Vahan Janjigian - The Forbes / Cfa Institute Investment Course: Timeless Principles for Building Wealth

Contents

Copyright 2011 by Forbes, LLC. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

FORBES is a registered trademark of Forbes LLC. Its use is pursuant to a license agreement.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com . Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions .

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com .

Library of Congress Cataloging-in-Publication Data:

Janjigian, Vahan.

The Forbes/CFA Institute Investment Course : timeless principles for building wealth / Vahan Janjigian, Stephen M. Horan, Charles Trzcinka.

p. cm.

Includes bibliographical references and index.

ISBN 978-0-470-91965-1 (cloth); ISBN 978-0-470-94922-1 (ebk); ISBN 978-0-470-94923-8 (ebk); ISBN 978-0-470-94924-5 (ebk);

1. Investments. 2. Finance, Personal. I. Horan, Stephen Michael. II. Trzcinka, Charles A. III. Title.

HG4521.J287 2011

332.024'01dc22

2010032750

To our beautiful wives, Noon, Connie, and Jaden,

and our happy children, Lori, Lucine, Lily, and Cayse

Preface

Bertie Charles B.C. Forbes was born in Scotland in 1880. At a young age, he developed an interest in journalism and business. Eventually he made his way to South Africa and then to the United States. In 1917, he founded Forbes magazine, the first publication devoted solely to reporting on business. In his first editorial he wrote, Business was originated to produce happiness, not to pile up millions.

His son, Malcolm Stevenson Forbes, served as Editor-in-Chief from 1954 to 1990. Prior to taking over the reins, Malcolm got the bright idea of creating the Forbes Stock Market Course , which was first published in 1948. World War II had recently ended and things were looking up, but Malcolm was concerned that many Americans simply did not understand how the markets worked or how to go about beginning an investment program. He wanted to help them get started on the path toward building wealth.

Just about the same time Malcolm Forbes was putting together the first edition of the Forbes Stock Market Course , Benjamin Graham, today known by many as the father of fundamental investing, outlined the merits of a rating system for financial analysts, saying, The analyst who qualifies for the rating... is likely to develop a more professional attitude toward his work and a keener interest in maintaining and advancing the standards of his calling. The organization now known as CFA Institute, a global association of almost 100,000 investment professionals, was born in 1947 from that initial call to action.

Each year, CFA Institute administers a series of exams to candidates worldwide who are trying to earn the prestigious Chartered Financial Analyst (CFA) designation. The CFA charter is respected as the gold standard of professional credentials within the global investment community. To earn this credential, candidates must pass a series of three exams, have at least four years of relevant work experience, and agree to abide by the industrys most stringent code of ethics and standards of practice. They must master a Candidate Body of Knowledge, which includes ethical and professional standards, quantitative methods, economics, financial reporting and analysis, alternative investments, corporate finance, equity investments, fixed income, derivatives, portfolio management, and wealth planning.

Now Forbes and CFA Institute have teamed up to bring you The Forbes/CFA Institute Investment Course . This collaboration between two of the worlds leading investment brands is a natural fit. Since 1917, Forbes has promoted a commonsense approach to investing. Retail investors often turn to Forbess publications for investment ideas and for information about the latest investment trends. CFA Institute has long promoted the highest standards of ethics, education, and professional excellence. Investment professionals worldwide value the information they find in the CFA Institutes journals and briefs. Furthermore, the co-authors of The Forbes/CFA Institute Investment Course have worked together over the years on previous drafts of what used to be called the Forbes Stock Market Course . Two of the authors are longtime CFA charter holders. One is chief investment officer at Greenwich Wealth Management and editor of the Forbes Special Situation Survey investment newsletter; the other is the head of Professional Education Content at CFA Institute. The third author is the James and Virginia Cozad Professor of Finance at Indiana University School of Business. All three hold PhD degrees in finance, have years of experience teaching undergraduate and graduate courses at leading universities, and have published their research in respected academic journals.

We have created a special web site at www.cfainstitute.org/forbes as a supplement to this text. The web site includes quizzes and additional materials. Throughout the book, you will find references to information available on this web site. While we have written the book to stand on its own, we think many of you will want to learn more about specific topics. We believe the information provided on this web site will satisfy your curiosity.

In recent years, investors have been rocked by scandal and financial crises. Some simply had their money stolen by crooks such as Bernie Madoff. Others saw their life savings suddenly dwindle with the bursting of the housing bubble. Whether you rely on professional advice or follow a do-it-yourself approach, managing your wealth is ultimately your responsibility alone. To make the right decisions, you must have a certain amount of knowledgeif only so you can ask the right questions. The Forbes/CFA Institute Investment Course provides much of the information you will need to take control of your investments. This educational tool will answer many of the questions you might already have, and give you a deeper understanding of stocks, bonds, mutual funds, and a host of other investment vehicles. We believe The Forbes/CFA Institute Investment Course is an indispensable resource for both experienced and novice investors. We hope you will agree.