Intro & Chap 1
Help!
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| Author | not originally finance but a science guy. like doctors the more they see the less they know, this is also true in finance
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| Journal of medicine | like the journal of finance these are both peer reviews and should be read and kept up with by drs and financial people.
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| faulty financial information | USA today, brokers, fortune mag, most finance don't even know of the science of finance
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| What are the 4 pillars? | 1. Theory 2. History 3. Psychology 4. Business
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| Theory | return and risk go hand in hand; rewarded for your exposure to one thing--RISK!
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| Biggest risk of all | failing to diversify
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| Key when tracking your portfolio | Behavior of your portfolio as a whole not a specific asset is what matters
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| portfolio theory | mixing assets into a particular blend
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| History | study of past will help you see when asset prices are 2 expensive and risky and when they are 2 cheap to pass up
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| what kind of science is finance | social not hard science
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| Hard science | aircraft, electrical, physics, circuits, etc. always respond the same way to a set of circumstances
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| social science | behave in different ways even with the same circumstances
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| Psychology | people are attracted to decreasing payoffs; we have behavioral investing issues; we become grossly over confident; we pay and trade to often
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| Business | Investors are naive about brokers & investment companies; brokers not our friends, more you know about the financial industry the better off you will be. Financial industry exists to serve itself. To extract fees from the public
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| Fiduciary responsibility | unlike doctors and lawyers, there is no fiduciary responsibility for financial investors
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| Chap 1 | No Guts, No Glory!
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| Assets with increasing returns | have increasing risks
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| what is the best investment over the long term? | stocks, by about 6%
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| why do we invest now? | to spend later
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| how does a small % spent from your portfolio today affect you? | the overall balance in the future can be dramatically less because of compounding.
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| Financial History | Study of the past allows us to identify financial risks in the here and now. It also gives us wisdom to know the doom and peril
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| Bond returns in 20th century | bond losses in 1900's severe, instead of financial system being backed by gold it went to paper this drove up inflation,
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| Stock return history | during inflation bot bonds and stocks price can be hurt, but the stock price the companies can change the price of their goods and should increase with inflation.
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| Inflation | Bonds suffers along with stocks. Bonds suffer greater because of their fixed rates
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| Bond | Loan
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| Stock | ownership in a company
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| 2 flavors of risk | Short term risk and long term risk
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| short term risk | less than 3 years, what we feel in our gut and gives us sleepless nights. causes investors to bail out
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| long term risk | hang on and the short term does not matter. Stay the course; this is hard to do.
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| foreign stock returns | one nation's return not higher than other
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| average stock return | ~8%
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| average bond return | ~3-4%
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| Company characteristics that effect a company | 1. size: market capitalization (total market value of its outstanding stocks) small stocks = higher returns, but also higher risks 2. quality: good and bad companies Growth = good, Value = bad (kmart)
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| Examples of Value Stocks | K-mart, it is riskier with a higher return
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| Examples of Growth stocks | Wal-Mart, stable with lower return
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