From: lott@informatik.uni-kl.de (Christopher Lott)
Subject: misc.invest FAQ on general investment topics (part 1 of 2)
Followup-To: misc.invest
Summary: Answers to frequently asked questions about investments.
         Should be read by anyone who wishes to post to misc.invest.
Originator: lott@bogner.informatik.uni-kl.de
Keywords: invest, stock, bond, money, faq
Supersedes: <invest-faq-p1_726728402@informatik.uni-kl.de>
Reply-To: lott@informatik.uni-kl.de
Organization: University of Kaiserslautern, Germany
Date: Mon, 25 Jan 1993 05:00:05 GMT
Expires: Mon, 22 Feb 1993 05:00:02 GMT

Archive-name: investment-faq/general/part1
Version: $Id: faq-p1,v 1.1 1993/01/23 12:46:28 lott Exp $
Compiler: Christopher Lott, lott@informatik.uni-kl.de

This is the general FAQ for misc.invest, part 1 of 2.

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Subject: Sources for Historical Stock Information
From: bakken@cs.arizona.edu, nfs@princeton.edu, gary@intrepid.com,
	discar@nosc.mil, irving@Happy-Man.com, ddavis@gain.com, 
	krshah@us.oracle.com, cr@farpoint.tucson.az.us

There are no free sources for historical stock information on the Internet.

Paid services include:
    + Prodigy.  US$13/month for basic service includes 15 minute delayed
      quotes on stocks at NO additional charge.  
      Available via local dial-up all over the US.

    + Compuserve.  US$7.95/month for basic service includes 15-min delayed
      quotes on stocks and options at no additional charge.  Historical
      quotes are available for about $.05 each.  Available via local
      dial-up all over the US.

    + Genie.  US$4.95/month for today's closing quotes. Genie Professional
      service (price not given) gives historical quotes, stock reports,
      different investment s/w, access to Charles Schwab and online trading.

    + Farpoint. ($4 or $8/week for an IBM-compatible diskette) provides
      daily high, low, close, and volume for for approximately 6000 stocks. 
      They offer historical data from 1 July 89 to present.  Write to
      Farpoint, 3412 Milwaukee Avenue, Suite 477, Northbrook, Illinois 60062.

    + Historical Data Services in Kansas City, MO.  They carry stock quotes,
      commodities, indexes, mutual funds.  Daily stock quotes, per year: $0.75
      Contact them at 800-677-7369.

    + Dow Jones News Retrieval.  Stock, bond, mutual, index quotes as well
      as news articles on companies, and misc. analysis packages.  US $25
      per month flat rate for the after hours service (8pm-5am local time). 
      Available via dailup over Tymnet and SprintNet; available via Internet.

    + Standard & Poor's Compustat (most complete and most expensive).

    + Disclosure's "Compact Disclosure" on CD (only $6,000 a year).

    + Value Line's Database 

Bulletin Boards for historical stock information include:
    + The Farpoint BBS offers a free source of historical stock data
      (about 3 years worth).  They give you 120 minutes of free time
      daily and have historical data files on hundreds of stocks.
      Phone number is +1 (312) 274-6128.

    + The Business Center BBS in San Diego carries most issues on the
      NYSE, NASDAQ, and AMEX.  It is free but limits on-line time to
      20 minutes.  Phone number is +1 (619) 482-8675.

 [ Compiler's note:  Anyone have a list of other sources?  ]

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Subject: Beginning Investor's Advice
From: pearson_steven@tandem.com, egreen@east.sun.com

Investing is just one aspect of personal finance.  People often seem to
have the itch to try their hand at investing before they get the rest
of their act together.  This is a big mistake.  For this reason, it's
a good idea for "new investors" to hit the library and read maybe read
three different overall guides to personal finance - three for different
perspectives, and because common themes will emerge (repetition implies
authority?).  Anyway, what I'm talking about are books like:

  Madigan and Kasoff, The First-Time Investor, ISBN 0-13-942376-1
  Andrew Tobias,
	 [Still] the Only [Other] Investment Guide You Will Ever Need.
         (3 versions with slightly different titles, all very similar.)
  Sylvia Porter, New Money Book for the 80s
  Money Magazine, Money Guide
  and maybe Charles Givens, [More] Wealth without Risk (see ** below)

Another good source is the Mutual Fund Education Alliance (MFEA); write
them at MFEA, 1900 Erie Street, Suite 120, Kansas City, MO 64116.

What I am specifically NOT talking about is most anything that appears
on a list of investing/stock market books that are posted in misc.invest
from time to time.  You know, Market Logic, One Up on Wall Street,
Beating the Dow, Winning on Wall Street, The Intelligent Investor, etc.
These are not general enough. They are investment books, not personal
finance books.

Many "beginning investors" have no business investing in stocks.  The
books recommended above give good overall money management, budgeting,
purchasing, insurance, taxes, estate issues, and investing backgrounds
from which to build a personal framework.  Only after that should one
explore particular investments.  If someone needs to unload some cash in
the meantime, they should put it in a money market fund, or yes, even a
bank account, until they complete their basic training.

While I sympathize with those who view this education as a daunting task,
I don't see any better answer.  People who know next to nothing and
always depend on "professional advisors" to hand-hold them through all
transactions are simply sheep asking to be fleeced (they may not actually
be fleeced, but most of them will at least get their tails bobbed).  In
the long run, you are the only person ultimately responsible for your
own financial situation.

** Caveats about Charles Givens: some of his ideas are on the aggressive
side (as opposed to conservative).  For example, some of his suggestions
about insurance might be considered too risky for some folks, and he also
makes aggressive interpretations of tax law.  People have to find their
own comfort level on these things.

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Subject: American Depository Receipts (ADR)
From: ask@cbnews.cb.att.com

An American Depository Receipt is a share of stock of an investment in
shares of a non-US corporation.

For example, BigCitibank might purchase 25 million shares of a non-US
stock. Call it EuroGlom Corporation (EGC).  Perhaps EGC trades on the
Paris exchange, where BigCitibank bought them.  BigCitibank would then
register with the SEC and offer for sale shares of EGC ADRs.

EGC ADRs are valued in dollars, and BigCitibank could apply to the
NYSE to list them.  In effect, they are repackaged EGC shares, backed
by EGC shares owned by BigCitibank, and they would then trade like any
other stock on the NYSE.

BigCitibank would take a management fee for their efforts, and the
number of EGC shares  represented by EGC ADRs would effectively
decrease, so the price would go down a slight amount;  or EGC itself
might pay BigCitibank their fee in return for helping to establish a
US market for EGC.  Naturally, currency fluctuations will affect the
US Dollar price of the ADR.

Dividends paid by EGC are received by BigCitibank and distributed
proportionally to EGC ADR holders.  If EGC withholds (foreign) tax on
the dividends before this distribution, then BigCitibank will withhold
a proportional amount before distributing the dividend to ADR holders,
and will report on a Form 1099-Div both the gross dividend and the
amount of foreign tax withheld.

Most of the time the foreign nation permits US holders (BigCitibank in
this case) to vote their shares on all or most issues, and ADR holders
will receive ballots which will be received by BigCitibank and voted in
proportion to ADR Shareholder's vote.  I don't know if BigCitibank has
the option of voting shares which ADR holders failed to vote.

Having said this, however, for the most part ADRs look and feel pretty
much like any other stock.

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Subject: Beta
From: RKSHUKLA@SUVM.SYR.EDU,ajayshah@almaak.usc.edu,rbp@investor.pgh.pa.us

Beta is the sensitivity of a stock's returns to the returns on some market
index (e.g., S&P 500). Beta values can be roughly characterized as follows:

b < 0		Negative beta is possible but not likely.  People thought gold
		stocks should have negative betas but that hasn't been true

b = 0		Cash under your mattress, assuming no inflation

0 < b < 1	Dull investments (e.g., utility stocks)

b = 1		Matching the index (e.g., for the S&P 500, an index fund) 

b > 1		Anything more volatile than the index (e.g., small cap. funds)

b -> infinity	Impossible, because the stock would be expected to go to zero
		on any market decline.  2-3 is probably as high as you will get

More interesting is the idea that securities MAY have different betas in
up and down markets.  Forbes used to (and may still) rate mutual funds
for bull and bear market performance. 

Here is an example showing the inner details of the beta calculation process:

Suppose we collected end-of-the-month prices and any dividends for a
stock and the S&P 500 index for 61 months (0..60).  We need n + 1 price
observations to calculate n holding period returns, so since we would
like to index the returns as 1..60, the prices are indexed 0..60. 
Also, professional beta services use monthly data over a five year period.

Now, calculate monthly holding period returns using the prices and
dividends. For example, the return for month 2 will be calculated as:
             r_2 = ( p_2 - p_1 + d_2 ) / p_1

Here r denotes return, p denotes price, and d denotes dividend.  The
following table of monthly data may help in visualizing the process. 
Monthly data is preferred in the profession because investors' horizons
are said to be monthly.
	===========================================
	  #     Date   Price   Dividend(*)   Return
	===========================================
	  0  12/31/86  45.20         0.00        --
	  1  01/31/87  47.00         0.00    0.0398
	  2  02/28/87  46.75         0.30    0.0011
	  .       ...    ...          ...       ...
	 59  11/30/91  46.75         0.30    0.0011
	 60  12/31/91  48.00         0.00    0.0267
	===========================================
(*) Dividend refers to the dividend paid during the period.  They are
    assumed to be paid on the date.  For example, the dividend of 0.30
    could have been paid between 02/01/87 and 02/28/87, but is assumed
    to be paid on 02/28/87.

So now we'll have a series of 60 returns on the stock and the index
(1...61).  Plot the returns on a graph and fit the best-fit line
(visually or using some least squares process):

                      |         *   /
               stock  |  *    *  */ *
               returns|    *  * /      *
                      |   *   /    *
                      | *   /*  *     *
                      |   /  *  *
                      | /    *
                      |
                      |
                      +------------------------- index returns

The slope of the line is Beta.  Merrill Lynch, Wells Fargo, and others
use a very similar process (they differ in which index they use and in
some econometric nuances).

Now what does Beta mean?  A lot of disservice has been done to Beta in
the popular press because of trying to simplify the concept.  A beta of
1.5 does *not* mean that is the market goes up by 10 points, the stock
will go up by 15 points.  It even *doesn't* mean that if the market has
a return (over some period, say a month) of 2%, the stock will have a
return of 3%.  To understand Beta, look at the equation of the line we
just fitted:

     stock return = alpha + beta * index return

Technically speaking, alpha is the intercept in the estimation model. 
It is expected to be equal to risk-free rate times (1 - beta).  But it
is best ignored by most people.  In another (very similar equation) the
intercept, which is also called alpha, is a measure of superior performance.

Therefore, by computing the derivative, we can write:
     Change in stock return = beta * change in index return

So, truly and technically speaking, if the market return is 2% above its
mean, the stock return would be 3% above its mean, if the stock beta is 1.5.

One shot at interpreting beta is the following.  On a day the (S&P-type)
market index goes up by 1%, a stock with beta of 1.5 will go up by 1.5% +
epsilon. Thus it won't go up by exactly 1.5%, but by something different.

The good thing is that the epsilon values for different stocks are
guaranteed to be uncorrelated with each other.  Hence in a diversified
portfolio, you can expect all the epsilons (of different stocks) to
cancel out.  Thus if you hold a diversified portfolio, the beta of a
stock characterizes that stock's response to fluctuations in the market
portfolio.

So in a diversified portfolio, the beta of stock X is a good summary of
its risk properties with respect to the "systematic risk", which is
fluctuations in the market index.  A stock with high beta responds
strongly to variations in the market, and a stock with low beta is
relatively insensitive to variations in the market.

E.g. if you had a portfolio of beta 1.2, and decided to add a stock
with beta 1.5, then you know that you are slightly increasing the
riskiness (and average return) of your portfolio.  This conclusion is
reached by merely comparing two numbers (1.2 and 1.5).  That parsimony
of computation is the major contribution of the notion of "beta". 
Conversely if you got cold feet about the variability of your beta = 1.2
portfolio, you could augment it with a few companies with beta less than 1.

If you had wished to figure such conclusions without the notion of
beta, you would have had to deal with large covariance matrices and
nontrivial computations.

Finally, a reference.  See Malkiel, _A Random Walk Down Wall Street_, for
more information on beta as an estimate of risk.

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Subject: Bonds
From: ask@cbnews.cb.att.com

Bonds are debt instruments.   Let's say a corporation needs to build
a new office building, or needs to purchase manufacturing equipment,
or needs to purchase aircraft, they will have to raise money.

One way is to arrange for banks or others to lend them money. But a
generally less expensive way is to issue (sell) bonds.  The corporation
will agree to pay dividends on these bonds and at some time in the
future to redeem these bonds.

In the U.S., corporate bonds are often issued in units of $1,000.
When municipalities issue bonds, they are usually in units of $5,000.
Dividends are usually paid every 6 months.

Bondholders are not owners of the corporation.  But if the corporation
gets in financial trouble and needs to dissolve, bondholders must be
paid off in full before stockholders get anything.

If the corporation defaults on any bond payment, any bondholder can
go into bankruptcy court and request the corporation be placed in
bankruptcy.

The price of a bond is a function of prevailing interest rates (as
rates go up, the price of the bond goes down, and vice versa) as
well as the risk perceived for the debt of the particular
corporation.  For example, if the company is in bankruptcy, the
price of the bond will be low.

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Subject: Books About Investing (especially stocks)
From: jhc@iris.uucp, nfs@princeton.edu, ajayshah@rcf.usc.edu,
	rbeville@tekig5.pen.tek.com

Books are organized alphabetically by author's last name.

Author			Title(s)
-----			--------
Peter Bernstein		Capital Ideas 
George S. Clason 	The Richest Man in Babylon
Burton Crane		The Sophicated Investor
William Donoghue	No-Load Mutual Fund Guide
Louis Engel		How to Buy Stocks
Norman G. Fosback	Stock Market Logic
Benjamin Graham 	The Intelligent Investor, Security Analysis
C. Colburn Hardy	The Fact$ of Life
Jiler			How Charts Can Help You 
Gerald M. Loeb 		The Battle for Investment Survival
Peter Lynch 		One Up on Wall Street 	
Burton Malkiel		A Random Walk Down Wall Street 
Sylvia Porter		New Money Book for the 80s
Pring			Technical Analysis Explained
Claude Rosenberg	Stock Market Primer
L. Louis Rukeyser	How to Make Money in the Stock Market
Charles Schwab		How to be Your Own Stockbroker
John A. Straley		What About Mutual Funds
Andrew Tobias		[Still] Only [other] Investment Guide You'll Ever Need
			      (3 books, very similar titles)
Train			Money Masters, New Money Masters
Venita Van Caspel	Money Dynamics for the 1990s
Martin Zweig		Winning on Wall Street

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Subject: Bull and Bear Lore
From: keith@iscp.Bellcore.COM

This information is excerpted from "The Lore and Legends of Wall Street,"
a book by Robert M. Sharp.

During Gold Rush days in California, there were bull fights.  Sometimes
the bull faced a bear instead of a matador.  Bulls throw the bear UP in
the air using their horns to win (kill the bear); bears pull the bull 
DOWN to the ground to win (kill the bull).

Somehow these terms became associated with the markets, probably due to
trading in gold-mining stock.  The terms 'bull' and 'bear' then told the
market's direction.

Later, Cornelius Varderbilt fought Daniel Drew for control of the Harlem
Railroad.  Some writer compared their fight to bull-bear fights in
California.  This usage apparently made the terms stick.  BTW, Vanderbilt
eventually won.

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Subject: Computing the Rate of Return on Monthly Investments
From: jedwards@ms.uky.edu 

Q: Assume $X is invested at the beginning of the year into some mutual
   fund or like account, with $Y added to the account every month. 
   Now, down the road, if the value at any given month "i" is Vi, what
   conclusions can be drawn from it ?

The relevant formula is F = P(1+i)**n - p((1+i)**n - 1)/i
where F is the future value of your investment (i.e., the value after
n periods), P is the present value of your investment (i.e., the amount
of money you invest initially), p is the payment each period (p is
negative if you are adding money to your account and positive if you
are taking money out of your account), n is the number of periods you
are interested in, and i is the interest rate per period. 
You cannot manipulate this formula to get a formula for i; you have
to use some sort of iterative method or buy a financial calculator.

One thing to keep in mind is that i is the interest rate *per period*.
You may need to compound the rate to obtain a number you can compare
apples-to-apples with other rates.  For instance, a 1 year CD paying
12% interest is not as good an investment as an investment paying 1%
per month for a year.  If you put $1000 into each, you'll have $1120
in the CD at the end of the year but $1000*(1.01)**12 = $1126.82 in
the other investment due to compounding.  I always convert interest
rates of any kind into a "simple 1-year CD equivalent" for the purposes
of comparison.

See also the 'irr' program which has been posted to misc.invest several times.

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Subject: Computing Compound Return
From: bakken@cs.arizona.edu, chen@digital.sps.mot.com  

To calculate the compounded return, just figure out the factor by which
the investment multiplied.  Say $1000 went to $3200 in 10 years. 
Take the 10th root of 3.2 (the multiplying factor) and you get a
compounded return of 1.1233498 (12.3% per year).  To see that this works,
note that 1.1233498**10 = 3.2.

Another way of saying the same thing:  In my calculation, I assume all
the gains are reinvested so following formula applies:
	TR = (1 + AR) ** YR
where TR is total return, AR is annualized return, and YR is year. To
calculate annualized return otherwise, following formula applies:
	AR = (10 ** (Log TR/ YR)) - 1
Thus a total return of 950% in 20 years would be equivalent of 11.914454% 
annualized return.

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Subject: Discount Brokers
From: davida@bonnie.ics.uci.edu, edwardz@ecs.comm.mot.com, gary@intrepid.com

A discount broker is merely a way to save money for people who are looking
out for themselves.  

According to Charles Schwab, the big difference between them and "the other
guys" is that there is no analyst sitting in the back that will call you up
and encourage you to purchase a stock.  They have people there that can
provide good financial advice--but only if you ask.  If you walk in the door
and say "I want to buy XXX", that's what they'll do.

All transactions with E-Trade are apparently initiated through either touch-
tone phone or computer.  They are particularly cheap ($0.015/share, min $35).

List of US discount brokers and phone numbers:

Accutrade First National   800 762 5555
K. Aufhauser & Co.         800 368 3668
Brown & Co.                800 343 4300
Fidelity Brokerage         800 544 7272
Kennedy, Cabot, & Co.      800 252 0090  213 550 0711
Barry Murphy & Co.         800 221 2111
Norstar Brokerage          800-221-8210
Olde Discount              800 USA OLDE
Pacific Brokerage Service  800 421 8395  213 939 1100
Andrew Peck Associates     800 221 5873  212 363 3770
Quick & Reilly             800 456 4049
Charles Schwab & Co.       800 442 5111
Scottsdale Securities      800 727 1995  818 440 9957
Stock Cross                800 225 6196  617 367 5700
Vanguard Discount          800 662 SHIP
Waterhouse Securities      800 765 5185
Jack White & Co.           800 233 3411
E-Trade                    800 786 2573  415 326 2700

Here is a table to compare commissions at various discount brokers.  This is
based on commission schedules gotten at various times in 1991 and 1992. 
These tables are for stocks only, not bonds or other investments.

                                           $2000 trades
                     Firm    400@ 5  200@ 10  100@ 20   50@ 40   25@ 80
             K. Aufhauser  $  43.49 $  27.49 $  25.49 $  25.49 $  25.49
        Pacific Brokerage  $  38.00 $  28.00 $  28.00 $  28.00 $  28.00
         Jack White & Co.  $  45.00 $  39.00 $  36.00 $  34.50 $  33.75
    Kennedy, Cabot, & Co.  $  38.00 $  38.00 $  38.00 $  23.00 $  23.00
            Bidwell & Co.  $  41.25 $  31.25 $  27.25 $  25.75 $  23.50
           Quick & Reilly  $  50.00 $  50.00 $  49.00 $  49.00 $  49.00
            Olde Discount  $  35.00 $  50.00 $  40.00 $  40.00 $  40.00
        Vanguard Discount  $  57.00 $  57.00 $  48.00 $  40.00 $  40.00
       Fidelity Brokerage  $  63.50 $  63.50 $  54.00 $  54.00 $  54.00
           Charles Schwab  $  64.00 $  64.00 $  55.00 $  55.00 $  55.00
                  E-Trade  $  35.00 $  35.00 $  35.00 $  35.00 $  35.00

                                           $8000 trades
                     Firm   1600@ 5  800@ 10  400@ 20  200@ 40  100@ 80
             K. Aufhauser  $  90.50 $  61.50 $  43.49 $  27.49 $  25.49
        Pacific Brokerage  $  74.00 $  63.00 $  38.00 $  28.00 $  28.00
         Jack White & Co.  $  81.00 $  57.00 $  45.00 $  39.00 $  36.00
    Kennedy, Cabot, & Co.  $ 123.00 $  63.00 $  38.00 $  38.00 $  38.00
            Bidwell & Co.  $  84.75 $  56.75 $  45.25 $  39.25 $  30.25
           Quick & Reilly  $  79.00 $  79.00 $  79.00 $  79.00 $  49.00
            Olde Discount  $  67.50 $  95.00 $  70.00 $  60.00 $  40.00
        Vanguard Discount  $  82.00 $  82.00 $  82.00 $  82.00 $  48.00
       Fidelity Brokerage  $ 109.00 $ 102.70 $ 102.70 $ 102.70 $  54.00
           Charles Schwab  $ 120.00 $ 103.20 $ 103.20 $ 103.20 $  55.00
                  E-Trade  $  35.00 $  35.00 $  35.00 $  35.00 $  35.00

                                          $32000 trades
                     Firm   6400@ 5 3200@ 10 1600@ 20  800@ 40  400@ 80
             K. Aufhauser  $ 194.50 $ 138.50 $  90.50 $  72.50 $  67.50
        Pacific Brokerage  $ 218.00 $ 139.00 $  91.00 $  63.00 $  38.00
         Jack White & Co.  $ 161.00 $  97.00 $  81.00 $  57.00 $  45.00
    Kennedy, Cabot, & Co.  $ 195.00 $  99.00 $ 123.00 $  63.00 $  38.00
            Bidwell & Co.  $ 252.75 $ 140.75 $ 100.75 $  88.75 $  57.25
           Quick & Reilly  $ 222.00 $ 131.40 $ 131.40 $ 131.40 $ 131.40
            Olde Discount  $ 187.50 $ 215.00 $ 135.00 $ 115.00 $  90.00
        Vanguard Discount  $ 156.00 $ 156.00 $ 156.00 $ 156.00 $ 156.00
       Fidelity Brokerage  $ 301.00 $ 173.00 $ 169.90 $ 169.90 $ 169.90
           Charles Schwab  $ 360.00 $ 200.00 $ 170.40 $ 170.40 $ 170.40
                  E-Trade  $  96.00 $  48.00 $  35.00 $  35.00 $  35.00

-----------------------------------------------------------------------------

Subject: Dollar Cost and Value Averaging
From: suhre@trwrb.dsd.trw.com

Dollar Cost Averaging purchases a fixed dollar amount each transaction
(usually monthly via a mutual fund).  When the fund declines, you
purchase slightly more shares, and slightly less on increases.  It
turns out that you lower your average cost slightly, assuming the
fund fluctuates up and down.

Value Averaging adjusts the amount invested, up or down, to meet a
prescribed target.  An example should clarify:  Suppose you are going
to invest $200 per month and at the end of the first month, your $200
has shrunk to $190.  Then you add in $210 the next month, bringing the
value to $400 (2*$200). Similarly, if the fund is worth $430 at the
end of the second month, you only put in $170 to bring it up to the
$600 target. What happens is that compared to dollar cost averaging,
you put in more when prices are down, and less when prices are up. 

Dollar Cost Averaging takes advantage of the non-linearity of the 1/x
curve (for those of you who are more mathematically inclined).  Value
Averaging just goes in a little deeper when the value is down (which
implies that prices are down) and in a little less when value is up. 
An article in the American Association of Individual Investors showed
via computer simulation that value averaging would outperform dollar-
cost averaging about 95% of the time. "Outperform" is a rather vague
term.  As best as I remember, whatever the percentage gain of dollar-
cost averaging versus buying 100% initially, value averaging would
produce another 2 percent or so.

Warning: Neither approach will bail you out of a declining market nor
get you in on a bull market.

-----------------------------------------------------------------------------

Subject: Direct Investing and DRIPS
From: BKOTTMANN@falcon.aamrl.wpafb.af.mil, das@impulse.ece.ucsb.edu,
	jsb@meaddata.com, murphy@rock.enet.dec.com

DRIPS are an easy, low cost way of buying stocks.  Various companies
(lists are available through NAIC and some brokerages) allow you to
purchase shares directly from the company.  By buying directly, you
avoid brokerage fees. However, you must nearly always purchase the
first share through a broker or other conventional means; successive
shares can then be bought directly. Shares can be purchased either
through dividends or directly by sending in a check.  Thus the two
names for DRIP: Dividend/Direct Re-Investment Plan. The periodic
purchase also allows you to automatically dollar-cost-average the
purchase of the stock.

The latest Money Magazine (Nov or Dec 92) reports that the brokerage
house A.G. Edwards has a special commission rate for purchases of
single shares. They charge a flat 16% of the share price, or about
$6 for Disney.  

Published material on DRIPS:
 + _Guide to Dividend Reinvestment Plans_
   Lists over a one hundred companies that offer DRIP's.  The number
   given for the company is 800-443-6900; the cost is $9.00 (charge to CC)
   and they will send you the DRIPs booklet and a copy of a newsletter
   called the Money Paper.  

 + _Low cost/No cost investing_ (author forgotten) 
   Lists about 300-400 companies that offer DRIPs.

 + _Buying Stocks Without a Broker_ by Charles B. Carlson.
   Lists 900 companies/closed end funds that offer DRIPS.  Included is a
   profile of the company and some plan specifics.  These are: if partial
   reinvestment of dividends are allowed, discounts on stock purchased
   with dividends, optional cash payment amount and frequency, fees,
   approximate number of shareholders in the plan.

 [ Compiler's note:  It seems to me that a listing of the hundreds or
   more companies that offer DRIPS belongs in its own FAQ, and I will not
   reprint other people's copyrighted lists.  Please don't send me lists
   of companies that offer DRIPS. ]

-----------------------------------------------------------------------------

Subject: Future and Present Value of Money
From: lott@informatik.uni-kl.de

This note explains briefly two concepts concerning the time-value-of-money,
namely future and present value.

* Future value is simply the sum to which a dollar amount invested today
will grow given some appreciation rate.  The formula for future value
is the formula from Case 2 of present value (below), but solved for the
future-sum rather than the present value.  In this formulation, the
appreciation rate is computed monthly.

    To compute the future value of a sum invested today, the formula is:
	fv = principal * (1 + (rrate / 100) / 12) ** (12 * termy)
    where
    	principal = dollar value you have now
    	termy     = term, in years
    	rrate     = annual rate of return, in percent

    Example of calculating the future value of an invested sum:
	I invest 1,000 today at 10% for 10 years.  The future value
	of this amount is 2707.04.

* Present value is the value in today's dollars assigned to an amount of
money in the future, based on some estimate of inflation and rate-of-return
over the long-term.  A reasonable estimate for long-term inflation is 4.5%.
In this analysis, inflation is compounded yearly and rate-of-return is
calculated based on monthly compounding.

Two cases of present value are discussed next. Case 1 involves a single
sum that stays invested over time.  Case 2 involves a cash stream that is
paid regularly over time (e.g., rent payments).

Case 1: Present value of money invested over time.  This tells you what a
        future sum is worth today, given some inflation rate over the time
        between now and the future.  Another way to read this is that you
        must invest the present value today at the rate-of-return to have
        some future sum in some years from now (but this only considers the
        raw dollars, not the purchasing power).

    To compute the present value of an invested sum, the formula is:
		        future-sum 
	pv =   --------------------------------------
	       (1 + (rrate/100) / 12) ** (12 * termy)
    where
	future-sum = dollar value you want in termy years
	termy = term, in years
	rrate = annual rate of return on money that you can expect, in percent

    Example:
	In 30 years I will receive 1,000,000 (a gigabuck).  What is
	that amount of money worth today (what is the buying power)
	assuming a rate of inflation of 4.5%?  The answer is 259,895.65

    Example:
	I need to have 10,000 in 5 years.  The present value of 10,000
	assuming a rate-of-return of 8% is 6712.10.  I.e., 6712 will
	grow to 10k in 5 years at 8%.  

Case 2: Present value of a cash stream.  This tells you the cost in 
	today's dollars of money that you pay over time.  Usually the
	payments that you make increase over the term.  Basically, the
	money you pay in 10 years is worth less than that which you pay
	tomorrow, and this equation lets you compute just how much.

    To compute the present value of a cash stream, the formula is:
         month = 12*termy   paymt  * (1 + irate/100) ** int ((month - 1)/ 12)
    pv = SUM                -------------------------------------------------
         month = 1               (1 + (rrate/100) / 12) ** (month - 1)
    where
	month = month number
	termy = term, in years
	paymt = monthly payment, in dollars
	irate = rate of inflation (increase in payment per year), in percent
	rrate = rate of return on money that you can expect, in percent
	int() function = keep integral part; used to compute yr nr from mo nr 

    Example:
	You pay $500/month in rent over 10 years and estimate that inflation
	is 4.5% over the period (your payment increases with inflation.)
	Present value is 49,530.57

I wrote two small C programs for computing future and present value; send
email to lott@informatik.uni-kl.de if you are interested.

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Subject: How Can I Get Rich Really Quickly?
From: jim@doink.b23b.ingr.com

Take this with a lot of :-) 's.

Legal methods:
  1. Marry someone who is already rich.
  2. Have a rich person die and will you their money.
  3. Strike oil.
  4. Discover gold.
  5. Win the lottery.

Illegal methods:
  6. Rob a bank.
  7. Blackmail someone who is rich.
  8. Kidnap someone who is rich and get a big ransom.
  9. Become a drug dealer.

For completeness sakes:
 10. "If you really want to make a lot of money, start your own religion."
                - L. Ron Hubbard

Hubbard made that statement when he was just a science fiction writer in
either the '30s or '40s.  He later founded the Church of Scientology. 
I believe he also wrote Dianetics.

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Subject: Hedging
From: nfs@princeton.edu

Hedging is a way of reducing some of the risk involved in holding
an investment.  There are many different risks against which one can
hedge and many different methods of hedging.  When someone mentions
hedging, think of insurance.  A hedge is just a way of insuring an
investment against risk.

Consider a simple (perhaps the simplest) case.  Much of the risk in
holding any particular stock is market risk; i.e. if the market falls
sharply, chances are that any particular stock will fall too.  So if
you own a stock with good prospects but you think the stock market in
general is overpriced, you may be well advised to hedge your position.

There are many ways of hedging against market risk.  The simplest,
but most expensive method, is to buy a put option for the stock you own. 
(It's most expensive because you're buying insurance not only against
market risk but against the risk of the specific security as well.) 
You can buy a put option on the market (like an OEX put) which will
cover general market declines.  You can hedge by selling financial
futures (e.g. the S&P 500 futures).

In my opinion, the best (and cheapest) hedge is to sell short the
stock of a competitor to the company whose stock you hold.  For example,
if you like Microsoft and think they will eat Borland's lunch, buy MSFT
and short BORL. No matter which way the market as a whole goes, the
offsetting positions hedge away the market risk.  You make money as
long as you're right about the relative competitive positions of the
two companies, and it doesn't matter whether the market zooms or crashes.

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Subject: Investment Associations (AAII and NAIC)
From: rajeeva@sco.com, dlaird@terapin.com

AAII:	American Association of Individual Investors
	625 North Michigan Avenue 
	Chicago, IL 60611-3110
	+1-312-280-0170

A summary from their brochure: AAII believes that individuals would
do better if they invest in "shadow" stocks which are not followed
by institutional investor and avoid affects of program trading. 
They admit that most of their members are experienced investors with
substantial amounts to invest, but they do have programs for newer
investors also.  Basically, they don't manage the member's money,
they just provide information.

Membership costs $49 per year for an individual; with Computerized
Investing newsletter, $79.  A lifetime membership (including
Computerized Investing) costs $490.

They offer the AAII Journal 10 times a year, Individual Investor's guide
to No-Load Mutual Funds annually, local chapter membership (about 50
chapters), a year-end tax strategy guide, investment seminars and study
programs at extra cost (reduced for members), and a computer user'
newsletter for an extra $30.  They also operate a free BBS.

NAIC:	National Association of Investors Corp.
	1515 East Eleven Mile Road
	Royal Oak, MI 48067
	+1-313-543-0612

The NAIC is a nonprofit organization operated by and for the benefit
of member clubs.  The Association has been in existence since the 1950's
and has around 110,000 members.

Membership costs $32 per year for an individual, or $30 for a club and
$9.00 per each club member.  The membership provides the member with a
monthly newsletter, details of your membership and information on how to
start a investment club, how to analyze stocks, and how to keep records.

In addition to the information provided, NAIC operates "Low-Cost
Investment Plan", which allows members to invest in participating
companies such as Disney, Kellogg, McDonald's, Mobil and Quaker Oats... 
Most don't incur a commission although some have a nominal fee ($3-$5).

Of the 500 clubs surveyed in 1989, the average club had a compound
annual growth rate of 10.8% compared with 10.6% for the S&P 500 stock
index...It's average portfolio was worth $66,755.

-----------------------------------------------------------------------------

Subject: Life Insurance
From: joec@is.morgan.com

This is my standard reply to life insurance queries.  And, I think many
insurance agents will disagree with these comments.

First of all, decide WHY you want insurance.  Think of insurance as
income-protection, i.e. if the insured passes away, the beneficiary
receives the proceeds to offset that lost income.  With that comment
behind us, I would never buy insurance on kids, after all, they don't
have income and they don't work.  An agent might say to buy it on your
kids while its cheap - run the numbers, the agent is usually wrong. 
And I am strongly against this on two counts.  One, you are placing a
bet that you kid will die and you are actually paying that bet in
premiums.  I can't bet my child will die.  Two, it sounds plausible,
but factor inflation in - it doesn't look so good.  A policy of face
amount of $10,000, at 4.5% inflation and 30 years later is like having
$2,670 in today's dollars - it's NOT a lot of money.  So don't plan on
it being worth much in the future to your child as an investment.

I have some doubts about insurance as investments - it might be a good
idea but it certainly muddies the water.

So you have decided you want insurance, i.e. to protect your family against
your passing away prematurely, i.e. the loss of income you represent.

Next decide how LONG you want insurance for.  If you're around 60 years
old, I doubt you want to get any at all.  Your income stream is largely
over and hopefully you have accumulated the assets you need anyway by now.

If you are married and both work, its not clear you need insurance at
all if you pass on.  The spouse just keeps working UNLESS you need both
incomes to support your lifestyle.  Then you should have one policy on
each of you.

If you are single, its not clear you need it at all.  You are not sup-
porting anyone so no one cares if you pass on, at least financially.

If you are married and the spouse is not working, then the breadwinner
needs insurance UNLESS you are independently wealthy.

If you are independently wealthy, you don't need it because you already
have the money you need.  You might want it for tax shelters but that is
a very different topic.

Suppose you have a 1 year old child, the wife stays home and the husband
works.  In that case, you might want 2 types of insurance: Whole life
for the long haul, i.e. age 65, 70, etc., and Term until your child is
off on his/her own. Once the child has left the stable, your need for
insurance goes down since your responsibilities have diminished, i.e.
fewer dependents, education finished, wedding expenses done, etc

Do you have a mortgage? Perhaps you want some sort of Term during the
duration of the mortgage - but remember that the mortgage balance
declines over time. But don't buy mortgage insurance itself - much too
expensive. Include it in the overall analysis of what insurance needs
you might have.

Now, how much insurance?  One rule of thumb is 5x your annual income. 
What agents will ask you is 'Will your spouse go back to work if you
pass away?' Many of us will think nobly and say NO.  But its actually
likely that your spouse will go back to work and good thing - otherwise
your insurance needs would be much larger.  After all, if the spouse
stays home, your insurance must be large enough to be invested wisely to
throw off enough return to live on.  Assume you make $50,000 and the
spouse doesn't work.  You pass on.  The Spouse needs to replace a
portion of your income (not all of it since you won't be around to feed,
wear clothes, drive an insured car, etc.).  Lets assume the Spouse needs
$40,000 to live on.  Now that is BEFORE taxes.  Lets say its $30,000 net
to live on.  $30,000 is the annual interest generated on a $600,000
tax-free investment at 5% per year (i.e. munibonds).  So this means you
need $600,000 of face value insurance to protect your $50,000 current
income.

This is only one example of how to do it and income taxes, estate taxes
can complicate it.  But hopefully you get the idea.

Which kind of insurance IMHO is a function of how long you need it for.
I once did an analysis of TERM vs WHOLE LIFE and based on the assumptions
at the time, WHOLE LIFE made more sense if I held the insurance more than
about 20-23 years.  But TERM was cheaper if I held it for a shorter period
of time.  How do you do the analysis and why does the agent want to meet
you?  Well, he/she will bring their fancy charts, tables of numbers and
effectively snow you into thinking that the biggest, most expensive
policy is the best for you over the long term.  Translation: mucho
commissions to the agent.  Whole life is what agents make their money on
due to commissions.  The agents typically gets 1/2 of your first year's
commissions as his pay.  And he typically gets 10% of the next year's
commissions and likewise through year 5.  Ask him how he gets paid.  If
he won't tell you, ask him to leave.

What I did was to take their numbers, review their assumptions (and
corrected them when they were far-fetched) and did MY analysis.  They
hated that but they agreed my approach was correct.  They will show you
a 12% rate of return to predict the cash value flow.  Ignore that - it
makes them look too good and its not realistic.  Ask him/her exactly what
they plan to invest your premium money in to get 12%.  How has it done in
the last 5 years? 12? Use a number between 4.5% (for TBILL investments,
ultra- conservative) and 10% (for growth stocks, more risky), but not
definitely not 12%.  I would try 8% and insist it be done that way.

Ask each agent:
1)-what is the present value of the payment stream represented by my
premiums, using a discount rate of 4.5% per year (That is the inflation
average since 1940).  This is what the policy costs you, in today's
dollars. Its very much like paying that single number now instead of a
series of payments over time. 
2)-what is the present value of the the cash value earned (increasing
at no more than 8% a year) and discounting it back to today at the same
4.5%. This is what you get for that money you just paid, in cash value,
expressed in today's dollars, i.e. as if you got it today in the mail. 
3)-What is the present value of the life insurance in force over that
same period, discounted back to today by 4.5%, for inflation.  That is
the coverage in effect in today's dollars. 
4)-Pick an end date for comparing these - I use age 60 and age 65.

With the above in hand from various agents, you can see fairly quickly
which is the better policy, i.e. which gives you the most for your money.

By the way, inflation is slippery and sneaky.  All too often we see
$500,000 of insurance and it sounds great, but at 4.5% inflation and 30
years from now, that $500,000 then is like $133,500 now - truly!

Have the agent do your analysis, BUT you give him the rates to use, don't
use his.  Then you pick the policy that is the best value, i.e., you get
more for your money.  Factor in any tax angles as well.  If the agent
refuses to do this analysis for you, get rid of him/her.

If the agent gets annoyed but cannot fault your analysis, then you have
cleared the snow away and gotten to the truth.  If they smile too much,
you may have missed something.  And that will cost you money.

Never agree to any policy unless you understand all the numbers and all
the terms.  Never 'upgrade' policies by cashing in a whole life for
another whole life.  That just depletes your cash value, real cash
available to you.  And the agent gets to pocket that money, literally,
through new commissions.

Check out the insurer by going to the reference section of a big library. 
Ask for the AM BEST guide on insurance.  Look up where the issuer stands
relative to the competition.

Agents will usually not mention TERM since they work on commission and
get much more money for Whole Life than they do for term.  Remember,
figure the agents gets fully 1/2 of your 1st years premium payments and
10% or so for all the money you send in over the following 4 years.  Ask
them to tell you how they are paid- after all, its your money they are
getting.

Now why don't I like UNIVERSAL or VARIABLE?  Mainly because with Whole
Life and with TERM, you know exactly what you must pay because the issuer
must manage the investments to generate the appropriate returns to
provide you with the insurance (and with cash value if whole life).
With UNIVERSAL and VARIABLE, it becomes YOU who must decide how and where
to invest your premium income.  If you guess badly, you will have to pay
a higher premium to cover those bad decisions.  The insurance companies
invented UNIVERSAL and VARIABLE because interest rates went crazy in the
early 80's and they lost money.  Rather than taking that risk again, they
offered these new policies to transfer that risk to you.  Of course,
UNIVERSAL and VARIABLE will be cheaper in the short term but BE CAREFUL -
they can and often will increase later on.

Okay, so what did I do? I bought both term and whole life.  I plan to
keep the term until my son graduates from college and he is on his own. 
That is about 11 years from now.  I also bought whole life (NorthWest
Mutual) which I plan to keep forever, so to speak.  NWM is apparently
the cheapest and best around according to A.M.BEST.

Where do you buy term? Just buy the cheapest policy since you will tend
to renew the policy once a year and you can change insurers as each time.

Also:   A hard thing to factor in is that one day you may become
uninsurable just when you need it, i.e. heart attack, cancer and the like. 
I would look at getting cheap term insurance that is a bit more but then
you can keep renewing, even if ill, or you can convert to whole life.

Last thought.  I'll bet you didn't you know that you are 3x more likely
to become disabled during your working career than you to die during your
working career.  How is your short term disability insurance looking?
Get a policy that has a waiting period before it kicks in.  This will
keep it cheaper.  Look at the exclusions, if any.

-----------------------------------------------------------------------------

Subject: Money-Supply Measures M1, M2, and M3
From: merritt@macro.bu.edu

M1: Money that can be spent immediately.  Includes cash, checking accounts,
    and NOW accounts.

M2: M1 + assets invested for the short term.  These assets include money-
    market accounts and money-market mutual funds.

M3: M2 + big deposits.  Big deposits include institutional money-market
    funds and agreements among banks.

"Modern Money Mechanics," which explains M1, M2, and M3 in gory detail,
is available free from:
        Public Information Center
        Federal Reserve Bank of Chicago
        P.O. Box 834
        Chicago, Illinois 60690

-----------------------------------------------------------------------------

Compilation Copyright (c) 1992 by Christopher Lott, lott@informatik.uni-kl.de
-- 
Christopher Lott    lott@informatik.uni-kl.de   +49 (631) 205-3334, -3331 Fax
Post: FB Informatik - Bau 57, Universitaet KL, W-6750 Kaiserslautern, Germany
Newsgroups: misc.invest