EconAir

This primer is aimed at the long-term investor. But this does not mean that you should necessarily hold all of the stocks and funds in your portfolio for a long time. WHY STOCK PRICES GO UP The movement of a stock index such as the S&P 500 or an individual stock depends on two things: Earning per share (EPS) and changes in EPS. Stock price/earnings per share ratio (PE ratio) and changes in the PE ratio. If the PE ratio stays the same, an increase in EPS often leads to an increase in the stock price. The same is true of a stock index. Rising EPS combined with a rising PE ratio is often the reason why a stock goes up more than the average stock. Since 2009, the beginning of the stock market recovery from the last recession, most of the increase in stock prices has been due to the increase in earnings per share (EPS). Well, that was easy. Well, not really. The stock market is “forward-looking,” that is, it tries to anticipate change, especially cha...

Positive Externality You need to know three things about management and finance: 80/20 Rule Opportunity Cost Compound Growth 80/20 Rule (Also called Pareto’s Law) This idea says that a relatively small percent of actions account for a relatively large percent of outcomes. Find and concentrate your efforts on the important influences on your business. The percentages aren’t always 80/20. Some examples: 20% of your customers account for 80% of your sales. McDonald’s accidentally learned that 10% of its customers accounted for 60% of its daytime sales. And it was an identifiable group that they had never aimed its advertised at. 20% of your product line accounts for 80% of your sales and profits. Often, companies with a large product line with many variations find that 50% of their products account for over 90% of sales. An even smaller percent usually account for most of the profits. 20% of your SKUs account for 80% of your stockouts (and l...

Famous Headline Introduction The usual reasons given for the Great Depression – the stock market crash of 1929 and the later collapse of the banking system – do not tell the whole story. Available economic data indicate (there were no national income accounts in 1929) that a recession had already begun before the stock market crash. The crash of October and November of 1929 was a catalyst that made the recession worse but the partial stock market recovery in early 1930 did not end the recession. Industrial production continued to fall quickly and unemployment rose rapidly in 1930. Continuing farm and businesses failures over the next two years wiped out thousands of small rural banks and threatened total financial collapse in early1933.  For a fuller explanation, we have to go back to the 1920s to see additional reasons for the origins and the rapid decline in output at the beginning of the Great Depression. We have to look at the int...