are likely to be sure losers.
n Investors should consider as alternatives: n Bonds with moderate credit risk where the spreads over
Treasuries are generous. n Tax-exempt municipal bonds are especially attractive. n Foreign bonds in fiscally secure countries, e.g., Australia
n High-quality U.S. stocks with generous dividend yields n Abbott Labs, ATT, Exxon, J&J, P&G.
Strictly Financials 23
![Page 24: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/24.jpg)
If Markets are Efficient ….
Market efficiency refers to how quickly security prices reflect new information. If markets are efficient, it isn’t possible
to “beat the market.”
24
![Page 25: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/25.jpg)
Strictly Financials 25
Implications of Market Efficiency for Investors n Stock experts don’t have an advantage over
amateurs because the competition is so severe. n Investment return will be a function of risk. n The key factor in market efficiency is information.
Most SEC regulation is designed to promote the flow of information to investors.
n Technical analysis is valueless because market participants already have incorporated any information contained in past price sequences into stock prices.
![Page 26: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/26.jpg)
A Technician’s Chart1
Strictly Financials 26
November 23, 2012 There is risk of loss in all trading Page 1
Figure 1
THE OPTION STRATEGIST HOTLINE™© McMillan Analysis Corporation
P. O. Box 1323, Morristown, NJ 07962–1323 800-724-1817 Email: [email protected]
Thursday, November 22nd, 2012
Note: if you are viewing a text version of this report, click on the following link to see the charts:http://www.optionstrategist.com/weekly-charts
The volatility produced by the oversoldcondition of last week, coupled with theCongressional debate over the fiscal
cliff, has produced some mixed signals forstocks. Some of these are quite powerfulsignals, but the one true indicator is price andso that is the one on which we will moststrongly rely.
The market, as measured by theStandard & Poors 500 Index (SPX) has been ina steady decline since mid-October. From itsearly October highs to its lows last week, ithas lost 125 points – a sizeable decline,although not a particularly “fearful” one. Asa result, SPX is in a downtrend, and that isbearish. There is overhead resistance at1400-1410. The declining 20-day moving average is at 1395, and the trend line (see Figure 1) is atabout 1400. So that general area of 1395 to 1410, which was support on the way down, is nowresistance. It is normal for support to become resistance. Now, the onus is on the bulls to try torecover back above that level, if they can.
Equity-only put-call ratios gave sell signals in early October. At first, they appeared to be
Figure 2 Figure 3
1 From Larry McMillan’s “The Option Strategist’s Hotline” Nov. 22, 2012
![Page 27: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/27.jpg)
Strictly Financials 27
Implications (cont’d.) n Fundamental analysis and brokerage-firm
recommendations will not enable you to identify firms which will outperform the market.
n Information contained in accounting statements and other public information already is reflected in security prices.
n It makes no sense to try and time the market. n If there’s a way to “beat” the market, it’s not obvious.
![Page 28: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/28.jpg)
Strictly Financials 28
How Then Should We Invest? 1. Buy and hold a well-diversified portfolio through time
– and make sure you have exposure to international stocks and bonds – in developed and emerging markets.
2. Minimize fees, trading costs and expense ratios.
3. Minimize tax impacts of buying and selling.
4. Rebalance periodically to your risk/reward target.
![Page 29: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/29.jpg)
Diversification in an Institutional Investor Portfolio
1) Stocks – Large-cap, small-cap, growth, value, international, including emerging markets
2) Fixed income – Treasuries, high-yield, corporate, municipal
3) Real estate – REITs, direct-investment funds 4) MLPs – Transportation, E&P, Liquids, Storage 5) Commodities – Ags, metals, oil and gas, 6) Precious metals – Gold, silver 7) Hedge funds – Various types 8) Risk-management tools – Options, futures
Strictly Financials 29
![Page 30: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/30.jpg)
So, What Will the Next Decade Bring?
30
![Page 31: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/31.jpg)
One Thing that is Really Changing - Demographics of Major Countries
1. Countries with larger numbers of younger workers will enjoy higher growth rates than “older” countries.
2. Demand for housing, autos and consumer goods is driven by the 25- to 45-year-old age cohort.
31
![Page 32: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/32.jpg)
Italy
32
![Page 33: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/33.jpg)
Germany
33
![Page 34: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/34.jpg)
United States
34
![Page 35: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/35.jpg)
Brazil
35
![Page 36: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/36.jpg)
India
36
![Page 37: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/37.jpg)
China
37
![Page 38: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/38.jpg)
Demographic Changes Are Driving the Way Investments Will Be Made in The Future.
Strictly Financials 38
![Page 39: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/39.jpg)
Strictly Financials 39
![Page 40: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/40.jpg)
Strictly Financials 40
![Page 41: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/41.jpg)
THE VIX – A MEASURE OF EXPECTED MARKET VOLATILITY (RISK).
Strictly Financials 41
![Page 42: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/42.jpg)
Strictly Financials 42
![Page 43: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/43.jpg)
You Can Keep Track of Current Market Volatility with the VIX n The “VIX” is a measure of the market’s perception
about market uncertainty over the next 30 days. n It’s derived from the Black-Scholes “option-pricing
model,” of which one input value is expected volatility (i.e., future standard deviation) of the S&P 500.
n You make the calculation by “solving the model backwards” – that is “given the observed price, what volatility is needed to produce that price by the model.”
Strictly Financials 43
![Page 44: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/44.jpg)
So, What Does All of This Data Tell Us?
n Remember when people say “this time is different,” it is never different.
n Markets over and under correct, but they ultimately revert to the mean of their long-term values.
n Periods of over performance will be followed by periods of under performance, etc.
n Diversification is a key strategy for investing.
Strictly Financials 44
![Page 45: Decoding Financial statements and Investing in a Time of Uncertainty by Gary Trennepohl](https://reader034.fdocuments.net/reader034/viewer/2022051610/5486961fb47959d80c8b5212/html5/thumbnails/45.jpg)
Story Ideas 1. What do investors and investment
advisers say about market volatility? 2. Are investors/advisers investing in
international markets? If so, where and why?
3. What will happen to bond prices and interest rates in 2012-2014?