What You Will Learn From Reading “Why Stocks Go Up and Down” – Chapter 1

Nov 3, 2014 What You Will Learn From Reading “Why Stocks Go Up and Down” – Chapter 1

In this new series of blog posts I am going to give a brief excerpt from each chapter and discuss why it is important for investor education.

Chapter 1 [other chapters will be covered in subsequent blog posts] is titled “Starting a Business”. In this chapter, Mr. Jones establishes The Jones Mousetrap Company by opening a bank account for the company and depositing $100. He then buys some wood and metal for his raw materials inventory, and some tools to make the traps. He also hires an employee and pays wages. Chapter 1 follows the accounting for each of these and other transactions, and shows the resulting evolution of the income statement and balance sheet. This will be expanded upon in subsequent chapters. Chapter 1 is very basic, but without this accounting foundation, it has been our experience that many new investors do not understand financial statements as well as they should, and therefore do not fully understand how they relate to stock and bond prices.

Here is an excerpt from Chapter One.

At this point, Jones began making mousetraps. He used $20 worth of wood and metal and built 10 traps. If Jones wanted to be more accurate on his balance sheet, he could now separate inventory into two groups:

Inventory:
Finished Goods   ……   $20
Raw materials   ……   $10

Jones brought the traps to a store that agreed to sell them. The store bought all 10 traps for $5 each, or a total of $50. Jones collected the $50 at the end of January. At this point Jones decided to redo his balance sheet and draw up his first income statement. To recap, this is what has happened:

1. Sales of $50 were made and the $50 was received in cash.
2. Finished Goods worth $20 were sold.

Thus the income statement for the month of January would look like this:
JM Statement of Income From 1/1/10 to 1/31/10
Sales   ……   $5
Less: Cost of goods sold   ……   $-2
Equals: Profit   ……   =   $3

You may be wondering how a book that starts out at this basic level can be about stocks and bonds. From our years of teaching, Patrick and I have learned that with a better understanding of financial statements that comes from learning basic accounting, you will discover that you have a deeper understanding of your own investments, and therefore have more confidence in your investment decisions. Although the book does start at a basic level, by the end, you will see that it goes well beyond other introductory books, often explaining things that others shy away from.

“Why Stocks Go Up and Down” is the outgrowth of the introductory investments course I taught for the Boston Security Analysts Society for over 20 years. My co-author, Patrick Gregory, has taught investments courses at Bentley University where he received the Innovation in Teaching Award. He has also taught preparatory courses for the C.F.A. exams, as well as teaching investments privately at institutions including Fidelity and Wellington Management. Because of our teaching experience, we believe that this book is unique in its approach, coverage, depth, and clarity

Excerpts and comments on the other chapters will be posted over the next few weeks. If you want a preview of what is covered in the book immediately, please visit our website at www.whystocksgoupanddown.com and click on Contents.

For more about investment education, please see the blog on our website at www.whystocksgoupanddown.com