Tuesday, January 8, 2013

Glossary of investment terms

This item appeared in the Toronto Star Business January 5, 2013 - Enjoy!

Did you hear the one about the financial planner who walked into a pizzeria to order a pizza? The server asks him: "Should I cut it into four pieces or eight pieces?"

The planner replies: "I'm feeling rather hungry right now. You'd better cut it into eight pieces."

Think of the eight pizza slices as an 8 for 1 stock split – you get twice as many pieces as the four slice pie and so you feel richer.

I know it was a corny joke but I was just trying to do contribute to the investor education movement that is being championed by the business media, various financial institutions and our own Ontario Securities Commission (OSC). The OSC invite visitors to “Check out our brochures to learn more about investing and how to protect your money.”

There is no doubt that an informed, educated investor will make better investment decisions and so with the New Year upon us I now use this space to table my own glossary of investment terms that should serve us well through 2013.

Bear Market: This is what the markets do after you buy because of bright economic conditions, record corporate earnings growth, peace in the Middle East, and low oil & gold prices.  

Bond: A bond is a magical piece of paper that is worth more when the economy is bad and then worth less when the economy is really bad.

Bull Market: This is what the markets do after you sell because of a recession, corporate scandals, political unrest, war jitters and soaring oil & gold prices.

Cash Flow: Cash flow is the movement of money from a mutual fund to the fund manager. Sometimes called the management expense ratio or MER.

Commissions and Trailer Fees: The commission is money you pay to buy and sell. A trailer fee is the money you pay to buy and never sell.

Day Trader: The day trader has the opportunity to lose large amounts of money over short time periods. See long term investor.

Diversification: In a bear market a diversified portfolio will collapse more slowly.

Financial Planner: A financial planner is a jack of all trades and master of none.

Financial Columnists and TV Experts: They are legends in their own mind.

Fundamentals: Otherwise known as the “compelling story”. The compelling story is what draws you in and keeps you intoxicated until closing time.
Fundamental Analysts and Technical Analysts: The fundamental analyst thinks he or she is right and the technical analyst thinks the market is right.

Growth Stocks: Growth stocks are the ones then go up when you don’t own them.

Investment Math: When it comes to investing math is everything.  I have learned there are three kinds of investors - those that can count and those that can't.

Investor Advocate: An investor advocate is a bad investor looking for someone else to blame

Long Term Investor: A long term investor is a day trader who has refused to sell a losing trade.

Margin Debt: Using margin is the unique opportunity to have your original investment go to zero and yet lose 200 percent of your capital.

Market Correction: A correction is what the markets do the day after you buy stocks.

Options: Buying call options is the opportunity to lose small amounts of money over short time periods. Writing covered calls is the opportunity to either trade away a rising stock or to hold on to a falling stock

P/E Ratio: The P/E ratio is also known as the panic/exit ratio. Fund managers use this number to calculate the time required for all of the unit holders to bail out of a fund.

Seasonal Investing: In a bull market seasonal investing is the strategy of buying low, selling higher and then buying back even higher. In a bear market it is the strategy of selling high, buying low, and then selling even lower.

Stock: A stock is magical piece of paper that is worth more when the economy is good and then worth less when the economy is really good.

Value Investing: Picking stocks that go down as soon as you own them, otherwise known as value traps..

On the topic of value traps this is a comment on Shoppers Drug Mart Corporation I found posted on found on stockchase.com “Generating so much free cash flow that they don’t know what to do with it so they are buying back shares and raising dividends”

Our chart of Shoppers displays a classic value trap with the current price sitting just below the March 2009 lows posted by just about every listed large cap stock on the planet and that is a compelling story.

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