analysis

Example 1:

While browsing through the finance section of the Forbes website, I ran across this article titled “4 Best Investments to Make in 2018”. I thought this was an interesting article in that it is one that informs those of us who lack knowledge on smart investing what some good investments are.

The author begins by making his argument on why people should act fast with little analysis on the basic investments they should make. He argues that people who think too much about the investments may fall into a problem called “paralysis by analysis”. This paralysis occurs when people become overwhelmed by their endless investment possibilities and fail to act and invest their money. He states his solution is to invest the money right away and don’t let life happen and let the money you set aside for investments disappear. His suggestions for quick investments are as follows:

#1 – Invest in the stock market

With this type of investment, the author defines two groups of people. Those who don’t trust the stock market and those who put every cent they have into the stock market. His suggestion is to invest small amounts of the money you have set aside by using the dollar cost average method. This method is a basic method where investors buy few stocks when the market value is high and more stocks when the market value is low. He then continues to suggest where in the stock market you should invest.

#2 – Peer-to-peer lending

This is a simple investment where you can invest small amounts of your cash through companies to other people. Essentially you are lending money and earning interest similar to how a bank would make a personal loan. The author states that investors in peer-to-peer lending can earn up to 6% interest or more.

#3 – Real estate

The author states that real estate investing in physical property is not for everyone and that it is risky, but there are real estate investments that can be less risky. These investments include real estate notes and a new company called Fundrise. These investments allow groups of people to pool there money together through organizations that invest in property. This eliminates the need for people to become landlords and invest in smaller amounts to minimize risk.

#4 – Invest in you

The author states that by investing in yourself you can get high rates of returns. Some ways to invest in yourself include learning as much as you can by reading books, investing in courses to learn from other people, personal coaching, and going back to school.

The author states that he does not recommend an analysis or if you do, it should be minimal. To me, I think this is a mistake. The author states that there is risk in the investments that he is recommending but does not share with the readers any tips and tricks of analyzing the risk factors of the investments. I think that by following these suggestions without an analysis, we cannot know for sure if we are paying too much for these investments. For a simple example, you could go back to school to earn a degree and get a higher paying job, but you need to do your best to determine if the cost of that degree will be more than paid for by your increase in pay. Otherwise, you will be paying too much for growth. We could even be paying too much for a growth that cannot be promised. When people make any type of investment they should at least perform a minimal analysis themselves such as plotting an earnings per share graph or they should consult professionals who have the tools and can perform an analysis required to know whether or not you are making a good investment.

What do you guys think?

 

Source: https://www.forbes.com/sites/jrose/2018/01/05/best-investments-to-make/#74c2770e4b72 

Example2:

I saw this article today on CNBC entitled “David Stockman: Stocks will plunge 50% in this 'daredevil market'”.

The article is written by Stephanie Landsman but she is mostly reporting on what David Stockman has forecasted.  He is predicting a dramatic drop to the whole stock market primarily because the stock market has seen “about eight or nine years” of expansion and that the last two stock market downturns were about 7 or 8 years apart.  He also notes that the Trump tax cuts are, for the most part, not having a noticeably large positive impact on the economy, but that the market is still pricing in a large positive impact.  David Stockman is also fearful that a “black swan” (some unpredictable event) will result in this dramatic stock market drop.  He does state that he believes that we could see the EPS for the S&P 500 drop to $75 from where it is currently, around $192.  This would definitely affect the fundamental value of the S&P 500 stocks but he doesn’t specifically say why earnings in this country will drop so dramatically (other than he thinks we are due for a recession) and why he specifically predicts $75 per share (maybe because that was a low in 2010).

David Stockman’s prediction about a stock market plunge seems to be largely based on a gut feeling rather than a numerical analysis of the market.  The risks he brings up are real but I don’t think it logically follows to say that the stock market must crash anytime soon if it has had a long run of growth (especially if that growth is supported by fundamental value).  I found this document with a chart comparing earnings growth and price growth for the S&P 500 from May 2008 until about a month ago.  It appears to me that the S&P might be a little overpriced right now but in general, it seems like the price is tracking with earnings.  It is inevitable that we will encounter another recession in this country but I have not seen any compelling evidence that our next recession is on the near-term horizon, in fact it seems like we are still in the natural upswing following the “Great Recession” that started in 2008 (more on accelerating earnings growth can be found in the same document I linked to above).  Gut feelings about the future are not without value but they are accompanied by the potential pitfall of overreacting or underreacting significantly to information based on your emotions at the moment.  Basing your predictions about the future on concrete facts paired with accurate, realistic, and reasonable models is, in my estimation, a much surer path to correct predictions.

I also want to say that our current period of growth in the stock market may be unprecedented in recent history but that does not mean it will not continue for the foreseeable future.  The fact that in 2008 we began the most dramatic economic downturn seen in this country in almost 80 years (i.e. “unprecedented in recent history”) to me means that it is less likely that we can rely on patterns seen in “normal” times to hold true for events related to that downturn, like the recovery period that is following it.

I guess we will have to wait for some time to pass to see if his gut feeling turns out to be correct.

What are your thoughts on this?

Example 3:

Tesla has been a hot topic in the news of late. First, an unsuccessful coup to remove Elon Musk as chairman followed by Elon’s teary speech during his June shareholders meeting garnered plenty of salacious coverage.  Elon Musk has indeed created a cult like following but Tesla has a difficult road ahead of it to finally become profitable and justify its overzealous valuation.

Enter Charley Grant, a CFA charterholder who is a columnist for the Wall Street Journal and covers U.S. health care and industrial companies for the Heard on the Street.  He recently wrote an article titled “What is tesla really worth? Auto maker rivals Ford, GM in market cap; profits are far behind”.  The article begins with a recap of the previous year then transitions into a short current status of the company.  He proceeds to perform a valuation that is based on some specific outcomes before concluding with a word on his projections of the shareholders priorities.  After my first read, the article seemed thorough and much too smart for me, but after re-reading with a more scrutinizing eye, there are a number of issues to address.

First is a classic example of circular reasoning.  Charley Grant falls for this faulty reasoning when he begins his valuation with the following statement: “Say Tesla's valuation should be 10 times higher than GM and Ford's…”. He then derives a total net income of $700 million based off this statement with a few presumptions of delivery numbers and sale prices (of which we will cover shortly).  Finally, he calculates a $1.1 billion operating income based on a 5.4% margin until he comes full circle to prove the very same assumption he began the valuation with. This lacks a solid anchor and uses only speculative values.

Next, the assumption of a constant share price for Tesla stock.  Much of his valuation is based on the fact that the Tesla share price will stay at $300 as it becomes profitable.  This is an absurd notion.  Mr Grant even states later in the article that “Tesla has never generated a positive operating margin for a full year” and twice mentions lowering the multiple. In essence, he is proposing that as Tesla’s P/B ratio drops due to increased book value, the market will not value the company more but rather reduce its intrinsic value in near perfect sync.

Last there is the issue of his delivery estimates.  The number he chose was 380,000 vehicles delivered in 2018, with very little reasoning behind it. The singular hint he did provide was that he disagrees with analysts and calls them “a bullish lot”; so, that is why he did not select the 302,000 estimate they forecast.  He also doesn’t choose the 500,000-car delivery estimate that Elon has forecasted.  Why? A simple forecast based on current output and historic increase over the last quarter may have provided better clarification for this forecast.

One last thing was a simple math issue.  It seems that Mr Grant expects 380,000 vehicles, with an average sale price of $50,000 to come out to $21 billion.  But if my math serves me correctly, that is only $19 billion.  In other words, while the article touches on many important points and has some decent insights, but it lacks fundamental analysis, proof reading, and is not built from a solid anchor.

Grant, C. (2017, Apr 17). What is tesla really worth? auto maker rivals ford, GM in market cap; profits are far behind. Wall Street Journal (Online) Retrieved from  http://login.ezproxy1.lib.asu.edu/login?url=https://search-proquest-com.ezproxy1.lib.asu.edu/docview/1888557434?accountid=4485