Moneywise24 Personal Finance

We continuously hear about how people make unwise financial decisions, and how we rely too much on our emotions. We tend to think “this will not happen to me, I am a smart and educated person”. A documentary I saw yesterday demonstrated the exact opposite. Below, I would like to take the opportunity to recap two scenarios of yesterday’s documentary, and the results.

5 Euros now, or 40 Euros in six weeks

Different random people on the streets were offered a 5 Euro bill on the spot, or they had the option to receive 40 Euros in six weeks. Nearly all people chose the 5 Euro bill option. However, taking the 5 Euro bill option is the most unwise decision; 5 Euros is much less than 40 Euros. Even if people would have been offered 5 Euros per week for the next six weeks, the total would be only 30 Euros.

We humans are greedy people, which is largely programmed in our genes. First, shopping or becoming money makes us feel good; yes, our bodies produce endorphine, having a very positive impact on our mood. However, from a survival perspective we also have to take the opportunity when it comes by immediately, as this opportunity might not be available tomorrow. Although we cognitively know, that taking the 5 Euro note now is not the best decision, emotionally it is still the best thing to do.

Absolute vs. comparative amounts

It is very difficult to look at money from an abstract point of view; how much is 10 Dollars worth? For someone earning 4 Dollars per hour it is worth much more than for someone earning ten times as much. And what is 10 Dollars worth in China, or India, or South Africa?

Random people on the street were asked to take a pick from two possible scenarios:

• You are offered an annual salary of 100,000 Dollars per year whereas everyone else earns 50,000 per year.
• You are offered an annual salary of 200,000 Dollars per year whereas everyone else earns 300,000 per year.

Although a 200,000 Dollar salary is clearly higher than a 100,000 Dollar salary, most people still chose the 100,000 Dollar salary. The main motivation of the people asked was that it makes them feel good to earn more than everyone else… people were simply comparing themselves to others, in stead of making an objective decision and go for the higher amount.

The human mind is truly astonishing, and it takes some will and effort to truly make objective decisions, which are best for you. Still, humans are emotional, and probably it will never be entirely possible to turn them off.

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Many books and websites write about analyzing stock performance, fundamental analysis and financials. However, many forget to include where to find all this information. I thought it would be logical to first write about the various resources available, before digging into the details of fundamental analysis.

Official annual / quarterly reports

If you want to know more about a company, the first place you might think of are official publications of that particular company. This usually includes the annual and quarterly reports. The main benefit of such reports is that they are extensive, complete, they come directly from the source, and that they include a lot of background information. Annual reports usually include an extensive background of the company, its divisions, products, and markets. Additionally you will find all the financial figures you need for your analysis, and the report might provide extensive information about the direction the company wants to head, and possible problems they might encounter in the next years.

The downside of such reports is that it is very time consuming, and you will need to know the company you want to invest in, in order to visit their website and download their reports.

Your bank

Banks usually have their own business unit for investors. A bank will usually be able to provide you with some consolidated information, such as the latest company results, the latest news pertaining to certain stocks, as well as their rating of particular stocks. Banks might recommend to buy, hold, or sell stocks, based on their analysis.

However, banks are still somewhat limited in the information they provide. Many banks are limited to only certain markets or stock exchanges, and the analyses they provide is a mere summary of facts from one of the analysts. Additionally, the analyst’s recommendation is quite subject, as he/she will need to interpret his findings in order to make a recommendation, and interpretations may vary from person to person.

Newpapers

Newspapers are a good source for recent micro- and macro economic developments, Mergers & Acquisitions, crises, etc. Additionally, newspapers offer an overview of stock prices.

Of course, printed media are never as up-to-date as online media, the stock prices are from the previous day, and the news is not the latest. If you are relying on broadcastings (radio, television), you are usually restricted to pre-set times of when news will come available, as well as what they choose to broadcast. Personally, I hardly use any print media anymore in order to conduct my fundamental analysis.

Finance portals

Finance portals, such as Yahoo! Finance or Reuters are platforms, which consolidate certain information. For example, Reuters offers the latest news of a particular company, it offers financial figures and ratios over the last 4 years or 4 quarters, and it offers analyst research and findings. Some portals (e.g. Yahoo! Finance) offer a filter, allowing you to filter down available stocks according to a number of criteria. In other words, you will find everything in one place.

The downside of such financial portals is that information is supplied by other sources, and therefore certain information might either be not up-to-date or not available.

My personal experience has demonstrated, that using a few resources simultaneously works best for me. Usually, I would first visit a finance portal, narrow down my search for available stocks, and I would take a glance at the financials, the available ratios, and the latest news about that company. If I have a good feeling about this particular company, I would download their annual report for further reading. This would allow me to make a personal recommendation of whether I would buy, hold, or sell the stock. Last, I would visit the website of my own bank and view the recommendations of its analysts; this is to assure that there is an overlap of my findings and their findings.

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