On the Virtue of Hard Questions for Young Analysts

Yesterday I represented the Baltimore CFA Society at the kickoff meeting for the 2013 CFA Institute Research Challenge.  As is the norm, the Washington, DC CFA Society (which is 2.5x larger than us) and Baltimore choose a local company for the students to analyze.  Last year, it was Under Armour [UA].  This year, it is Marriott [MAR].

One quick aside.  Last year, the more bearish you were on Under Armour, the better a team scored.  But guess what?  Under Armour rose 15% in the last 7+ months — the team that finished last had the result that was the best, and the winner did the worst.  I know many of my readers don’t like Jim Cramer, but one thing that he said shines through here: “The bear case always sounds more intelligent.”  The same is true in academic competitions.  That’s one reason it is good to have a mix of temperaments in an investment firm.  Personally, I believe that bulls and bears do better together than separately — they need to round each other out.

Personally, I would prefer to analyze a growth stock like Under Armour, to the “asset light” hotelier Marriott.  That said, Marriott’s  Investor Relations team was out in force for the six (maybe seven) colleges who showed up, and gave what I thought were credible answers to the students who asked them questions.  Near the end of the presentation, the senior Investor Relations person walked them through each line of the income statement — I thought that was a nice touch, but wondered what Marriott used as an internal measure of profitability.

(Note to any students reading me: take a look at what Moody’s, S&P, and Fitch use as their metrics on Marriott.  The rating agencies are not dumb, and they get more data than stock analysts do. They are inside the wall.  They get material nonpublic information, and disclose the portion of it that is relevant to bond investors.  At the presentation, the Marriott IR folks stressed repeatedly that they want to maintain an investment grade credit rating.  That is a large constraint on what Marriott does, and should be considered in any good analysis.)

This will be an interesting competition, and five months from now, it will be fun to be a judge in the local version of the Investment Challenge.


Two weeks ago, I was a judge in a competition among finance students for four colleges that met a McDaniel College.  I was the only judge that did not graduate from McDaniel, which was formerly Western Maryland College, named after the Western Maryland Railroad which funded the school in its early years.

The question at hand was whether the Texas Rangers should have acquired A-Rod in 2000.  This is a tough question, because it is a binary decision, and it faces the winner’s curse.  So, you hired A-Rod.  How badly did you overpay to get him?

I don’t think I am overstating the problem.  Anytime there are multiple bidders for a unique asset, the winning buyer tends to overpay.

The case study (from Harvard) had its own issues.  It overestimated how fast average player salaries would grow, and the econometrics behind the estimation of wins as a function of player salaries was decidedly poor.  More than the Harvard Business School case study would admit, it was a lousy decision to hire A-Rod.  Add in the social effect on other players when A-Rod is paid a huge amount relative to them, and even if he is a nice guy, you wonder if you are truly valuable to the franchise.

But when you are a judge in such a competition, your mind works this way: the first team sets the tone, and has an advantage until a team eclipses them.  Then that team sets the tone.

The judges were pretty neutral on whether A-Rod should be hired or not.  The vote depended more on the process they undertook.  How much research did they do?  How do they back up their assertions?  Did they believe the data in the case study blindly?


Face it, the business world is unclear/dirty, and those that analyze it have to take account of what they don’t know, and make the best decision that they can.  This is the virtue of hard questions for young security analysts, and why we hold such competitions.

Toss them a hard problem.  Make them think outside the box.  Life is tough, and investment decisions are often unclear.  This is life.

Investment competitions are a far better way to train students than the raw academics.  Modern Portfolio Theory is garbage.  Most academic approaches to investing don’t work.  But try to understand a business like Marriott.  They make money off of selling their name.  They make money managing hotels.  How can they be sure to make money as they do so?  Those are the tough questions to analyze.

It’s a good thing to make young analysts face a hard question.  Whether they win or lose, they had to work hard, plan, compromise with team members, and come to a decision that would face criticism.  When we invest money, we don’t get criticism vocally, but we do see the gains and losses.  Thus the investment competitions are a very good way to prepare students for the eventual gains and losses they will face when they are making business decisions on their own.



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