Dow: 12,933, -313 (-2.36%) S&P 500: 1,395, -34 (-2.37%)
After spending hundreds of thousands of hours in line yesterday at most polls according to some reports, Americans gave President Obama four more years, kept the House of Representatives in control of the Republicans, and secured the Senate’s majority for the Democrats. Phrased more succinctly, voters decided not to change anything. The election uncertainty that stalled the stock market so much over the last month is gone so investors could turn to the facts: the "Fiscal Cliff" is coming on January 1, 2013, and Greece is about to run out of money…
Reblogged from Chaos Sweeps Away the World We Know! The Disaster, current events & Catastrophe Blog. Forecasts for 2013 to 2023. Read tomorrows news today! Plus current economic, commodities, stock indices and financial news.:
October 29, 2012 – Hurricane Sandy Closes New York Stock Exchange: Caution tape cordons off a subway entrance at Columbus Circle due to closure in New York, U.S., on Sunday, Oct. 28, 2012. The U.S. securities industry canceled equity trading on all markets on Oct. 29, moving to protect workers as Hurricane Sandy barreled toward New York City with 70-mile-per-hour winds and the threat of an 11-foot surge.
The GDP was released.
This release is a “market mover”. GDP represents the total value of the country’s production and consists of the purchases of domestically-produces goods and services. It give an indication on the overall performance of the economy therefore also hints to how investments will perform. In my opinion, GDP is the country’s most important economic tracker. Basically, GDP growth means strong corporate earnings which translates to happy investors.
The GDP is up to 1.7% up from 1.5% from July 27′s release. Component revisions were mostly favorable because of higher personal consumption, nonresidential structures, and exports.
This matched analysts estimates of a modest growth. Although modest this is good because people got what they were expecting. At the very least, it eases some fears people may have had.
Fundamental analysis is a method for evaluating a security which involves the use of financial statements to study factors that are directly related to it. When performing fundamental analysis, you are trying to find out the company’s intrinsic value or what it’s actually worth as opposed to just looking at its market price. The idea behind finding a company’s intrinsic value is simple. You add all future profits together then discount it to account for the time value of money. Basically if your analysis suggests that the stock is worth more than its market price, it would be logical to buy it.
Like most things, finding the intrinsic value of a company is better said than done. That being said, below is a model I made to show you what it would look like to try and figure out the intrinsic value of a company.
Cash flow – The theoretical amount that shareholders would get if all the company’s earnings, or profits, were distributed to them.
Discount factor – The number that brings the future cash flows back to year zero. In other words, the factor used to determine the cash flows’ present value (PV).
Cash flow in year 5 years – The amount the company could distribute to shareholders in year five.
Growth rate – The growth rate into perpetuity.
Cash flow in 6 years – The amount available in 6 years to distribute to shareholders.
Capitalization Rate – The discount rate (the denominator) in the formula for perpetuity
Value at the end of 5 years – The value of the company in 5 years.
Discount factor at end of 6 years – The discount factor that converts the value of the firm in year five into the present value.
PV – The present value of the company in 5 years
Many issues can come up while doing fundamental analysis. One is the possibility of the company stopping all operations. Another one of the issues would be predicting future cash flows for the next x amount of years. It is difficult enough to predict one year, let alone several. For purposes of keeping the model simple, I made it constant. If you ever create your own model, you could always just change it to whatever growth rate you think is suitable. These uncertainties can never be escaped.
This has been a very general example and there are many other ways to evaluate a company’s intrinsic value. Either way, the theme of knowing actual worth as opposed to just looking at its market price remains constant.
There are some criticisms of fundamental analysis. These mostly come from investors who use technical analysis and from people who believe in the efficient market hypothesis.
Technical investors don’t care much for the intrinsic value of a company. They believe that fundamental analysis is insufficient because it can’t explain the constant price fluctuations in the market. They do have a point. Why would the price keep fluctuating if the intrinsic value isn’t constantly changing as well? This is why they prefer to analyze trends. They don’t care if the intrinsic value is lower than the market value as long as they’ll be able to sell the stock to another investor for higher than what they paid for. Anyways, fundamental analysis is seen as a long-term strategy while technical analysis is used for short term-investing. Neither is better. They’re just different.
As for the believers of the efficient market hypothesis, they just believe that it is impossible to beat the market by huge margins in the long run. The idea behind that is that whether you use fundamental or technical analysis, opportunities for huge returns will be whittled down almost immediately by the market’s many participants.
When investments come to mind, the stock market almost instantly follows. There’s a good reason why. Owning stocks is probably the easiest way to accumulate wealth over time. I want to cover the different types of investment strategies but before I go into that there’s something you need to know about investing in the stock market.
There is no perfect strategy in picking stocks! You can’t just abide by a few rules, follow a formula, and expect amazing returns on your investments. That’s not how it works so if you are here to learn strategies that will give you better chances of making money then good for you. If you are here for a secret mystical formula from the gods that will guarantee wealth then you will be disappointed. If a guy tells you that he has this magic formula that can guarantee you a safe and high return, he’s taking you for a fool.
Here are a couple of reasons on why this is:
1) Not all the factors that affect a company’s value are quantifiable. Can you imagine having a magic formula that has not only numbers in them but also has things like “good, average, bad, very good, very bad” in them? How else would you measure competitive advantages such as reputation and staff skillfulness? It just can’t be done. Besides, words like “good” and “bad” are all relative and subjective. It can’t be standardized.
2) The market isn’t perfect. That’s why it has “corrections”. People aren’t perfect. They make mistakes and sometimes overreact which affect market price. Emotions play a major role in the market. Take Facebook’s IPO for example. Due to complications in NASDAQ’s trading systems, trades were delayed during the IPO and the people were unsure if their trades were even acknowledged even after 40 minutes following the order. This uncertainty turned into fear which then caused the stock to disappoint.
All in all, there is no one perfect way to pick stocks. Even if there was an almost perfect formula, people would always follow their “gut feeling” or instinct. Preferred trading strategies are different for each person and one strategy isn’t necessarily better than the other. It all depends on the investor’s personality, risk tolerance, time frame for the investment, and time devotion in stock picking.
Below will (soon) be the links to articles about the different investment strategies:
Stock Investing Strategies: