Ask me anything about finance/investing

This site taught me how to play poker for free. I'd like to give something back. I'm an equity analyst for a hedge fund. My job is to try and come up with better valuations for publicly traded companies than the market can. In the course of coming up with these valuations I get the chance to meet with the management teams of all sorts of companies, as well as pretty much every stripe of investment professional there is. Beyond that, my professional network includes people doing just about every type of financial analysis on both the buy and the sell side.

I feel like a lot of you have questions about both how to invest your own money, and how more complicated parts of the financial system and economy work. If you guys have any questions about any of these topics, or want advice (*) on how to invest your own money, or if you want tips on how to get into this line of work, I'll do my best to answer them or if I don't know the answer I'll ask someone who does.



*I legally don't think I can give really specific advice, but I can be helpful.

If you were given 25k how would you plan to invest it? If you were given 100k would your plans change at all?

Assume you are fairly young.

On January 04 2010 20:14 Bigbobm wrote: If you were given 25k how would you plan to invest it? If you were given 100k would your plans change at all?

The important thing isn't really the amount of money, but the liquidity and risk constraints. So if I had money that I didn't have to touch for 40 years for retirement, it would probably almost entirely in equity funds with an emphasis on emerging markets (and the developed world ex US, most US investors invest way too much in the US). If I had 25k that I needed to buy a car in 3 months, then you can't get too creative really and I'd look for a short term instrument experiencing technical pressure (something about the market structure makes investors uneasy, but the fundamentals are sound) much like what happened to municipal bonds last year. If you give me a time horizon I can probably get more specific.

I'll also say that anybody who is not a millionaire multiple times over shouldn't really be focusing on investing in individual assets. I'm always shocked when poker players who build bankrolls to sustain variance ignore the same logic and invest their winnings in individual pieces of real estate for example. If you want a house to live in with your family that's fine, but bankroll management is important in investing too.

What school qualifications do you have and/or what subjects did you take etc. The more detail the merrier.

Thanks.

what strategies do you favor for valuing equities? I understand you get the ability to visit companies and get an IRL look at how they run, but could you focus on what methods you use outside of this privelege? how do you spell privelige?

Do you use technical analysis at all?

OK, I'll take up your kind offer thanks.

About 25k to invest. I wish to do it as ethically as I can (basically no arms, I'm not going to be too pussy about anything else, though it helps). I don't really want advice on investing it myself as I have my own skills in what I do and I am happy to pay for someone else's in what they do, and I don't have the time, but down what avenues should I go to get this done in the best way? My attitude to risk on this amount is surprisingly low even though I am young, because I want it as a kind of "rainy day" fund.

I apologise if my ignorance in these matters make my questions irrelevant or senseless. Thanks again!

On January 04 2010 20:23 Funktion wrote: What school qualifications do you have and/or what subjects did you take etc. The more detail the merrier. Thanks.

Sure.

I went to Johns Hopkins University, graduated in 4 years with a degree in Political Science.
I took the following relevant classes:

Financial Accounting
Management Econ
Corporate Finance
Stat I (taught myself a bit of stat II)
Intl Finance
Micro

I wish I had taken econometrics and recommend it to everyone who wants to do anything in finance. By far the most useful course was management econ, because the professor didn't just teach formulas (common in finance/accounting) but helped you build an analytical toolbox of sorts to figure real questions; For example many classes will ask you what is the DDM value of X firm, but they won't really help you determine if that's an appropriate analytical technique. I also interned at a mutual fund and a venture capital company. There is no substitute for industry experience. You almost need to learn a new language.

On January 04 2010 20:23 Night2o1 wrote: what strategies do you favor for valuing equities? I understand you get the ability to visit companies and get an IRL look at how they run, but could you focus on what methods you use outside of this privelege? how do you spell privelige? Do you use technical analysis at all?

I don't use technical analysis at all. I've yet to see compelling statistical evidence that demonstrates that people who are good at it are anything but the right tail of variance. There are exceptions to this but they rely on distinct informational or technological advantages (Renaissance Technologies does this as I understand it), and aren't really traditional technical strategies.

I personally favor looking for undervalued identifiable assets or easily predictable cash flows. Luckily for me, most smart analysts are looking for the next hot growth stock with uncertain cash flows, so I can pick through flawed companies looking for hard assets that once the capital structure is dissected, can actually be bought for cheap by buying the equity. It's usually a lot of work in excel figuring out when and why cash comes into the company and leaves, but at the end a simple Discount Cash Flow Analysis can get you a discrete valuation for the company if you've done your legwork right. Spending a lot of time testing and tweaking your assumptions about cost and revenue growth is important too, and that's where meeting the companies comes in.

The privilege (thank you google chrome auto spellcheck ) of meeting with management is usually best used trying to get at whatever you can't understand from the financial statements. This can mean very different things for many different companies. With a biotech company, I may spend an entire meeting writing the process by which their newest drug works, without understanding it, just so I can show my notes to contacts in the medical world. With a oil service company, I may spend a good bit of time trying to ascertain which customers they can depend on to renew options, and which they can't. It really differs from company to company but it's definitely the most fun part of my job. FWIW I've met with a few internet poker companies and have had really cool conversations about where they think online poker is going. Unfortunately I can't TR that here.

EDIT: misread the question. What methods do I use outside of meeting companies? I spend a lot of time reading financial statements, reading newspapers, and talking to people. With all of that information I try to build a mental database of everything that's going on in the world and look for inconsistencies. Maybe the growth rate that's suggested from Company X's EV/EBITDA multiple is 1% in perpetuity, but I've noticed that this company's customers having trouble keeping inventory in stock. I might then deduce that company X is going to have either a pricing or volume push past 1% in the near term, and depending on the cost structure, might deserve a higher valuation.

CLiffs: I read everything and anything and try to construct a logical system in my head for where money is flowing, then I compare this to financial modelling I and others have done based on financial statement analysis. Discrepancies between the two systems usually mean value.

On January 04 2010 20:25 Oly wrote: OK, I'll take up your kind offer thanks. About 25k to invest. I wish to do it as ethically as I can (basically no arms, I'm not going to be too pussy about anything else, though it helps). I don't really want advice on investing it myself as I have my own skills in what I do and I am happy to pay for someone else's in what they do, and I don't have the time, but down what avenues should I go to get this done in the best way? My attitude to risk on this amount is surprisingly low even though I am young, because I want it as a kind of "rainy day" fund. I apologise if my ignorance in these matters make my questions irrelevant or senseless. Thanks again!

No problem. What you're looking for are so-called "socially conscious mutual funds". These funds are just like other funds except they don't invest in certain companies (defense, tobacco and sometimes booze and gambling I think). I can't link you to specific ones (google socially conscious fund and many come up), but generally look for ones with a high sharpe ratio over a 5 or 10 year period (will be available in any prospectus), and a low annualized standard deviation of return (though you will sacrifice expected return for less risk, so be honest with how much volatility you can sustain, the tradeoff between risk and return looks something like this in expected form:+ Show Spoiler +

). Always of course look for funds with the lowest expense ratio, and make sure you're not paying any loads (fees). Be aware that you will be paying a higher expense ratio for the socially conscious mandate, so your realized returns will be lower than a similarly managed fund.

Cheers, great stuff thanks.

What kind of skills and career experiences do you look for in potential hires?

On January 04 2010 20:39 Sicks Macks wrote: Show nested quote + On January 04 2010 20:23 Night2o1 wrote: what strategies do you favor for valuing equities? I understand you get the ability to visit companies and get an IRL look at how they run, but could you focus on what methods you use outside of this privelege? how do you spell privelige? Do you use technical analysis at all? I don't use technical analysis at all. I've yet to see compelling statistical evidence that demonstrates that people who are good at it are anything but the right tail of variance. There are exceptions to this but they rely on distinct informational or technological advantages (Renaissance Technologies does this as I understand it), and aren't really traditional technical strategies. I personally favor looking for undervalued identifiable assets or easily predictable cash flows. Luckily for me, most smart analysts are looking for the next hot growth stock with uncertain cash flows, so I can pick through flawed companies looking for hard assets that once the capital structure is dissected, can actually be bought for cheap by buying the equity. It's usually a lot of work in excel figuring out when and why cash comes into the company and leaves, but at the end a simple Discount Cash Flow Analysis can get you a discrete valuation for the company if you've done your legwork right. Spending a lot of time testing and tweaking your assumptions about cost and revenue growth is important too, and that's where meeting the companies comes in. The privilege (thank you google chrome auto spellcheck ) of meeting with management is usually best used trying to get at whatever you can't understand from the financial statements. This can mean very different things for many different companies. With a biotech company, I may spend an entire meeting writing the process by which their newest drug works, without understanding it, just so I can show my notes to contacts in the medical world. With a oil service company, I may spend a good bit of time trying to ascertain which customers they can depend on to renew options, and which they can't. It really differs from company to company but it's definitely the most fun part of my job. FWIW I've met with a few internet poker companies and have had really cool conversations about where they think online poker is going. Unfortunately I can't TR that here. EDIT: misread the question. What methods do I use outside of meeting companies? I spend a lot of time reading financial statements, reading newspapers, and talking to people. With all of that information I try to build a mental database of everything that's going on in the world and look for inconsistencies. Maybe the growth rate that's suggested from Company X's EV/EBITDA multiple is 1% in perpetuity, but I've noticed that this company's customers having trouble keeping inventory in stock. I might then deduce that company X is going to have either a pricing or volume push past 1% in the near term, and depending on the cost structure, might deserve a higher valuation. CLiffs: I read everything and anything and try to construct a logical system in my head for where money is flowing, then I compare this to financial modelling I and others have done based on financial statement analysis. Discrepancies between the two systems usually mean value.

You sound a lot like Joe Ponzio, Warren Buffet and other similar business investors, I'm glad to hear that and theirs is the path that I look to follow. I know how to do a DCF (or I could easily look it up for a refresher) and I have a small knowledge of some other value-oriented methods of valuation so I figure its the experience and general knowledge that I should be working on.. sounds like what you're saying to me at least?

I understand some hedge funds mess with more complicated financial instruments (which I basically know zip about), I'm curious to know what types of investments your company makes and even more so what part you specifically are involved in(so I have a better idea of where your speciality is). What I mean is do you look outside of stocks, towards bonds or commodities, etc? Do you do short-term purchases or shorts, etc?

what fund do you work at?

On January 04 2010 20:29 Sicks Macks wrote: I also interned at a mutual fund and a venture capital company. There is no substitute for industry experience. You almost need to learn a new language.

Thanks a lot that was really helpful info. At what time/stage did you do your internships?

If we can't be bothered to look deeply into our financial investment decisions, who should we have do it for us?

If we can be bothered and decide to do a little bit of analyzing on our own (read a few books, talk to people, spend ~10 hours a week on it), how would you suggest we begin this path?

What kind of ROI can we expect in each scenario over the next 20 years?

On January 04 2010 21:29 Pacifist wrote: What kind of skills and career experiences do you look for in potential hires?

I mean to be honest high finance is pretty clubby about giving out interviews (school really matters here, then gpa, etc). Once you're in an interview for a role like mine, people need to think that you are:

A) smart
B) have a unique thought process
C) can easily explain your thoughts and conclusions to others
D) can quickly process new information

One of the best interview questions I ever got was a classic test of all 4: "Cars cost $20,000, Tuxedos cost $500, they both rent for $100 a day. Why isn't every car rental owner buying a tuxedo rental store instead? List every reason". I missed this one pretty badly, but the explanation really helped me learn how to quickly think at a structural level about industries I've never participated in.

As far as career background goes, it doesn't really matter. Anyone can learn accounting. The above stuff is tougher.

On January 04 2010 21:41 Night2o1 wrote: You sound a lot like Joe Ponzio, Warren Buffet and other similar business investors, I'm glad to hear that and theirs is the path that I look to follow. I know how to do a DCF (or I could easily look it up for a refresher) and I have a small knowledge of some other value-oriented methods of valuation so I figure its the experience and general knowledge that I should be working on.. sounds like what you're saying to me at least? I understand some hedge funds mess with more complicated financial instruments (which I basically know zip about), I'm curious to know what types of investments your company makes and even more so what part you specifically are involved in(so I have a better idea of where your speciality is). What I mean is do you look outside of stocks, towards bonds or commodities, etc? Do you do short-term purchases or shorts, etc?

Thanks, Warren Buffet is my original favorite investor. The best thing to do if you really want to get into understanding stocks is to sit down in excel with a company's 10-K and 10-Q disclosures (available on their investor relations website) and build a simple model that explains what happens to their different accounts when certain things happen. Pick a company with one product or service so it's simple. Say Chipotle for example (CMG, I don't cover them). Try to get a feel from their press releases what it costs to open a store, what costs are variable, which are fixed etc. Then you can project traffic/store count/cost inflation in the out years and see what happens to things like cash flow and EPS. You could of course use this to see if CMG is over or undervalued, but it's most useful just to see where you feel you need more information to be exact. It's in thinking about ways to refine your models and process that you get the experience to find genuine edges in investing (hint: they're rarer than in tough poker line-ups and people are more delusional about them than in PLO)

As far as hedge funds go, we're very vanilla. We invest both long and short, but we have a long term focus (As most value investors do). Many of my friends work for crazier hedge funds. The only "nutty" thing we do is invest in very small, illiquid companies.

Question: Which of the following investment scenarios do you preffer and why with these assumptions:
- money to invest: $250k
- liquidity: high
- time horizon: 3-5 years
- risk acceptance: low

Scenario 1: Investing into shares/commodities or similar funds.
Scenario 2: Buyin 1-2 real estate properties, renting them and selling them in a couple years.

On January 04 2010 21:43 TenBagger wrote: what fund do you work at?

Don't feel comfortable saying. I've posted enough silly stuff over my time here that I'd rather keep IRL separate.

On January 04 2010 21:45 Funktion wrote: Show nested quote + On January 04 2010 20:29 Sicks Macks wrote: I also interned at a mutual fund and a venture capital company. There is no substitute for industry experience. You almost need to learn a new language. Thanks a lot that was really helpful info. At what time/stage did you do your internships?

Summer between junior and senior year. I had a tougher time than many getting my first job because of it. I'd recommend soph-junior summer.