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  1. 1. THE STOCK MARKET Finance 301: Summer 2010 CRN 80570: W 18:00 to 21:20 - NH 209 DRAFT AS OF 6/24/10 Hand-Out (HO) pages may vary. Instructor: Douglas M. Crow Office Phone: 503-481-5445 (Cell: Leave a Message) This is my personal cell. Do not use the PSU phone. Email: This is the best way to contact me. Office: Faculty Services, SBA 5th Floor Office Hours: Before/After Class or generally Tuesday. Contact me directly for meetings as needed. Course Learning Objectives Understand stock market operations, investment analysis, equity investments and portfolio diversification through research and study of the following: • The history, characteristics, rules and regulations of U.S. stock markets. • How the stock market relates to U.S. and global macroeconomic conditions and capital markets. • How to research a company and its environment and perform basic securities/stock analysis before investing. • How to research mutual funds, exchange traded funds and other stock related investment vehicles. • Investment risk and investment return and the relationship between the two • How to create a diversified investment portfolio. At the end of the course, students should have a basic understanding of the stock market and the opportunities and risks it offers as part of an investment program. As a practitioner rather than an academic, I will emphasize the learning and application of useful knowledge and your ability to communicate and discuss this information. The practical application of financial theory will be integrated into the course. Required Text and Course Packet Students are required to obtain the following: All of the books for the course are available in paperback and can be found at most new and used book stores including Powell’s and Amazon. These are well-known, popular books about the stock market not academic texts. These are all useful books that you are likely to retain in your business library for future investment activity or other academic course work. I have purchased all required books for less than $60. Required Texts: 1. Malkiel, Burton G., A Random Walk Down Wall Street (8th Edition 2003). This is a time-tested classic first published in 1973. One for stock investing. Rather academic in approach, but a “good” read. A 9th edition has just been published—any will do, but the pages are for the 8th. The revisions are pretty minor but so changes the pages a little. Assignments are around topics, so cross reference is easy. 2. Scott, D. L., Wall Street Words ( Any of several editions). Excellent reference. 3. Required Hand-outs. You can pick-up at Clean Copy a set of materials that will follow the class lectures and be included on the exams. The cost will be about $30. This is a compilation of valuable data, short articles and checklists and will be the main “textbook” for the class. Useful on quizzes and exams. Supplemental Readings: Some selections from my personal investment library. Page 1
  2. 2. 1. Ellis, Charles D. Investment Policy (1985). 2. Graham, Benjamin. The Intelligent Investor (1973). 3. Graham, Dodd and Cottle, Securities Analysis (1962). 4. Gardner, David and Tom, The Motley Fool Investment Guide (1997) or any of their books. 5. Gitman and Joenik, Fundamentals of Investing (Text, several editions). 6. Investors Business Daily, Guide to the Markets (1996). 7. Kindleberger, Charles, Manias, Panics and Crashes (3d ed 1996) 8. Lefevre, Edwin, Reminiscences of a Stock Operator (1923). 9. Lowenstein, Roger, When Genius Failed (2000). 10. Lynch, Peter, One Up on Wall Street or any of his other books. 11. Navarro, Peter, When the Market Moves, Will You be Ready (2004). 12. O’Neal, William J., How to Make Money in Stocks (2002, various editions). 13. Samuelson, Paul., Economics (Text various editions). The “classic” and best. 14. Schwab, Charles, Guide to Financial Independence (2004) 15. Schwager, Jack D., Technical Analysis (1999). 16. Whitman, Martin, Value Investing (1999). Advising: SBA and Me. Noted below is a service of SBA. In addition, I am available to assist my students to the extent I can in any of these matters. I view this as an important part of my job as your instructor. I lack the expertise in some of the administrative matters and a full knowledge of your background, but can offer my opinions on course work, post graduate studies and careers. I think it is important to gather several views into the decision making process. Please contact me at class or via my coordinates noted above. The SBA provides academic advisors as well as career and internship advisors to assist students in making the most of their collegiate experience. Academic advisors are trained to provide counsel in a wide range of issues. From selecting a business major to evaluating transferred transcripts, academic advisors are here to help students with all of their degree related questions. The following is a brief summary of the type of issues with which academic advisors can offer assistance: • DARS reports ♦ SBA admissions requirements ♦ Major selection and requirements ♦ Transcript evaluation ♦ Course overrides ♦ Transfer credit petitions ♦ Career planning ♦ Portland State rules and policies In addition to academic advising, the SBA provides career and internship advisors to assist students in landing a job upon graduation or a summer internship while students are still in pursuit of their degree. Career and internship advisors can also provide resume and interview guidance. All SBA advisors are available by appointment, which must be scheduled in advance. Drop-in hours are available as well. Drop-in hours are held regularly throughout the week and are designed to help answer routine or simple questions. For more information about SBA advising and drop-in hours please visit the School of Business website at and click on student resources. Page 2
  3. 3. Grading Procedures Class Participation 10 points Homework (2 each) 10 points (5 each) Quizzes (2) 20 points Stock Analysis Project 30 points Presentation Project. 10 points Final Exam 20 points Total 100 points • Each item is graded 1-10 and the weighted total gives your score and grade. • Class participation and quizzes are divided into two grading periods for a total 20 points. • No curve, just your performance and the scoring system operated by the instructor. • Your scores are carefully tracked and summed on an Excel spreadsheet. • Academic honesty is required to pass. Cheating will result in automatic failure. • Plagiarism is considered cheating. • Attendance and participation at class is instrumental to performing well in the course. • You will receive information in class not from other sources and included on exams— • Take notes or get them from a classmate. • You are competing against yourself and based on the same questions and participation for all students. • You are responsible for announcements made in class. • The quizzes will be designed to check your progress in the course. Quizzes and Tests. All quizzes and tests will be announced at least a week in advance or in the syllabus. All quizzes and exams will be open book, open notes and any materials are allowed, like your past quizzes. The format will be short answer: approximately 10 questions on quizzes and 20 on the final exams. Some questions may be repeated. The coverage will be all material presented or required reading in the class up to the time of the quiz or exam. Good note taking will be imperative to success since most of the questions will be covered and answered in a previous class. Grading System Your final grade will be determined according to the following percentages: A 93-100 B+ 87-90 C+ 77-80 D+ 67-70 A- 90-93 B 83-87 C 73-77 D 60-67 B- 80-83 C- 70-73 F below 60 Class Approach. Each class will begin with 10-15 minutes of discussion about current events or questions about the general subject or past classes. I try to link the subjects discussed in classes with what is actually happening in the equity markets now. Stock valuations and the behavior of markets depend on and reflect events from the company, industry and macroeconomic events and trends. This will be followed by a student presentation related to the subject of the class (see items in course outline). Presentations focus on specific topics of relevance to the stock market. These two activities, questions and reviews of past information should all take about 50 minutes followed by a break. The next two segments will be a lecture and class discussion each of about 45-55 minutes. 10-15 minutes at the end of the class will be flexible and open for group meetings, short meetings with the instructor or for the good of the order. I generally stay after class to continue discussions or work on problems. Page 3
  4. 4. Class Participation The class participation grade evaluates a student’s contribution to the classroom. Participation grades are determined by a balance of the quantity and the quality of comments in class Participation grades are determined by student’s contributions to discussion of current events at the beginning of each class and thoughtful comments and questions about the short weekly presentations and during the lecture portions of the class. I will endeavor to know each student and will keep notes about participation or the lack thereof during the entire quarter. Discussion of current events covers events from the prior week in the stock market, interest rates, business and consumer activity, and general economic issues and whatever else seems of importance to investors at the moment. I want to put you in the frame of mind of an active investor or business manager impacted by these events. Students are graded twice during the quarter on participation. Stock Analysis Project Using the skills you learn in the course, analyze a stock of your choosing and make a buy/sell recommendation. I will keep a record and no students can have the same stock. I will assist in selecting a stock as needed. The name of your pick will be recorded at the first class. It is not a matter of whether this is a “good” or “bad” company from any perspective. The process of analysis is what will determine the grade. Be sure to pick a stock for which there is ample information. Projects will be graded on both content and form. You will be asked to present drafts of certain sections for my review. These will be graded, but can be revised for the final report. Your analysis must be typewritten, no longer than 12 pages (not including attachments/appendixes, tables, references, endnotes, etc.), with all names on each page of the paper and the appendices. Appendices should not exceed 10 pages. (The total report not in excess of 20 pages.) The paper will analyze your selected company, project its future earnings, and evaluate its stock as an investment. Future earnings depend on corporate performance, the general economic/political environment specifically related to the stock, the performance of the stock’s sector within the market. The approach is to look at the next three years (year end 06, 07 and 08). Report and analyze what is most critical to the assessment of the company and investment decision. This is a distillation of your study and thoughts. As such, your paper must contain the following (PLEASE FOLLOW THIS OUTLINE EXPLICITLY, COVER ALL SECTIONS AT LEAST BRIEFLY—IF YOU DO NOT YOU WILL LOOSE POINTS. REMEMBER THERE IS NO “CORRECT” ANSWER): 1. Executive Summary: a summary of your analysis (one or two sentences about the company and a summary of key points of analysis and recommendation, ½ page); 2. Review of the Company and its Business: analysis of the company and its business. Become familiar with the company and think like an owner. Key product lines, strengths/weaknesses, Strategic Competitive Advantage; Drivers for growth or contraction, management capacity. Governance issues?. What elements exist that could impact valuation? Hidden assets or liabilities? Read the 10K, 10Q’s for last 12 months, proxy and WWW info for the past 3-6 months; This section should be 3-5 pages. 3. Economic Forecast : A forecast of the USA and World (if you are dealing with a multinational company) macro economic environment over the next 3 years. Regional, national and global (multinational or export dominant) as needed and applicable. You can find examples in Brokerage and Bank newsletters or reports (ask??), State Budget Office, Council of Economic Advisors, Congressional Budget Office, WSJ, Barron’s, Business Week and other business periodicals. GNP or GDP +-% for 2008, 2009 and 2010? ½ page. 4. Stock Market Forecast: A forecast for the USA and world (as needed) stock markets over the next three years. Will the stock market indices up, down or flat that apply to your stock pick? How much do you estimate (%)? Specifically the S&P 500 index and other more specific ones increase or decrease and what %? ½ page. 5. Sector & Industry Forecast: A forecast for the company’s business sector and where the sector is headed in the next three years; Is your company a strong or weak competitor? How is this reflected in its comparative valuation? Data is available from IBD (Weekly Ranking) and on the internet from Yahoo and Reuters and other sites. Can combine with #2. About 1 page. 6. Ratio Analysis: Use an Excel table to calculate key solvency and profitability ratios (see the handout—focus on profitability) to identify financial and operational strengths and weaknesses internally and make comparisons with similar companies or direct competitors. Include the Beta for your stock (available on various internet sites like Brokerage sites and Investor’s Business Daily). Yahoo, IBD, Reuters, Brokerage and other internet sites have competitor information. Such a review will allow you to complete #7 and #8 of this outline. (Most ratios are in the hand-out for class but you may also invent your own for particular situations); This exercise can be shown in an appendix. About 1page with interpretation of what the ratios mean for your company. Focus on relevant ratios that tell a story about the company. 7. Company Financial Forecast and Valuation : See the handout for examples. This is basically an Excel table with a paragraph explanation or footnotes discussing assumptions. Taking your knowledge of the company, its financial and stock performance over the last 3 years, then forecast Page 4
  5. 5. the next 3 years. The focus should be on profit margins and the impact of company events and trends on margins. Answer questions like: How will the company evolve? What will be the drivers for revenue and profit growth and will margins expand or contract? Will there be more or less shares outstanding at the end of each year? Use a table to project three-year revenue, gross margin, operating margin and net margin and profit growth. Focus on revenues, operating and net profits and earnings per share. Watch for stock buyback or dilution events. Use # 3, 4, and 5 above of the three base years to determine positive and negative trends that will increase or decrease revenues and earnings per share—then determine the impact on share price and discuss in #8 below. You might also do a small technical analysis: What does the chart look like? Add footnotes as needed. #7 IS THE MOST IMPORTANT PART OF THE ANALYSIS. 8. Supplementary Valuation: You may also want to take another approach in the valution. Are their “hidden” or contingent assets or liabilities that will have a material impact? Besides the calculation in 7, you may want to use other instrinsic value models like: http://www.diamond- or the NASD site with several different analytical models. Here you agree to the terms at the site and then plug in your stock symbol and the model does the calculation based on financial information—nothing more. Up to 1 page. 9. Final Recommendation: This is a two-part section. Part 1: Your view: What is your conclusion of whether or not to buy/sell/hold the stock and why? Part 2: How would Lynch, Malkiel or a NASD “Guru” (master investor like one of those covered in class) view the stock compared your analysis? 1 page. 10. Appendixes and References: Supporting documents such as ratio calculations, financial statements, and references for all the data you uncover and report. Up to 12 pages as needed. Warning!!!! Plagiarism is a serious offense. If you use copyrighted/published sources (the Internet, newspapers, TV, magazines, etc.) to obtain information used either directly or indirectly in your paper, you must cite and/or quote them. Failure to do so will result in a score of ZERO on the project. Approximately 400-500 words per page, this is average for most single spaced, 12 point fonts, with standard margins). Small Group or Individual Project. Each week, two students will prepare a short presentation on a specific subject. These are about subjects of timely interest or background that a stock market investor should know, but will not be covered in standard texts. The project will include a short written report of up to two pages (500 words or less), an oral presentation to the class (5 minutes per subject or a total of maximum 15 minutes) and leadership of class discussion for up to 10 minutes. To receive full credit, the assignment must be completed in whole and turned in at the beginning of class. Please include a 1 page written summary of your presentation to be handed to me at the time of the presentation. If you want to pick your own subject—let me know. Subject 6/29 Shareholder Activism and Public Company Governance. Carl Icahn: Shareholder Friend or Foe Securities Laws. Enron: Manipulation and Greed Historical “Masters” Jessie Livermore Bernard Baruch J. P. Morgan Robert Miller 7/7 Master Investors: W. Buffett-Biography and Berkshire-Hathaway Ben Graham-the Mentor—An Intelligent Investor Fooled by Randomness or Black Swans by N. Nicholas Taleb (2004, 2007) Economists: Roubini, Schiller, Schilling. 7/14 Index Fund Investors: Charles Ellis: Winning a Losers Game. John Bogle and Vanguard Funds. Page 5
  6. 6. SRI Investing /Investor Ethics. 7/21 Investment Styles. Martin Whitman (value), Ken Heebner (timing), __________________ (growth), _____________(technical). 7/28 Web-Based Industry Research: C. Wulff and McDep Tom Brown/Banks Motley Fools Joel Greenblatt’s Magic Formula. Ratio Screening. 8/4 Mutual Fund Masters: Peter Lynch John Templeton Hedge Funds: Long Term Capital Management (1998). Hedge Fund Master: George Soros. 8/11 Final Exam Week This class has a final exam. Quizzes and Final exams are open book. Absences that are not cleared with me one week in advance will not be recognized and will not be allowed make-ups. If you know you will miss an exam, see/contact me immediately. Other • An incomplete will only be given for documented extremely extenuating circumstances based on School guidelines. As an Adjunct Professor this further complicates this matter for me, since I may not teach the next quarter. • No withdrawals will be granted past the standard date without documented extenuating circumstances. • Earning a poor grade in the course in itself does not constitute an extenuating circumstance. • Academic honesty is required to pass the course. When and issue of cheating or honesty arises, students may want to think about the Rotary International’s “4-Way Test” for guidance on ethical conduct: "Of the things we think, say or do: 1. Is it the TRUTH? 2. Is it FAIR to all concerned? 3. Will it build GOODWILL and BETTER FRIENDSHIPS? 4. Will it be BENEFICIAL to all concerned?" Rotary is a world-wide public service organization of over 1.2 million business and professional members organized in local units. FIN 301 Summer 2010 SCHEDULE Assignments are due on the dates indicated. The reading is to be completed, before the class in which it is first discussed. Page 6
  7. 7. Date Class Subjects Reading Project and Exams 6/23 1 Introduction to the course Syllabus Syllabus Overview. My contract with you. H-O 1 Themes for FIN 310 H-O 2 Approach and History Course overview H-O 3 Critical Thinking Assign Companies and Groups to students. H-O 4 The “Agency” Problem Discuss Stock Analysis Project What is a security or a stock? Scott at 423 Why stocks as an investment? Performance. Benchmarks to remember. H-O 5 Asset Allocation Discuss company size classifications: Big, Mid and Small. H-O 109 Assets Ret. 1995-2006 H-O 9 Asset Returns Basic Rules about Stock Investing. Asset Allocation H-O 14-17 Risk Buying and Selling Rules and Capital Protection. HO 18-19 Returns Strategies H-O 20-22 P/E and Stock Interest Rate Components: sum of risk free, duration, inflation, default and Markets liquidity--The pricing and allocation of capital. Time Value of Money and Rule of 72 H-O 12 Interest Rate Structure Dividends and Yield The 3 Pillars of Modern Portfolio Management: • Risk and Reward-Capital Asset Pricing Model –The Security Market H-O 27 Dividends Line. (Sharpe) • Diversification of Risk. (Markowitz) H-O 11 SML What is the “Efficient Market?” (Fama) H-O 28 “True” Diversification H-O 24-26 Market Efficiency Page 7
  8. 8. Date Class Subjects Reading Project and Exams 6/30 2 Financial Market History and Process Malkiel Random Walk, Company Business Learn securities market history. Bubbles and Booms! Chapters. 1, 2, 3,4 Overview: 100 Behavioral Finance—Any More Lessons? H-O 29-30 (Behavioral) words. (Draft). This Please get started on the reading. is to get started. Trading--stock exchanges, upstairs and cyberspace. Note these are not texts-really (Optional –not Listing Requirements. easy and interesting. graded) How stocks are traded and cleared. H-O 48 Trading Picking a Broker. Learn about broker/dealers. H-O 40+ The use and risk of margin and its regulation. Regulation T Learn about types of stock orders and how the process works: Market, Limit, Day or GTC, etc. Stock market indexes and their use. H-O 49-56 (Indices) The rules and laws—industry, federal and state H-O 31 Laws & Rules Regulators: NASD, NYSE, SEC, Dept. Justice, etc. Common Law and the Depression Era Laws Sarbanes Oxley & 8K Dispute Resolution in the Securities Industry H-O 32 Governance Issues Corporate Governance. H-O 33-34 Proxy Ballot • Legal Constructs and the Proxy • Review of Proxy Statements • Current Issues in Governance. • 13 D • Institutional v. individual investors v. “insiders.” Page 8
  9. 9. Date Class Subjects Reading Project and Exams 7/7 3 Introduction to Stock Analysis--Application of Research. Hand in Your Overview--the Stock Analysis Project. Malkiel: 203-274. 105-169 Company I. Technical Analysis (Expanded Discussion) Esp. 222-232, 210-226, Description. II. Financial Analysis 248-240 III. Value Analysis Scott pages 418-422 Company Analysis (Columbia Sportswear) H-O 75-77 Technical Detailed Review and Analysis of Proxy and 10K H-O Financial 84 A review of reports page by page. H-O 114, 99 Fundamental H-O 108 Life Cycle Apply the tools and concepts of Fundamental Analysis. Understand basic financial statements H-O 83-85 Comparision • Income Statement • Balance Sheet H-O 95-104 “Masters” Methods • Cash Flow Statements-Operating Cash Flow Understand and perform calculations for the following ratios: • Liquidity • Profitability • Funding Activity What are the strengths and weaknesses of Columbia? Operationally, management, finances? What do investors believe? How will it be view in various market conditions? Where is it going? What is Columbia worth? Page 9
  10. 10. Date Class Subjects Reading Project and Exams 7/14 4 Stock Research Stock Research on the Internet H-O 39 Quiz 1 Other Sources of data. Learn about Basic References: Value Line, Morningstar H-O 85 Value Line and Standard and Poors, IBD, WSJ, Forbes, Business Week, Money, etc. Review Yahoo and other WWW sites like: http://www.diamond- Industry Analysis • Basic Economic Sector Research • Research and understand Sector Reports • Sectoral Market Indexes and use of ETF’s. H-O 35-38 Basics of the Earnings Forecast. The “bottom” Line. Assets v. Earnings Doing a pro forma Income or Free Cash Flow Spreadsheet and valuation implications. H-O 91-93 Limitations of forecasting the “future.” Multiples v. DCF. Discuss Concepts for Valuations: Growth, Income and Value. H-O 95-104 Review of “Lists” of the “Masters.” Other Considerations in a Comprehensive Approach • Impact of product life cycle. • SWOT • Others • Application of Economic Theory to a company. H-O 120 Social Investing Socially Screened Mutual Funds • The “triple bottom line.” Page 10
  11. 11. Date Class Subjects Reading Project and Exams 7/21 5 Understand the goals of, the tools and concepts of Fundamental Analysis: H-O 87 Ratio Analysis Hand-in Your Com- Research and understand the company’s business and what its dynamics are? H-O 88-89 P/E Ratios pany Financial Pro- H-O 90 Unknown Companies jection through 2012 Understand basic financial statements • Income Statement The focus of the whole class will • Balance Sheet be to help students with their • Cash Flow Statements-Operating Cash Flow stock analysis report. Understand and perform calculations for the following ratios: • Liquidity Students are encouraged to check their stock on Yahoo or other • Profitability WWW sites. • Funding Activity Syllabus Stock Analysis format. Liquidity and Dilution Issues: Incentive Options, Insider Holdings/Buy or Sell, H-O 94 Dilution Buy-Backs Valuation H-O 84 Valuation Methods Price Multiple Valuation: H-O 107-108 Beta • Price to earnings H-O 87 Ratios What happens with a loss or “bad” year? • Price to Sales • Price to Assets • Price to Cash Flow from Assets • Net Worth Valuation • Strategic Valuations: the earning power of assets 7/28 Macro-Economic Theory: Students may want to review Quiz 2 How does the economy impact the stock market? their basic economic text or check the library (Samuelson or Understand the four phases of the business cycle. another Economic Data and Stock Market Implications. H-O 57-74 • GNP/GDP and Demand • Federal Reserve (monetary) and fiscal policy • Inflation and money supply • Interest rates and borrowing • Employment & Unemployment • Trade, Currencies and the Global Economy Review Stock Analysis Project Begin Discussion of Mutual Funds, ETF and Portfolio Management H-O 110-112 Page 11
  12. 12. Date Class Subjects Reading Project and Exams 8/4 7 Mutual Funds and Exchange Traded Funds Malkiel pages 354-387 Understand Mutual Funds—a “portfolio.” Morningstar, Lipper and Value Line Guides Lynch pages 83-239 Discuss the types of Mutual Funds—Investment Styles and Specialized Funds H-O 113 Morningstar Valuation and Stock Picking/Investment Selection: Review of “Lists” of the H-O 114 Heartland Approach “Masters.” Exchange Traded Funds (ETF) H-O 115-116 ETF-XLE • Compare ETF’s and Mutual Funds Example • Sector investing. • Hedging Putting it all together: Portfolio Strategy • Understand the concept of a portfolio H-O 5 Asset Allocation H-O 28 Diversification • “True” Diversification. The portfolio mix. H-O 72 Market Forecasting • Review Morningstar and other Measurements of Mutual Funds H-O 117-119 Trading and • Dynamics of portfolio management driven by timing, conditions and Selling risks. H-O 121 Considerations 8/11 8 Other Topics: Malkiel pages 354-867 FINAL (LAST 2 Hedging: Options, Short Sales and Other Methods. Lynch pages 239-295 HOURS OF Risk Arbitrage CLASS) Special Equity Investment Approaches Stock Analysis Project Due. COURSE REVIEW. FINAL EXAM. FINAL EXAM Week of 8/11: Final Exam. The exam will cover the entire course material. Open books and notes. 20 questions in similar format to the quizzes. Page 12