PLANNING FOR YOUR FIRM'S STOCK PRICE

THE CONCEPT OF DOLLAR-COST-AVERAGING REQUIRES THE INVESTMENT OF EQUAL AMOUNTS OF MONEY AT PERIODIC TIMES, OVER A LONG TIME PERIOD. PURCHASES ARE MADE WHILE PRICES DECLINE AS WELL AS WHEN THEY RISE. THE THEORY IS THAT MORE SHARES WILL BE PURCHASED AT THE LOW PRICE THAN AT THE HIGH PRICE, GIVEN AN EQUAL AMOUNT OF MONEY. THEN, THE OVERALL AVERAGE OF ALL SHARES WILL BE LOW ENOUGH TO MAKE A PROFIT. THIS TECHNIQUE WHICH DID PAY OFF FOR MANY YEARS HAS BECOME LESS EFFECTIVE SINCE 1950. THIS WAS BECAUSE OF THE ALMOST STEADY INCREASE IN STOCK PRICES FROM 1946 TO 1966. ONE OF THE MAJOR PROBLEMS WAS THE BELIEF THAT MORE SHARES WOULD BE PURCHASED AT LOW PRICES. EXPERIENCE OVER THE PAST DECADE SHOWS THAT PURCHASES COULD BE MADE AT HIGH PRICES MORE OFTEN, NEGATING THE EFFECT OF PURCHASES MADE AT LOW PRICES.

Full text: Barron's National Business and Financial Weekly, OCT. 20, 1975

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Speaking of Dividends

MANY INVESTORS ARE BEGINNING TO LOOK FOR SMALL COMPANIES THAT MAY OPEN UP WHOLE NEW MARKETS AND PROVE TO BE FINANCIAL WINNERS. RATHER THAN CONCENTRATING ON EARNINGS GROWTH, MORE EMPHASIS IS PUT ON THE COMPANY'S GENERAL FINANCIAL HEALTH. EMERGING GROWTH COMPANIES ARE OFTEN HARD TO SELECT AS THERE ARE FEW SOURCES OF INFORMATION ON THEM. THESE SMALL COMPANIES ALSO FACE THE PROBLEMS THAT BIG CORPORATIONS MAY COME IN AND TAKE OVER THEIR LINE AND THEY ARE MORE SUSCEPTIBLE TO VOLATILE PRICE SWINGS IF THEIR TOTAL MARKET IS LESS THAN $20-MILLION. IN SELECTING A GROWTH COMPANY, CHECK THE EARNINGS FOR ABOUT A 15 PER CENT GROWTH RATE AND A MATCHING INCREASE IN STOCK PRICE. THE RETURN-ON-EQUITY SHOULD BE AT LEAST 20 TO 30 PER CENT. SOME RECOMMENDED GROWTH STOCKS INCLUDE ETHAN ALLEN FURNITURE, WESTMORELAND COAL, RIVAL MANUFACTURING AND AMERICAN BUSINESS PRODUCTS.

Full text: Money, AUG. 1975

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ASHES TO ASHES

A FEW MONTHS AGO, WALL STREET SEEMED TO BE FALLING APART. NOW, IN SPITE OF THE DAMAGE DONE TO STOCK PRICES BY THE MIDDLE EAST WAR AND THE NIXON TAPES, THINGS ARE LOOKING VERY MUCH BETTER. OCTOBER TRADING VOLUME RAN AROUNG 18.4 MILLION SHARES A DAY, 55% ABOVE THE DISMAL LEVELS OF AUGUST. BEST OF ALL IS THAT SINCE LATE SEPTEMBER THE SEC HAS PERMITTED THE STREET TO RAISE FIXED COMMISSIONS BY 10 TO 15 PERCENT. THIS BETTER-THAN-EXPECTED SHOWING IS PARTLY THE RESULT OF COST-CUTTING AND FURTHER REDUCTION IN THE NUMBER OF FIRMS. AT PRESENT LEGISLATION IS BEING CONSIDERED IN BOTH THE HOUSE AND THE SENATE WHICH WOULD LAY THE GROUNDWORK FOR THE DEVELOPMENT OF A TRULY CENTRAL NATIONAL MARKET. HIGHER COMMISSIONS AND A HEALTHIER STOCK-MARKET HAVE TEMPORARILY SAVED WHAT IS LEFT OF WALL STREET. BUT NO SOLUTION IS YET IN SIGHT FOR THE TWIN ILLS OF EXCESSIVELY HIGH COSTS AND FREQUENT INSTABILITY.

Full text: Forbes, NOV 15, 1973

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THE RANDOM WALK AND MURPHY'S LAW

THE AUTHOR OFFERS SEVERAL MODELS FOR STOCK PRICE DETERMINATION. THESE INCLUDE THE TINBERGEN MODEL, THE MODIGLIANI AND MILLER MODEL, THE GORDON MODEL, THE BENISHAY MODEL, THE FRIEND AND PUCKETT MODEL, THE BOWER AND BOWER MODEL, AND THE KERAN MODEL. THE MAJORITY OF THE MODELS SHOWN EMPLOY WEIGHTED OR NORMALIZED EXPECTED EARNINGS AS A DOMINANT DETERMINANT FOR THE EXPLANATION OF SHARE PRICES OR OF RATES-OF-RETURN ON EQUITY. WHERE THE EARNINGS VARIABLE IS NOT INCORPORATED EXPLICITY, IT IS IMPLICITLY INCORPORATED INTO OTHER VARIABLES SUCH AS THE GROWTH OF DIVIDENDS IN THE GORDON MODEL. ONLY IN THE MODELS OF BENISHAY AND BOWER AND BOWER ARE EXPECTED EARNINGS WELL TREATED. MODIGLIANI AND MILLER USE THE INSTRUMENTAL VARIABLES APPROACH TO REDUCE MEASUREMENT ERRORS OF EARNINGS.

Full text: Marquette Business Review, FALL 1974

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TYING YOUR INVESTMENTS TO THE INDEXES

A STUDY WAS CONDUCTED ON THE OPERATION OF THE PRICE SYSTEM AS AN AGGREGATOR OF THE DIFFERENT PIECES OF INFORMATION WHERE THERE ARE MANY TYPES OF INFORMED TRADERS. IT WAS CONCLUDED THAT, IN AN ECONOMY WITH COMPLETE MARKETS, THE PRICE SYSTEM DOES ACT IN SUCH A WAY THAT INDIVIDUALS, OBSERVING ONLY PRICES AND ACTING IN SELF-INTEREST, GENERATE ALLOCATIONS WHICH ARE EFFICIENT. HOWEVER, SUCH ECONOMIES NEED NOT BE STABLE BECAUSE PRICES ARE REVEALING SO MUCH INFORMATION THAT INCENTIVES FOR THE COLLECTION OF INFORMATION ARE REMOVED. THE PRICE SYSTEM CAN BE MAINTAINED ONLY WHEN IT IS NOISY ENOUGH SO THAT TRADERS WHO COLLECT INFORMATION CAN HIDE THAT INFORMATION FROM OTHER TRADERS. WHEN THIS OCCURS, SOME TRADERS WANT VERY MUCH TO KNOW, FOR EXAMPLE, WHY PRICES ARE USUALLY HIGH. IT IS NOT ENOUGH FOR TRADERS TO OBSERVE ONLY PRICES. REFERENCES.

Full text: The Journal of Finance, MAY 1976

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