...CHAPTER 2 CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING Show Me the Earnings! The growth of new-economy business on the Internet has led to the development of new measures of performance. When Priceline.com splashed onto the dot-com scene, it touted steady growth in a measure called “unique offers by users” to explain its heady stock price. To draw investors to its stock, Drugstore.com focused on the number of “unique customers” at its website. After all, new businesses call for new performance measures, right? Not necessarily. In fact, these indicators failed to show any consistent relationship between profits and website visits. Eventually, as the graphs below show, the profits never materialized, and stock prices fell. The lesson here: Although the new economy may require some new measures, investors need to be careful not to forget the reliable traditional ones. PRICELINE.COM Net unique offers by users 3.0 million 2.0 1.0 0 I II III IV 1999 I II III IV 2000 DRUGSTORE.COM Unique customers 2.0 million 1.5 1.0 0.5 0 I II III IV 1999 I II III IV 2000 Stock price $120 a share 80 40 0 I II III IV 1999 I II III IV 2000 2000-IV close $2.13 Stock price $40 a share 30 20 10 0 I II III IV 1999 I II III IV 2000 2000-IV close $1.03 Source: Story and graphs adapted from Gretchen Morgenson, “How Did They Value Stocks? Count the Absurd Ways,” New York Times (March 18, 2001), section 3, p. 1. 34 Copyright ©2008 John Wiley & Sons, Inc. Preview of Chapter 2 ...
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...------------------------------------------------- Executive Summary There has been a lot said in the media about the Australian share market volatility. Market volatility has wiped 15% from the value of the Australian share market since March 2010 (Cain 2010). In volatile markets, it is common to feel uneasy about investing due to the risk involved. But, market volatility is completely normal and the current market conditions may actually be advantageous for some investors. For example, volatility is needed to some degree because if prices do not move sufficiently, it will be difficult to make money from trading them. Thus, the recent fluctuations in the share market have highlighted the fact that there are risks involved with investing money and that finding the right investment strategy is a crucial step in investing. Investors today have more investment options than were available to the average investor just a few decades ago. While having multiple options is usually a good thing, too many options can cause confusion and system overload and lead many people to avoid making decisions about their investment strategies. Most strategies used to invest in the share market fall into three general categories including technical analysis, fundamental analysis, or a buy-and-hold strategy. The fundamental analysis approach is primarily concerned with value; it examines factors that determine a company's expected future earnings and dividends as well as the continued dependability...
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