Friday, October 23, 2015

Investing


For my STEAM course, Economics we were assigned to create an investment report that matched our investment objectives, risk tolerance, time horizon, and ethics. Our report was to be accompanied with explanations illustrating our investment decision-making reasoning, company research, data analysis (stocks, P/E, and our return on investments (RIO)), and understanding of the free market economy and its impact. The purpose of this action project was to reflect our understanding of the free market as indicated by the building of personal investment portfolio. I researched publicly-traded companies, created an investment portfolio, analyzed my investment decisions, tested my values and ethics when money is in the equation, and explained my decision making process and its intended and unintended consequences

I was gifted $50,556.80 by my guardian angel. Below is how I chose to invest the money.

An investment philosophy is a set of guiding principles that inform and shape an individual’s investment decision-making process. My investment philosophy is seeking relatively undervalued stocks and believing they will eventually produce strong returns, this is not to say I won’t invest in stocks that are already producing strong returns. I believe that looking at small changes in the market, diversifying and calculating systematically risk are the main predictors of my success of my investments.

Risk tolerance is an individual or investor's willingness to accept more risk in exchange for possibility of higher return. According to the Rutgers University’s Risk Tolerance Quiz, I have an above tolerance for risk. Investors with an above-average tolerance for risk are more likely to invest in securities, such as stocks in startup companies. An individual’s risk tolerance may vary according to goals, age, and needs. We were assigned to take an online risk tolerance survey, below are my results.

Below are my three theoretical financial goals I chose to work with for this project.
  • 1-year goal: Have a saving balance of $5,000 of spending money for my freshman year in college.
  • 5-year goal: I would like be away on a sabbatical, but have a saving balance of $35,000 of spending money to be able to leave comfortably for 1.5 year while backpacking through Europe. 
  • 25-year goal: I hope to own a house in San Francisco for about $1,895,000.

This project required me to test my values and ethics when money in the equation and to be able to explain my decision making and its intended and unintended consequences. In a narrow point of view the sole purpose of a business is to make money, the more the better. This viewpoint is conveniently embedded in our capitalist world. My only purpose in investing in these companies is to make a profit. I am well-aware that this may seem mercenary, but we are a money-oriented society. Contrary to popular beliefs, money is not the source of all evil. "Money is a ratio created in proportion to other things " said Nathan Aldinger, an ex-financial planner and Mubex (Mutually Beneficial Exchange startup company) CEO. Money is amoral, It doesn’t have guiding principles of its own, therefore it’s not evil. I will be investing in Google (Alphabet), Walt Disney, and Amazon. These corporations create profit and also builds social institutions.

PE ratio is the ratio of Principal to Earnings. So, what you invest is the numerator and what you get out is the denominator. The number is essentially how much you would have to invest to make $1.

Alphabet Inc class C. 2015. Via Google.


- Google

Technology has revolutionized the way people work, communicate, and socialize with each other. It's only logical that I invest in Google stocks. Google has the cool factor working for it (driver-less cars, which have been spotted around California), and its very profitable YouTube business. Google stocks is a safe investment due to its dominance in the search and internet business. As of 2015, Google is worth $364.99 billion. Google is a formidable moat. A moat refers to how likely a company is to keep competitors away for an extended period. Google's continued popularity and relevance is particularly impressive given the rate of change and competition on the internet. Alphabet, google's parent corporation has a P/E of 34.86, compared to the industry which averages 20.24. Google is relatively a new in its field. Google does not pay dividends to its shareholders; it reinvest funds which increase the value of the corporation as a whole thus increasing the market value of the stock. I am willing to ride to ride out Google’s high P/E until it gets better.

Amazon.com, Inc. 2015. Via Google.
- Amazon

Amazon is the Walmart online. Amazon is the online retailing king. In the past five years, the online retailer has seen iconic shares soar. Amazon's stock is up a staggering 460%, making it one of the best-performing widely held stocks available. Amazon has a huge growth, unequaled innovation, and Prime Revenue. The company's Amazon Prime membership service has helped propel sales. Amazon Prime is a service which I admittedly use that offers free two-day shipping, unlimited movie streaming, over 800,000 free eBooks, unlimited photo storage, and unlimited music streaming all at the cost of $99 a year. According to a report by Re/code, Mahaney estimated that the company has between 30 million and 40 million Prime subscribers in the U.S., and a total of 40 million to 50 million worldwide. Amazon's P/E ratio is 511.06 and doesn't pay any dividends.

Walt Disney Co. 2015. Via Google.

- Walt Disney

I grew up loving Disney. Disney is a superpower in the entertainment industry, and has been on an impressive climb for the last years. Unlike some entertainment companies, Walt Disney has built a long-term viability. Much of this should be accredited to its aggressively strong branding. Disney's subsidiaries such as Pixar and Marvel also have powerful branding. Disney's ability to milk success, diversify revenue streams, cross-sell products are some of the reasons I decided to invest in its stocks. The recent dip in stock price have created a buying opportunity for me. Disney has a P/E ratio of 22.4 compared to its stock sector (entertainment) average of over 100. One area in which Disney isn't entertaining is in its dividends. Each stock share yields $0.66 per share. Disney's upcoming release schedule of Star Wars: Episode VII - The Force Awakens is predicted to be a very profitable event for the company.

A stock sector is the industry in which a business deals with. For my investments, I have branched into various different sectors. I diversified into different sectors to protect myself from shifts in particular industry that are possibly detrimental to my investments.

The time horizon is the time in which an investment is made or held before it is liquidated. It can range from seconds to decades. The time horizon depends on the investor’s individual objectives. The longer I wait the more profit I make. There isn’t a “right or wrong” time horizon. I have broken my investment into three portfolios, with additional details for each:

Portfolio I - 1 Year Goal

$3,000

2 shares of Google @ 693.34 (33% of portfolio)

9 shares of Disney @ 108.05 (66% of portfolio)

This grouping of Google and Disney has an expected ROI of 28.7%. After a year I should be able to have $5,000.

Portfolio II - 5 Years Goals
$20,000

26 shares of Amazon @ 560.31 (75% of portfolio)
46 shares of Disney @ 108.05 (25% of portfolio)

This grouping of Amazon and Disney has an expected ROI of 225.89%. I should be able to attain my goal of $35,000 for my trip.

Portfolio III - 25 Years Goals

$27,556.80

120 shares of Disney @ 108.05 (47% of the portfolio)
25 shares of Amazon @ 560.31 (52% of the portfolio)

This grouping of Amazon and Disney has an expected RIO of (340.6%. This gets me closer to achieving my goal of owning a house in San Francisco, the most expensive city in the United States as of now. San Francisco also gets me closer to my investments.

There are two main types of stock, common stocks and preferred stocks. Common stock or shares represent ownership in a company. The majority of stock is issued in this form. Not only do investors own a portion of the company, investors get 1 vote per share during the selection of the board members, the overseer of the major decision made. Preferred stocks is in some degrees a form of ownership, but this ownership is not accompanied with voting rights. Unlike like common stocks, which has variable dividends that are never guaranteed, with Preferred stocks, investors have a fixed dividend. All of the companies I will be investing in are common stocks. I prefer common stocks because they offer two ways for their owners to benefits, by capital gains and/or with dividends, and as the company becomes more valuable, so will the ownership interest represented by each shares of stock (this is the reason why don’t mind not getting dividends from Google or Amazon). 

I chose all of these companies because all of these companies in the long run would yield a profit.

Throughout my analysis, I have made numerous assumptions, which are:

  • - I assumed that Google, Disney,and Amazon will continue to be relevant. I believe that these companies are the driver of change in their industries creating a profit for its investors in the process. 
  • - Even after researching these companies, my entire strategy can fall apart if I sell at the wrong time. In the crisis of 2008, panic selling was a huge contributor to an already building crisis. Panic selling is a wide-scale selling of an investment which causes a sharp decline in prices. The ideal time to sell stock is when shares are overpriced relative to the value of the company. I am assuming that I will be able to ride out any obstacles. 
  • - I assume that the goals listed above hopefully would not change. 
I would still make the decisions I did in this project even I was given an opportunity to do otherwise. Investing is a great opportunity to make money.


Works Cited:


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