Class Exercise #2: Stock Portfolio Rules 1.You start with $10,000 in virtual money. 2.On the day you...

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Class Exercise #2: Stock Portfolio Rules 1. You start with $10,000 in virtual money. 2. On the day you open your portfolio (i.e. the day you present your portfolio to the class), you’re allowed up to 10 trades. 3. The primary idea of this exercise is to select individual stocks (i.e. do your research), but you may also elect to leave a portion of your money in cash Leaving a portion of your initial money in cash doesn’t count as one of your initial 10 trades Money left in cash will not accrue interest or yield a return. This is not true to life, but it’s the only way to make this exercise manageable over the remainder of the course. 4. You may buy any publicly traded individual stock on the NYSE or NASDAQ exchanges, in any full share increment. 5. You may also buy a fictional mutual fund that exactly tracks the performance of the S&P 500, in any full penny increment. This is a magical mutual fund that doesn’t charge any management fees. 6. After you present your portfolio to the class, your trades will be recorded. 7. We’ll track your portfolio performance every few days. 8. The one with the most money at the end of the course wins. Grading You’ll be graded on the initial construction of your portfolio. Of primary importance is your ability to defend your decisions. i.e. How much risk are you taking on? Why? Are you diversifying with bonds and cash or jumping headlong into stocks? Why? With respect to the stocks you purchase, are you diversified? How? Why? Have you researched the companies thoroughly? Can you prove it? Final rule: you can’t pick any of the stocks contained in the following “portfolio presentation example” foils. ©2015 D. M. Kaufman. All rights reserved

Transcript of Class Exercise #2: Stock Portfolio Rules 1.You start with $10,000 in virtual money. 2.On the day you...

Page 1: Class Exercise #2: Stock Portfolio Rules 1.You start with $10,000 in virtual money. 2.On the day you open your portfolio (i.e. the day you present your.

Class Exercise #2: Stock Portfolio

Rules1. You start with $10,000 in virtual money.2. On the day you open your portfolio (i.e. the day you present your portfolio to the

class), you’re allowed up to 10 trades.3. The primary idea of this exercise is to select individual stocks (i.e. do your research),

but you may also elect to leave a portion of your money in cash– Leaving a portion of your initial money in cash doesn’t count as one of your initial 10 trades– Money left in cash will not accrue interest or yield a return. This is not true to life, but it’s the

only way to make this exercise manageable over the remainder of the course. 4. You may buy any publicly traded individual stock on the NYSE or NASDAQ exchanges,

in any full share increment.5. You may also buy a fictional mutual fund that exactly tracks the performance of the

S&P 500, in any full penny increment. This is a magical mutual fund that doesn’t charge any management fees.

6. After you present your portfolio to the class, your trades will be recorded.7. We’ll track your portfolio performance every few days.8. The one with the most money at the end of the course wins.

Grading– You’ll be graded on the initial construction of your portfolio.– Of primary importance is your ability to defend your decisions. i.e. How much risk

are you taking on? Why? Are you diversifying with bonds and cash or jumping headlong into stocks? Why? With respect to the stocks you purchase, are you diversified? How? Why? Have you researched the companies thoroughly? Can you prove it?

Final rule: you can’t pick any of the stocks contained in the following “portfolio presentation example” foils.

©2015 D. M. Kaufman. All rights reserved

Page 2: Class Exercise #2: Stock Portfolio Rules 1.You start with $10,000 in virtual money. 2.On the day you open your portfolio (i.e. the day you present your.

Targeted Asset Mix

• Personal Status– Age: 37– Married– Two kids, age 6 and 3– Debt free– Planning early retirement

• College expenses for the little grommets aren’t too far off.• Retirement could be as early as ~15 years from now –

coinciding with kids’ college expenses. Ouch.• Debt free status means fixed living expenses are low – we

can take some investment risks.• Summary: Need aggressive growth from stocks while

preserving some capital for looming big-ticket expenses and income reductions. A total or near total loss would be devastating.

Portfolio Presentation – 2008 Example

60%30%

10%

StocksBondsCash

Page 3: Class Exercise #2: Stock Portfolio Rules 1.You start with $10,000 in virtual money. 2.On the day you open your portfolio (i.e. the day you present your.

• Initial funding: $10,000• Initial investments:

– $2,000 in cash (targeting another $1,000 to go into stocks soon, but holding in reserve for now)

– $3,000 in bonds– $5,000 in stocks

• Initial stock picks:– 30 shares Disney (DIS)– 35 shares Bank of America (BAC)– 50 shares Pfizer (PFE)– $2,047.70 in S&P 500 Index Fund

Portfolio Presentation – Example (cont.)

Page 4: Class Exercise #2: Stock Portfolio Rules 1.You start with $10,000 in virtual money. 2.On the day you open your portfolio (i.e. the day you present your.

• Stock diversity– Strong diversity across sectors with

S&P 500 position, plus heavier positions in pharmaceuticals (PFE), entertainment (DIS), and finance (BAC).

– Pharma and entertainment tend to be somewhat recession proof, and our economy is weak right now.

– Finance is a contrarian position – it’s been beaten way down and I’m hoping for a turnaround.

– All large cap positions. May miss out on positive moves in small cap, but today’s small cap trend is down and I don’t want to risk outsize losses.

Portfolio Presentation – Example (cont.)

Page 5: Class Exercise #2: Stock Portfolio Rules 1.You start with $10,000 in virtual money. 2.On the day you open your portfolio (i.e. the day you present your.

• Specifically, why Disney?– Fairly diversified as entertainment

companies go – film, TV, travel, and merchandise.

– Very strong worldwide brand.– Pixar acquisition and Steve Jobs board

seat ensures “cutting edge” adoption of distribution technology.

– Highly profitable – strong P/E ratio– Slight dividend bonus– Slight revenue growth...– ...Outpaced by 9% quarterly earnings

growth yoy – this company has expenses under control

– Highly solvent (see debt/equity ratio of ~.4)

– Key Risks: terrorist attack, movie flops, Steve Jobs health

Portfolio Presentation – Example (cont.)

Page 6: Class Exercise #2: Stock Portfolio Rules 1.You start with $10,000 in virtual money. 2.On the day you open your portfolio (i.e. the day you present your.

• Specifically, why BAC?– Less exposed to the current mortgage

crises (they packaged and sold off most of their sub-prime loans).

– Hoping we’ve seen most of the bad news in the financial sector (and earnings growth will start to recover)

– Reasonable P/E ratio– Strong earnings (negative earnings

growth notwithstanding)– Strong dividend provides a nice cushion

against potential capital loss– Betting that this company will recover

from any short term risk over the next 15 years while providing a nice dividend.

– Key risks: More bad news in financials, earnings continue to slow, BOD suspends the dividend, (sizeable) debt becomes unmanageable.

Portfolio Presentation – Example (cont.)

Page 7: Class Exercise #2: Stock Portfolio Rules 1.You start with $10,000 in virtual money. 2.On the day you open your portfolio (i.e. the day you present your.

• Specifically, why PFE?– People will always need their medicines– Strong product pipeline– Strong earnings with amazing quarterly

earnings growth yoy (119%)– Reasonable P/E ratio– Decent dividend provides a nice cushion

against potential capital loss– Very low debt/equity ratio– Key risks: Product pipeline setbacks with

the FDA

Portfolio Presentation – Example (cont.)

Page 8: Class Exercise #2: Stock Portfolio Rules 1.You start with $10,000 in virtual money. 2.On the day you open your portfolio (i.e. the day you present your.

Initial position summary and cost basis

Cash $2,000Bonds $3,000Stocks $5,000

S&P 500 $2,047.70DIS $ 952.50 (30 shares @ $31.75)BAC $ 982.80 (35 shares @ $28.08)PFE $ 967.00 (50 shares @ $19.34)

TOTAL $10,000

Portfolio Presentation – Example (cont.)

Little opportunity here for explosive growth, but well set up for healthy gains. Given my age and

goals, that’s an okay trade off.