Yesterday I was a judge (one of five) for the Washington/Baltimore Investment Research Challenge.? Five teams from local colleges participated to analyze a prominent local company, Under Armour.? (My kids love the stuff, I hate to pay the price.)
I have to say that I admire all of the young men and women who presented to us.? It takes a lot of guts to present to people 30 years older then you.? The experience differential is considerable.
One practical difference is that the students apply many methods from Modern Portfolio Theory that are roundly ignored by most investment managers.? Few investment managers apply Discounted Cash Flows [DCF], because it is too flexible, with too many parameters that are hard to calculate.? Some apply reverse DCF, attempting to estimate the rate of return of companies at their current price… same problems exist, though the comparability of results is simpler.
My advice to future contestants would be to spend more time on qualitative issues, and less on quantitative.? Regarding quantitative issues, I would encourage abandoning DCF in favor of simpler valuation methodologies.
Also, I would discourage using regression unless you really understand what it means.? It’s easy to teach people to use advanced statistical methods, but tough to teach them the limitations of where the methods get abused, or don’t work.? As I have often said, I rarely see advanced statistics used properly by Wall Street, and yesterday was no exception.
But all that said, there are a lot of bright people entering the talent pool for investing; for investment firms in a given region, going to an event like this could be a good recruiting tool.
PS — make sure you understand the liability structure in full, also…
To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rate and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin, and believed Orson Welles when he told them over the radio that the Martians had landed. – Jim Grant
That’s a great quotation, Steve. Thanks for sharing it.
David, great post as always (long time reader, first comment).
I participated in the CFA NC challenge in 2009 as a team member for Appalachian State University (we won) and we focused namely on capital structure and economic/industry environment, with our valuation model weighted primarily toward a multiples based approach versus DCF analysis.
What company did you analyze? It was a lot of fun for me; I hope to be invited back next year.
We analyzed Horizon Lines Inc. Although just partaking in the competition was rewarding enough, we received a scholarship to take the CFA level 1 exam; do you if the Baltimore team got something similar?
I don’t think they did, but I don’t know that they didn’t. They are getting paid to go to NYC for the next phase of the competition.