How To Get Rich? Erki Kert

AmCham YPC April 2009

Topics How to get rich?

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Should you invest Risk Where to invest How to invest The importance of performance How to buy a stock – an example How to choose between investments Putting together a portfolio Typical mistakes of beginners Analysis methods

Global financial crisis and stock market crash 2

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How to get rich? The formula does not give fast results, but is extremely simple

+ INVEST 3

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= WAIT

Inflation is greedy Rahaand rõõmus ja future kurb tulevik The happy the sad of your money 450 000 400 000 350 000 300 000 250 000 200 000 150 000 100 000 50 000 0 1

2 3

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5 A

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6 7

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9 10 11 12 13 14 15 16 17 18 19 20 B

C

Risk Acceptance of risk is the key difference between saving and investing. Risk can be described as price movement. The best way to avoid too much risk is to diversify. Company risk Market risk

TANSTAAFL – There ain’t no such thing as a free lunch 5

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The richest people in the world

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Bill Gates (52)

Warren Buffet (77)

Carlos Slim Helú (68)

$18b

$25b

$25b

$40b

$37b

$35b

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Where to invest? (1) Possibilities

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Stocks Funds Bonds Real estate Commodities (oil, gas, etc) Precious metals (gold, silver, etc) Other (art, antique, etc)

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Where to invest? (2) 13,7%

11,2%

6,3%

4,0%

3,3%

Source: Ibbotson Associates 8

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Time consumption How much time are you willing to spend for investing?

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24h a day (I even invest while dreaming) Full working day 3-4h a week Once a week Read some reviews once a month Just check once a year

Types of investors Long term investor

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investment horizon at least 2-3 years takes little time

Trader (swing trader, day trader)

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transactions are done for just a few seconds full time job

Automated trading systems

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computer makes the decisions

The importance of return Tootluse mõju 9 000 000 8 000 000 7 000 000 6 000 000 5 000 000 4 000 000 3 000 000 2 000 000 1 000 000 0 1

2

3 8%

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4

5

6

7

12%

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9 10 11 12 13 14 15 16 17 18 19 20 16%

20%

24%

Let’s begin! 1. 2. 3. 4. 5. 6.

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Open an account Choose a broker Set goals Practice with play money Go through the mistakes and make conclusions Start small with real money

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How to choose a broker? Service quality - client relations - quality of trading platform Price - monthly account fee - transaction fees

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Which regions and sectors to choose? More than 10,000 listed companies in USA Ca 100 companies in the Baltics. Defensive sectors (non-cyclical) - telecom - pharma - consumer discretionary Non-defensive sectors (cyclical) - car manufacturing - retail trade - entertainment 14

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Success and failure Reasons for failure

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Greed – try to catch a big fish Weak discipline (don’t fall in love with stocks) Cannot admit mistakes (“it’s always someone elses fault”) Going with the flow (emotions are your biggest enemy)

Factors of success

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Invest into assets that you know Do your homework and adopt Distinguish between important and not important Take full responsibility

Why stock move? - Financial results of companies - Other economic factors (oil price, interest rates) - Investor sentiment - The market move in the same rhythm 2 key drivers – greed and fear

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How to analyze? Fundamental analysis - Company’s core activities - reports (annual and interim) - management - market trends and perspectives -… Technical analysis - there’s just one info source – chart (price and volume)

“Investing without research is like playing poker and never looking at the cards.” – Peter Lynch 17

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An example – technical analysis Apple (AAPL)

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An example – fundamental analysis Eesti Telekom (ETLAT)

Strong and stable cash flows Attractive valuation - 2009 estimated P/E multiple is 7,6x Attractive and stable dividend yield - 2008 estimated dividend yield of 12,8%

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Stock market crash of 2008 World market performance (from peak)

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Iceland

-98%

South Africa

-38%

Russia

-54%

Czech Rep

-57%

South Korea

-35%

Sweden

-44%

Turkey

-51%

Australia

-45%

Brazil

-38%

Hong Kong

-50%

India

-46%

China

-54%

Estonia

-74%

Poland

-58%

USA

-46%

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World stock market index

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Tallinn stock exchange (OMXT)

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USA stock market (S&P 500)

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Who to blame? It’s difficult to find one just one culprit. Instead, the crisis was triggered by co-occurrence of many factors. - regulations - supervisory bodies (SEC) - politicians - lenders - Federal Reserve (FED) - consumers - companies - ratings agencies - ... 25

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Timeline and the causes of crisis 1. 2. 3. 4. 5. 6. 7. 8.

Roots from dot-com bubble Real estate price rally Securitization of real estate loans Loss of responsibility, more fuel to real estate rally Boom of derivatives (credit default swaps – CDS) Huge leverage (30-40x equity) Wall Street’s shortsightedness A huge mess no-one could understand

9. Drop in real estate prices 10. Loan defaults, inability to price securitized loans, backing of CDS contracts, credit markets froze 26

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Solving the crisis and the world after … Banks and other financial institutions are nationalized Huge bail-out packages around the world Interest rate cuts Trust towards deposits increased

What happened to Adam Smith’s invisible hand?

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But what about investing now? “Invest at the point of maximum pessimism” – John Tempelton

“Even the intelligent investor is likely to need considerable will-power to keep following the crowd.” – Benjamin Graham 28

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Anger towards bankers

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Thank you! Contact Erki Kert [email protected] 6 800 458

Financial portal – www.lhv.ee Forums – www.lhv.ee/forums Investing school – www.lhv.ee/kool Stock Shark 2009 (coming in autumn)

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