A safe investment for over the next 15-20 years
2nd Assignment – Investment Project ABIZ 4500 Rev20
Instructions – Investment Project Assignment
Due November 30, 2020 (10% of Course Grade)
A main task for students in the next few days is to read this assignment over carefully, before courses get too busy. Meet with your group within the next week on zoom etc, and discuss a brief plan for getting started on the assignment. Students will be in the same group for this assignment as for the business case assignment. Good Luck!
Students can look at “Information Sources” at the bottom of this document, to get started with some investment information and understanding of investments (e.g. stocks, bonds, investment funds (ETFs), etc. Parts of class lecture will also be helpful for this assignment, as we will be going over some investment analysis methods in the lecture. If you aren’t sure about something or a question, it’s often useful to ask a fellow group member or Dr. Google, and you can state your assumptions when writing your report, if you aren’t sure about something. (Students will have the same group leader as for the business case assignment, but they can select a different group leader for this assignment, if that is more suitable).
Assignment Overview: Your group will prepare a report that recommends how to invest $1,000,000 in about 4 to 6 long-term and safe investments for over the next 15-20 years (e.g. about one investment per group member). If there are 5 students in the group, and each invested $200,000, then it would total $1,000,000. It’s okay if one investment has less dollar amount, and another investment has a greater dollar amount, as long as the total amount comes to about $1,000,000. Students need to explain why they chose a particular investment, and provide analysis that supports their investment decision.
This assignment will hopefully provide you with some helpful knowledge in future for your own investing. It should also provide some additional experience for working in groups, which is often an important skill in the workforce.
Instructions and How to Submit the Completed Assignment for Your Group
-Your group leader is to email the completed assignment to: miltonboyd45@gmail.com
-also copy group members in the email
–Subject heading for email: “ABIZ 4500 – Investment Project Assignment – Group Leaders Name”
-attach assignment as a file in ms-word or pdf. (please no google documents, no dropbox, etc.)
–Cover Page will have the title: “Investment Project, ABIZ 4500,” and will have the student names, student numbers, and the name of the investment that each student recommended and analysed for the report, and dollar amount that will be invested .
Example of cover page:
Investment Project, ABIZ 4500
Jane Anderson, student # – TSX 60 stock index fund (ETF, Canada) – $Amount
Steven Brown, student # – XYZ stock dividend fund (ETF, U.S.) – $Amount
James Stewart, student # – ABC S&P500 stock index fund (ETF, U.S.) – $Amount
Jennifer Smith, student # – Farmland in Western Manitoba – $Amount
Kristin Taylor, student # – Rental House in Winnipeg – $Amount
Each group will turn in a written report, about 10-15 pages double spaced, plus any tables, figures, appendix etc. (The report can be a longer if needed, e.g. 15 – 20 pages, if it is good quality). Each student could do about one investment, and should have about 2-3 pages for the investment. Page numbers are to be put at the bottom of each page. Students need to include a list of references at the end of the report how they wish, regarding main sources of information.
For any charts, graphs, figures, tables, financial ratios, etc., students should also put a web link (URL) at the bottom or source, indicating where on the internet they got the information (e.g. MSN money, Yahoo finance, etc.). This way someone reading the report could easily check the numbers or information. You can consult with your group members as to how to do this, if you need assistance. Avoid plagiarism. Do not directly copy and paste text from the internet. However, for purposes of this report, you can copy and paste charts, graphs, figures, tables, etc. from the internet. But, you must put the web link URL below them, so that the reader of the report can click and quickly see exactly where the charts, graphs, figures, tables, etc. came from e.g. Yahoo or MSN.
Organization of Report
The report should be organized in sections based on the investments, such as:
Introduction (this is explained below)
- Jane Anderson – TSX 60 stock index fund (ETF, Canada) – $Amount
- Steven Brown – XYZ stock dividend fund (ETF, U.S.) – $Amount
3.James Stewart – ABC S&P500 stock index fund (ETF, U.S.) – $Amount
- Jennifer Smith – Farmland in Western Manitoba – $Amount
- Kristin Taylor – Rental House in Winnipeg – $Amount
Summary (This can be fairly brief)
Student Groups and Communication
For the assignment, the class will be divided into groups, and each group will have a group leader to arrange deadlines and plans. Students will be given their group member names and email contact information, and will be informed who their group leader is. The group leader is to email those in the group, and arrange a group meeting fairly soon. (If the group leader doesn’t email and doesn’t attempt to arrange for a group meeting (e.g. zoom), fairly soon, then the rest of the group can be in touch and select a new group leader if they wish, to avoid delays, and make sure the assignment gets done on time).
Student Participation: Each student in the group must participate in group meetings, meet deadlines, and contribute quality work in timely fashion, meeting deadlines. If a student does not participate properly, then points may be subtracted for the student. Or, the student could receive a score of zero for the report, if they let the group down and do not contribute to the report with material that is sufficient quality and in a timely fashion.
Background and Objective for Assignment: The $1,000,000 funds to be invested have come from your parents, as they have decided to give you the funds now to invest, rather than later as an inheritance, as they felt they could now have some influence on you while you are younger, and help you get off to a wise start. Your parents had sold their farm and small business and had retired, after working hard, and they want to see you invest the funds wisely.
They require you to invest in quality long-term investments (not excessive risk), with a planned holding period of at least 15-20 years or more. They feel that your university education should help you make wise decisions. However, they want to check over your investment ideas carefully to get you off to a good start, so they want you to prepare an investment report (the group report with fellow students) explaining the investments, and provide analysis.
Investment Alternatives for Report: Your parents have allowed you to invest in: 1) stock of large, safe, and stable companies with growing earnings e.g. Canadian firms or foreign firms (e.g. Canadian stocks, U.S. stocks) 2) real estate such as a rental house 3) farmland to be rented out 4) small business 5) ETF fund or mutual fund 6) a government bond or corporate bond.
Returns on Various Investments: In the long-term, stocks, real estate, and farmland are generally believed to have a higher return than bonds. However, good quality bonds are generally believed to be a safer than investment than stocks, real estate, and farmland, especially if these three assets are bought near the top of a market cycle, and then fall. Unfortunately, in recent years, a number of high quality bonds have had a lower yield (return) than inflation, and so the real return on some bonds (after adjusting for inflation), has been negative.
Some believe that central banks have been holding interest rates very low the past number of years, resulting in low bond yields for investors, and low interest rates on bank deposits for investors. This has resulted in investors instead putting more money into stocks, real estate, and farmland, where they believe they can get a higher long-term return, and also borrowing money to invest in these assets, given the low interest rates. This is believed to have pushed up prices of stocks, real estate, and farmland in recent years, to levels higher than would be the case, than if interest rates were lower. Therefore, some investors are mindful that if interest rates rise, then the value of these assets could be negatively impacted.
Investment Risks: While your parents are not sure about the future investment risks you would face, they have mentioned to you some of the risks during their lifetimes. These risks have included periods of world instability and threats of war. Some emerging economies over the years had their stock markets crash, or currencies lose value, or bond defaults, and so some of those international investments in emerging countries turned out to be risky.
Other times there had been periods of inflation, where bonds performed poorly (because of getting paid back in cheap dollars), but farmland and real estate performed better during inflation. Other risks they felt were threat of Quebec separation in the 1990’s, a weak Canadian dollar, and high provincial and national debt at times. In agriculture, they had seen periods of low grain prices, low livestock prices, and BSE in early 2000’s. They had seen the internet stock bubble and crash in 2000, unrest in the Middle East and the 911 event, high and low energy prices, and 2008 U.S. financial crisis with stocks falling 50 percent or more in some countries, and the virus event that began in 2020.
In agriculture, there were some positives, they had witnessed some rising grain prices at times, but these appeared to be offset to some extent by higher input costs, such as machinery costs, energy costs, fertilizer costs, chemical costs, and labor costs. They had felt that grain prices had benefited from a strong cycle at times. But they also thought that the past U.S. ethanol policy, droughts in other countries, and large commodity funds buying up commodities, was responsible for higher commodity prices at times.
In more recent years, they thought low interest rates had encouraged people to borrow and invest, and this had pushed up asset prices (e.g. pushed up farmland prices, stock prices, and real estate prices) higher than they should be. They weren’t sure how long this would continue, or if interest rates might go up in future, and adversely affect these asset prices, and maybe there was some risk. They were also concerned about how much debt governments and consumers had taken on in recent times. However, they also felt that government bonds had a low return, and after adjusting for inflation, they thought some government bonds might even have a negative real return, after adjusting for inflation (e.g. inflation higher than bond return). Overall, investing looked sufficiently challenging to them, for the investment horizon of the next 15-20 years.
Required Report: As a condition of receiving the funds, your parents have asked you to prepare a report on your proposed investments which they must approve. They want to know what you plan to invest in, and why.
Introduction: Your group should have an introduction in the report, and very briefly outline your assumptions for future inflation, GDP growth, and interest rates. Ensure that investments are sufficiently diversified, and summarize your investments in a few sentences, and very briefly explain why your group is making each investment. (Assume that all the investments are regular investments, not investments going into RRSP’s, TFSA’s, etc.).
Each person in the group could do one investment, for example. For each investment, your parents have asked you to include the following in the report:
For each investment explain why it was chosen, and the expected annual return (approximate) that you think it may provide over the next 15-20 years (e.g. 4% 6%, 8%, or?)
Analysis for Report
- Stock investing and analysis. Most stocks tend to rise and do fairly well during inflation and low interest rates, all other things being equal. However, if stocks are bought at the top of a market cycle, or if there is a stock market crash, then there can be risk. To help you analyze stocks for investing, you can look at the “valuation” section from the business case assignment, it mentioned:
-Valuation ratios (e.g. price to earnings, price to sales, price to book, dividend yield),
-Qualitative factors (industry outlook and company outlook),
– Margin of safety.
Note on Price to Earnings Ratio. For example, if stock price is $100, and annual earnings are $4 per share, then the price to earnings ratio is 25= ($100/$4). If looking at the inverse of price to earnings, this gives the earnings yield (also called “yield”). E.g. earnings/price, 4% = (e.g. $4/$100), which one could also think of as annual return on investment. The same idea applies to real estate and farmland (though another name for annual earnings would be annual net rent). All other things being equal, an investor would like a lower price to earnings ratio (or a higher yield).
Note: For investment funds such as stock index ETF’s, such as S&P500 index, you can often find the price earnings ratio (and also the dividend yield), for example, if you google it. (Though you may not be able to find price to sales, or price to book).
- Real estate (e.g. rental house) and farmland: Investing and analysis. Real estate and farmland prices tend to rise and do fairly well during inflation, and during low interest rates, all other things being equal. Though it’s also possible they can have some risk, if they were bought at the top of a cycle, and then decline in price. You would compute the price to earnings ratios if you invest in a real estate (rental house) or farmland. (Though you wouldn’t compute price to book ratio, or price to sales ratio). Real estate and farmland are a little different than stock market investing. But, some things are similar. For example, price to earnings ratios can be computed for farmland (price of farmland per acre/annual net rent per acre), and a rental house (price of rental house/annual net rent). To get the net rent, you would subtract out expenses from the rent funds received, and if you look on the internet, you should be able to figure out the main expenses.
For rental house and farmland investment, you can find some property listed for sale, if you look on the internet, and then list the address/location and price, and basic details, description (e.g. square foot size of rental house, or number of acres of farmland), in your report.
Analysis for real estate and farmland. The main thing to analyze for a rental house or farmland is price/earnings ratio. However, often investors are borrowing some funds to invest in farmland or a rental house. If you propose to borrow some funds for investing in a rental house or farmland, then you would give a simple explanation of the borrowing (e.g. state how much you would borrow, for how many years, and at what interest rate, and how much is the loan payment per year or per month). [You may also see a real estate term “capitalization rate,” it is basically the inverse of the price/earnings ratio, which is earnings/price, also called “yield”].
However, there is a main difference between investing in stocks, compared to farmland and rental houses. A stock or a business may go into decline, or go bankrupt and stock price may go to zero. Many companies cannot last 50 to 100 years for various reasons. But many people think that farmland and rental houses (or land under the house) in good locations should increase in value for the foreseeable future, though there may be periods of decline and cycles. However, it should be noted that a number of analysts think that lower interest rates have been keeping asset prices up (stocks, real estate, farmland) over the past number of years, higher than they would be otherwise, and that higher interest rates in future could adversely affect these asset prices. Some analysts are also concerned about the high debt taken on by governments and consumers, and the possible negative impact this could have on asset prices if borrowers have a problem paying back the debt and the interest.
- Borrowing. For this assignment, borrowing is allowed up to two thirds (66.67 percent), but only for investments of real estate (e.g. rental house), and farmland. For example, one could invest $200,000 in farmland, and borrow up to $400,000, to buy a piece of farmland for $600,000. This farmland example would count as investing $200,000 of the $1,000,000, for purposes of the report. [The borrowed amount ($400,000), and the total value of the farmland ($600,000), should also be mentioned in the report].
No borrowing is allowed for other investments regarding this assignment, e.g. no borrowing for: stocks, starting a small business, bonds, ETF funds, mutual funds, etc.
- Small business investment and analysis. If you decide to invest in a small business, then you would need to describe the small business you are going to start, and how it would work, and getting started, and why you think it would succeed (as the small business failure rate is very high). Compute the total cost of starting the small business, how much you are investing. Then explain how much revenue it will receive annually, and subtract out how much the expenses will be annually, which will leave annual net earnings. Then compute the price to earnings ratio [e.g. Cost (investment) to start the business /annual net earnings].
- Bond investing and analysis. Investing in a bond (buying a bond) is a form of loaning out money. A main advantage of high quality bonds can be safety e.g. government of Canada bonds, or U.S. government bonds, or corporate bonds from strong companies. But a main disadvantage is low return. As some government bonds may be paying a lower yield (e.g. 1%) than the inflation rate (e.g. 2%), and so real return after adjusting for inflation may be negative (e.g. minus 1 %). Also, if there is high inflation, then the bond investor gets paid back in cheap dollars, and so bond investments do poorly. Basically, high inflation is good for the borrower (the bond issuer e.g. government or company), and bad for the saver (e.g. the bond investor).
If times get tough, then a company may go bankrupt and default, and bond investors may not receive their interest and principal, and lose money on their bonds. Also, some government bonds can be risky and have default, for example, Greece, Argentina, and other countries have defaulted on their bonds in past. Also, some developing countries have had so much inflation that bond investors receive very little back in real terms, and inflation can be the enemy of bond investors.
A main thing to look at for a bond is bond yield, which is bond return. Then you can do comparisons with other investments. For example, assume a 5 year bond yield is 1%. Assume earnings yield for stock xyz was 4% ($4 annual earnings/$100 stock price). Assume dividend yield for stock xyz was 2% ($2 dividend/$100 stock price). In this particular example, both the xyz stock earnings yield and the stock dividend yield, look better than the bond yield. However, if the stock price fell, there could be some risk, particularly in the short-term. Bond yields can also be compared with yields (price/annual net rent) from real estate and farmland.
In general, safer higher quality bonds will have a lower yield, and higher risk bonds will have a higher yield. Also, government bonds such as from Canada and U.S. which are low risk/high quality now, will have lower yields than corporate bonds (as they have higher risk).
- Tax considerations. You don’t need to spend too much time on this, but you should know that bonds are taxed the highest tax rate, of the various investments. (e.g. interest on bonds is taxed at highest level). Then company dividends not as high tax rate, they are next highest tax rate. Then capital gains have the lowest tax rates (these are gains from asset prices going up such as stocks, real estate, farmland, etc.).
- Note on ETFs (exchange traded funds). ETFs have been getting popular in recent years because of:
- a) An ETF stock fund typically holds many stocks. For example, a U.S. S&P500 stock index fund holds 500 of the largest stocks, and they come from different areas of the economy. Basically all of them have some overseas business, many of them with 20-30% of their earnings coming from overseas, so they have some international diversification too.
- b) Lower cost. ETFs typically have lower annual expenses/management fees charged, compared to most other types of investment funds.
- c) Favorable tax situation. An ETF stock index fund is often held many years (without buying and selling it), and so not much tax is due.
- d) ETF stock index fund gets market average return. An ETF stock index fund (e.g. U.S. S&P500 index fund) typically gets the market average return because it basically is the market. (This is in contrast to about over 90% of stock investment funds that cannot beat the market average over the long-term, because they charge higher management fees or have poor stock picking (deciding which stocks to buy), or poor market timing (deciding when to buy and sell stocks).
- e) ETF stock index funds have a good stock picking system. An ETF stock index fund (e.g. U.S. S&P500 index fund) typically does fairly well because it actually is using a successful stock picking system. For example, each year, the S&P 500 index holds 500 stocks. A few new stocks will be added to the index that are growing and doing well, and some other stocks that are doing poorly and declining will be dropped from the index, resulting in 500 stocks always being held.
- f) Ease of use. ETF stock index funds are fairly easy to use and require a lower level of knowledge than many other investment alternatives. The investor buys them (they are basically buying the market), and without requiring too much knowledge, and can hold them long-term without putting too much time or effort. Warren Buffett recommends these stock index ETFs for many investors, for many of the reasons listed here.
- g) Risk: Stock index funds, such as an S&P500 stock index ETF, may drop by up to 50% (or more), and then later recover, such as happened in the 2008 financial crisis. So stocks and stock index ETFs should only be held by long-term investors, who are prepared to take on some risk, in hopes of getting higher long-term returns.
Some Information Sources on investments (subject to change), to help get started:
https://www.investopedia.com/ (explains stocks, bonds, ETF’s, mutual funds, etc.).
http://screener.finance.yahoo.com/stocks.html (for basic screens)
also:
https://www.msn.com/en-us/money
www.globeinvestor.com (then put in company symbol if analyzing a stock)
-Another source of information on stocks is analyst reports, from investment firms. However, caution is often needed regarding these analyst reports, as they tend to be overly optimistic, often suggesting a “buy” recommendation for many stocks and suggesting they will rise considerably in price, but relatively rarely recommending to “sell” stocks.
