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Karlsruhe -Liverpool Exchange

February 2004

Investment Strategies

& Presentation

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Aims of the Session

In this session we will:• Follow-up the SheerFiction Task.• Look at the principles underlying some

Share Investment Strategies• Introduce Task C

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Sheer Fiction Task

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Balance Sheet: 2003 Sheer Fiction PLC

Fixed Assets £800,000Current Assets

Stock £500,000Debtors £50,000

Creditors: Amounts falling due within 1 yr.Trade Creditors -£100,000Tax -£50,000

Creditors: Amounts falling due after 1 yr.Long Term Loan -£200,000

£1,000,000

Capital & ReservesShare Capital ( 500,000 shares, £1 each) £500,000Capital Reserves £250,000Retained Profits £200,000Profit for the Year £50,000

£1,000,000

Should we invest in this company?

Should we invest in this company?

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General Comments

1. Sheer Fiction shares have a Net Asset Value of £2.00, compared to a Market Value of £2.43. This does not compare well.

2. Gross Profit is fine, but a net profit Margin of 8.98% is poor, and both the ROCE and ROSF are on the low side. There are questions about the profitability of this year’s trading.

3. There is no Cash in the Bank, and although the Current Ratio is High (3.67), the Acid Test Ratio indicates that there may be Cash Flow difficulties.

4. The current dividend in the P&L Account and the yearly dividend in the Balance Sheet indicates that last year the dividend must have been greater.

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Specific Comments

1. Dividend per share (8p) is OK, but not spectacular. 2. Both the Earnings per share, and the P/E ratios are

quite satisfactory, and if maintained this represents a good growth rate.

3. However, Dividend Payout is very high (44.64%), and possibly indicates that the directors have been too generous with the dividends. When this is seen in the light of the 8p dividend, things do not seem quite so good.,

4. A dividend yield of 22.96% is good overall return, but on the evidence so far, an investor would be advised to take the money and run, selling the shares.

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Investment Strategies

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Some Underlying Principles

• As we have seen, it is possible to analyse a company’s finances to come to conclusions about whether or not to invest. However, financial data is simply a snapshot, and the current situation may not actually be reflected in the figures.

• Shares on the stock exchange are subject to variability; this is often due to market psychology rather than reflecting the real value of companies. Many strategies seek to exploit differences between ‘reality’ and ‘what the market thinks’.

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Types of Investor

Investors tend to fall into one or more of the following types:‘Tipsters’ Friend’• Uses inside information on companies from relatives, friends or

investment writers.‘Trend Follower’• Uses complex statistical and analytical tools to chart the

progress of shares, looking for trends and cycles.‘Weather Forecaster’• Uses economic and other forecasts to try predict in general

terms what the market will do, then use a mixture of strategies to react to this.

‘Valuation Expert’• Uses financial information about a company to value shares

independently of the market.

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Four Strategies

This next set of slides simply discusses some principles behind four of the most popular strategies. The information is left deliberately vague, and the slides themselves will not provide you with enough detail to put these into operation.

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Dogs of the Dow

Underlying Principle:

Because of the nature of the market, and speculation psychology, there will always be stocks which are undervalued. If you can seek them out and invest in them, then sooner or later, the stock will rise and you will make money.

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Dollar Cost & Value Averaging

Underlying Principle:

There are two different strategies here, but the principle is the same. In times when the market is depressed, the chances of you making a good profit are high. This means that you should buy lots of stock.

When the market is buoyant, the chances of making good profits are reduced. You should correspondingly buy fewer stocks.

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PE/EPS Strategies

Underlying Principle:PE represents the number of years you would need to have your money invested in a company in order for you to get a full return on your capital; therefore you should invest in companies with as low a PE as possible.Conversely going for high EPS means that you go for companies which maximise their profitability, and therefore grow at the quickest rate.

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Strategy

Underlying Principle:

Beta () Strategy looks at the variability of stock using some measure such as the standard deviation. This is compared to some external measure such as the FTSE Index.

This is then used to identify stocks with high volatility ( > 1), which, if the portfolios managed effectively can be used to make a series of short term gains.

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Task C

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Task C

Task C is in two parts:• The first part is a research task, looking

at possible investment strategies• The second part is a presentation and

analysis of your portfolio

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The Research Task

• Your Task is to seek out possible investment strategies which could be used automatically in a decision-making tool.

• You will need to find several strategies (possibly those that have been explored in this presentation, but in addition, several others.)

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URLs to pursue

• You should begin by exploring the advice given by Rutger Derksen on the CityComment website, and following up with a search on keywords, in order to find out about particular strategies.

• On the Karlsruhe Project website is a document which provides a few links to sites which you may find useful.

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The Presentation

At the end of the week, you will be expected to give a presentation . This will include:• An account of your TFSE Portfolio (Task A)• A review of your CityComment Portfolio• A revised portfolio constructed in the light of the

research carried out.