Tuesday, September 28, 2010
Saturday, September 25, 2010
Amen, brother. Regulators like things nice and vague when it comes to "securities." They like vague phrases like "investment contract" or "anything commonly known as a security" because it allows them to fit just about anything under that category if they want to regulate it. So, step one is this: does the investment meet the definition of a "security"? If so, it is subject to anti-fraud rules, whether it has to be registered or not (exempt). That means that a fixed annuity or a whole life insurance policy is not even subject to anti-fraud regulations. Why not? Neither one is a "security." Then, there are securities that are excused from registration requirements. They're still securities, so anti-fraud rules still apply. These securities just don't have to be registered. They are excused/exempted from the registration requirements. For example bank stock does not have to be registered with securities regulators. Neither do church bonds. A church bond is sold with an offering circular rather than a prospectus. But, that doesn't imply that the investment is somehow safer than other debt securities, and the offering circular will announce that at the very beginning. To see how this stuff works in the real world, please check out an offering circular for a "church bond" or series of "mission investments," really, at:
You'll notice that the investments are being sold by employees, who receive no special compensation for sales (not agents). You'll notice that the expenses incurred to sell the investments are about $1 million per year. You'll notice all the disclosure that is provided . . . because even though the securities aren't registered, they are subject to anti-fraud rules. Investors have to be informed of all the risks involved; otherwise, they could sue if they lose money. Spend some time with this document, and I'm confident you will begin to understand "exempt securities" and securities registration issues in general much, much better. Enjoy.
Tuesday, September 14, 2010
- How many trucks will need to be replaced each year for the next 10 years?
- How big is the company's market share projected to be?
- What is their profit-per-unit-sold?
- How much will profits on these vehicles impact the company's overall net income/bottom line?
- Does the company have a competitive advantage?
- Who are the officers and directors, and what have they done in the past?
Notice how some of these questions are answered with numbers and some are qualitative. No matter how quantitative we get, it's all based on projection and speculation. Out of 70,000 vehicles that need to be replaced, we first have to guess how many of those customers will pay the higher price for the hydraulic hybrid. We could be way off there. Then, we have to guess what % of the projected market will go to the firm we're analyzing. At this point, we could be so far off that every calculation about the revenues, costs, and profits will become exponentially inaccurate. Maybe that's why the efficient market theorists have such a following? Not only do we have to get these calculations and assumptions right, but we have to do a "discounted cash flow" model to figure the "net present value." And, we'd have to somehow marry that sort of braniac calculation with the guesswork involved with deciding if a particular senior management team is trustworthy and/or more likely to succeed in this new market space than any other. So many places it could go wrong. Not to mention that this new technology exists largely through government subsidies, and so the fundamental analyst has to try to figure out if those subsidies will keep coming and, if so, will they increase or decrease? If they dry up, which company would most likely survive without them? So, we have regulatory risk (subsidies might dry up) and risk of obsolescence (the technology) also threatening to make a mockery of our sophisticated calculations. No wonder there are technical analysts who leave all this fundamental hand-wringing to others. Just tell them the stock symbol, and they'll pull up the data on its market behavior. What's the 52-week high and low price of the stock? What's the 200-day moving average for its closing price? Where's the support and resistance? What's the volume? Technical analysts study market data, your exam might say.
Fundamental analysts, on the other hand, study companies--their operations, their projected revenues and profits. And, I'm sure some of them pretend they buy stocks based on the "discounted cash flow model" when, really, they just have a feeling about this Google, Facebook, or Groupon company everybody's talking about.
Thursday, September 9, 2010
This morning while reading the Sun-Times, I saw a full-page ad for Macy's with a familiar looking photograph at the center. Under the photo, the name Vicki Gunvalson really caught my eye. Hey, I know her, I realized. She's studying for the 65. Turns out, she's also a reality TV star on The Real Housewives of Orange County. She's in Chicago tomorrow night to autograph copies of her new book and help Macy's sell some high-end apparel.
Not only do I know Vicki through emails, but here in Chicago her sister, Lisa, has been coming in for Series 65 tutoring recently. Today she managed to pass her Series 65 on her third attempt, with a 76%. That's going to put the pressure on her famous sister, I'm thinking. I wonder if it's possible that this little back story could somehow find its way into the reality show. Maybe I go on the show and provide some private tutoring for Vicki's Series 65. Take her to the point of tears like some psychotic personal trainer--I think that's what sells on reality TV, right? Other people's pain. And, boy, I can't think of a bigger source of pain than the Series 65. Maybe it's nutty, but I think it would make for some good reality TV.