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From the desk of the
Money Page Editor
It has been a fast 16 weeks for the Money Page.
The Money Page was a new idea for the Fall
2000 semester with the goal to make students
and the community at Penn State Behrend more
aware of the financial stories and happenings
around the world as well as in the United States.
My editorial column is an effort to introduce
the community at Behrend to investing and
money management, using the simplest terms
and examples possible, so even nonbusiness
majors can grow an interest in the financial
world that surrounds us.
The time has come for you, our readers, to
tetxlnd to its`with fzJlit' frank OpiaoM 'a.nd sug
g'estions that Vvoitld'help . us hiake this . a better
and more educational, yet enjoyable reading.
Please email any comments, suggestions or
complaints to axs42B@psu.edu Thank you for
reading the Money Page and have a very fruitful
semester.
Amortya Sinha
Money Page Editor
2000 - 2001
Young investors
by Grace Shim
January 10, 2001
Knight-Ridder Tribune
Watching the value of your port
folio drop by half is never easy the
first time around. Many investors
whose stock market experience
covers less than five years, one of
the best five-year periods in stock
market history, are smarting from a
painful lesson in market correction.
Last year was volatile. The
Nasdaq, heavy with technology
stocks, by mid-December had taken
a 50 percent dive from its March
peak. Creighton University eco
nomics professor Ernie Goss has
noticed that among his students "a
lot are very discouraged with the
market."
Younger people are more likely
to be growth investors and growth
stocks had a tough time during the
latter part of 2000, he explained.
Young people, Goss said, likely
haven't known anything but eco
nomic growth. "If you graduated af
ter March 1991, you haven't seen a
recession," he said. "You haven't
seen significant unemployment."
The rise in stock market values be
ginning in late 1994 was spectacu
lar: a climb of more than 175 per
cent in the Dow Jones industrial av
erage, 350 percent in the Nasdaq
and more than 200 percent in the
Standard & Poor's 500. Those kinds
of returns heightened expectations.
Cella Quinn, an Omaha financial
adviser, cites a recent Gallup poll
that said investors younger than 40
expect returns to average 21.9 per
cent a year. The reality, she said, is
that the average annual stock mar
ket return from 1928 to 1999 was
10.5 percent. And since 1928, a 10-
year average annual return of 21.9
percent has never occurred. The
highest one-year gain was 19 per
cent.
"There's only been five times
since 1928 that the stock market re
turns have been over 19 percent on
a 10-year average annual return,"
she said. Chris Hastings, of Ameri
can Express Financial Advisors in
Omaha, said the combination of a
hot market and the promotion of fi
nancial products pushed young
people with little or no experience
to invest, many of them around the
time the Nasdaq peaked. "They're
buying tech stocks, not being
pleased with 10 to 15 percent re
turns," he said. "The biggest thing
for me is helping people under 30
understand the returns of 30-40-50
percent that we've seen over the last
two years are not the most realistic
expectations."
"The concern I've seen is the
emotional experience of seeing
your account go down 50 percent
for the year," he said. "A lot of
people who have recently invested
have not seen that happen before."
Take Sam Saad, a first-year law
student at Creighton University. He
started investing in 1996, buying
Worldcom stock at age 19. Last
year, he watched his portfolio, com
Monetary exchange rates
and how they are set 101
The price or demand for a
country's money (or currency) in
relation to another country's
money is known as the exchange
rate. An exchange rate is "fixed"
when countries use gold or another
standard that has been agreed upon
mutually and each currency is
worth a specific measure of the
metal or other standard. It is
"floating" when supply and
demand or speculation sets
exchange rates. If a country
imports large quantities of goods,
the demand will push up the
exchange rate for that country,
making the imported goods more
expensive to buyers in that
country.
As the goods become more
expensive, demand drops and that
country's money becomes cheaper
in relation to the other countries'
money. Then the country's goods
become cheaper to buyers abroad,
demand rises, and exports from the
country increase. The value of a
currency is a relative concept or its
value is equal to the worth of the
goods and services that it buys.
Now these same goods and
services are likely to be available
in various countries, with their
prices, of course set in their local
currency
This relationship allows us to
describe the value of one currency
in terms of another and arrive at an
exchange rate. Thus, in theory, the
exchange rate between two
currencies should he the ratio of
the prices of goods and services (in
local currency) in the correspond
ing countries
However, there are many
problems and exceptions to the
above theory: one of which is that
every country has different goods
and services. Thus in practice, the
exchange rates are set mostly by
the demand and supply for a
currency, which in turn depends on
the trade balances and capital
flows.
World trade now depends on a
managed floating exchange
system. Governments act to
stabilize their countries' exchange
rates by limiting imports, stimulat
ing exports, or devaluing curren
cies.
A brief history of currency
During the history of mankind,
different assets such as gold, silver,
get nervous as stock prices fall
posed largely of technology stocks,
drop 50 percent.
Saad said that he picked stocks
through research and by watching
the cable financial channel, CNBC.
With his parents' and broker's help,
Saad picked different technology
stocks that he considered popular.
It's been crazy," he said. "It will be
tougher to pay for school. But, he
added, "I don't worry about it that
much." Some younger investors say
the market has deterred them from
investing in technology stocks for
a while; some have cashed out. Oth-
ers say they try not to pay much at
tention to their statements or to the
Many more say they are just wait
ing it out for the long term.
Hastings, the financial adviser with
American Express, said he's seen a
lot of self-investors now seeking
professional advice. He said that
he's also seen that about 85 percent
of younger investors' goals are to
ward long-term investing.
Take University of Nebraska-Lin
coln graduate student Ryan Hayes,
25, for instance. He's had the joy
of watching his initial investment
turn into $65,000, thanks to the
technology stock boom. And he's
felt the pain of his portfolio dwin
dling to $41,000 due to the technol
ogy stock bust. "I got so killed over
a couple months," Hayes said. "I've
tried to not hit that panic button.
"It's easy to get caught up watch
ing it every day," he said.
"My home page with Excite has
precious stones, spices, and
tobacco leaves have been accepted
as currency. Of these the most
lasting and valued has been gold,
which has many of the characteris
tics of an ideal currency: limited
supply, non-degrading over long
periods and measurable properties
such as weight & purity. This
measure using gold was also
known as the "gold standard."
By the nineteenth century,
governments realized that paper
certificates, backed by gold
collateral could be a more practical
form of currency and introduced
the first paper bill. However it was
not until 1971 when the gold
standard connection with paper
hills were dropped by the USA.
The beginning of currency notes
also gave rise to the concept of
exchange rates. During the
nineteenth century, foreign
exchange brokers made active
markets for exchange of various
currencies against the Pound
Sterling. This virtually gave the
Pound Sterling the role of a
benchmark of value, similar to
gold. In the twentieth century the
role of benchmark currency moved
to the US Dollar.
How are the foreign exchange
rates determined?
To understand the basis of price
determination in foreign exchange
markets, we must first explore the
basis of currency itself. The
currency of a nation is a commod
ity that serves as a store of value
and also a means of transferring
value to facilitate trade.
As I have mentioned previously,
in the last paragraph, till the
nineteenth century there was the
gold standard but now it is non
existent, hence the big question:
What is the value of a dollar in
comparison to the Euro or the
value of a British Pound in
comparison to the Japanese Yen?
The answer to this question,
although a very debatable one, is
that the value of a currency is
equal to what one can buy with it.
Thus the value of a currency is
relative rather than an absolute
concept. This value is implicit in
the price of goods and services in a
country.
An example of how exchange
rates are determined is: Imagine
my portfolio. It has been incredibly
painful watching it." Hayes started
investing in high school and opened
a managed account with Salomon
Smith Barney four or five years ago,
a period in which he has seen 15
percent to 18 percent returns. "It
was fun the last few years," he said.
Now, he tries "not to watch it." "I
know a lot of people who are pretty
shocked and who converted their
investments into cash."
Hayes said he leaves the decision
making to his portfolio manager,
who recently has diversified Hayes'
holdings away from a heavy load
of technology stocks. After watch
ing his portfolio drop 40 percent in
four to five months, Ralston resi
dent Corey Krause, 25, is going to
take his profits if he can get
some.
"What I've taken from the past
couple of months is if my stock goes
up 50 percent, sell and go to some
thing else," he said. Krause admits
he looks for "high-risk, volatile
health care and pharmaceutical
stocks" because he wants a higher
return than the 10 percent average.
"I'm shooting for hopefully 15 per
cent," he said. "Being young, I was
looking at 30 years in the future and
did huge risk to moderate risk to
hopefully get a higher net return."
When Krause started investing
about two years ago, taking invest
ing in his own hands, he watched
the financial cable channels, talked
with other investors and did re
search on the companies. "The first
pizza is
the most
tant
Financial
took
l
ou
torpor Out
Amortya Sinha
in the world. The current
price of a slice of pizza in
the US is $1.40, and in the
UK is 1.65 Pounds. Com-
paring the two prices we
can arrive at the exchange
rate between these curren
cies as US Dollar to British
1.65/1.40=1.17
Pound
Another way to deter
mine exchange rates is using the
purchasing power parity of a
currency. Purchasing power parity
(PPP) is an economic theory that
states that the rate of exchange of
one currency to another should be
equal to the inverse ratio of the
prices for representative goods in
the two currencies.
Purchasing power parity
implies that the equilibrium
exchange rate is given by:
Exchange rate = Price in terms
currency / Price in base currency
Although this theory is logical,
in real life it is impossible to
define the representative goods
and services as their quality vary
from one nation to another. Still
analysts study a large diversity of
representative goods to estimate
the PPP levels of various curren
cies (against the USD). When an
exchange rate is higher than the
corresponding PPP rate, the
currency is said to be undervalued
and when the exchange rate is
lower than the corresponding PPP
rate the currency is said to be
overvalued
An example of this would he
the Big Mac index, which
compares the prices of
McDonald's Big Mac hamburgers
in several countries. The Econo
mist publication of London in the
U.K. constructed this index and
today it can be regarded as good a
PPP indicator as any. Some of the
properties that make the Big Mac
a suitable benchmark for com-
parison is its availability and
consistency across most countries
in the world. Moreover, it is an
year, I did pretty good," he said.
"At one point, I doubled." But it
didn't last. Krause said one of his
stocks slid 48 percent. CM+RT"I
wasn't surprised that it went
down," Krause said. "I'm sur-
prised to see how much it's gone
down." -RTKrause said that he's
"coping fine because I guess I un
derstand the market is going to go
up and down." "To me, it's kind
of fun," he said. "It's the highest
form of gambling. It's exciting to
do it on your own."
Allison Walters, 23, human re
sources analyst for the Federal Re
serve Bank in Omaha, took the op
posite approach a more conser
vative one. Upon starting her new
job in June 1999, Walters started a
Roth IRA a tax-deferred retire
ment account and picked a mu
tual fund in which to invest her
savings. Though new to investing,
she made sure to stay away from
technology stocks because "they
were pretty unstable."
Last year, Walters changed her
mutual fund to a more conserva
tive one, but overall, "I rode it out
a little bit." She said that early this
year, she plans to talk with finan
cial advisors, intends to pursue
technology stocks and will start a
401 K retirement plan. "I think my
generation, we need to plan for the
future," she said. "Then there's the
age-old question do we have the
money? And I think we do."
"Putting $2O, $3O away a month
helps."
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Shortcomings of the purchasing
power parity
Although the purchasing power
parity theory is pretty easy to
follow and agree to, it makes
several assumptions that weaken
its influence on the exchange rate
determination process. Some of
these shortcomings are: Presence
of tariffs and quotas, presence of
exchange controls, barriers to free
trade such as standards and
regulations, and lack of a perfect
representative of goods.
Despite these shortcomings, PPP
does indicate the "equilibrium"
rates of exchange. The spot
exchange rates may deviate from
these levels in the short term.
Demand and supply factors in
currency markets
In the short term, currency
exchange rates are strongly
influenced by capital flows as
investors shift funds between
countries in search of the most
attractive investments. A large
inflow of funds increases the
demand for a given currency such
as the dollar and strengthens it.
While a large outflow of funds
increases the supply of the cur
rency such as the dollar and hence
weakens it.
A descriptive example of this is
the Asian currency crisis of 1997-
98 when most of the southeast
Asian stock markets lost 20% -
50% of their value. Given a further
30%. to 80% devaluation of local
currencies over the same period,
the losses for international inves-
tors were enormous
Here are the current exchange
rates for some selected cur
rencies to one U.S. dollar:
Euro: 1.06
Deutsche Mark: 2.07
Japanese Yen: 118.11
British Pound: 0.68
French Franc: 6.95
From Wall St. we have here
the closing market figures for
01/18/2001:
10678.28
up 93.94 (0.89%)
NASDAQ:
2768.49
up 85.71 (3.19%)
S&P 500:
1347.97
up 18.50 (1.39%)
BOND:
1115/32
up 9:116 (5.48%)
ulated
modity
hose prices
ire relatively
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