General Meeting

Announcements Portfolio Update Market Update Lecture: Asset Pricing Pitch- GY Important Dates Meeting Agenda

Announcements

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Announcements Technical Workshops Every Thursday 7-8 SAC2.120 This Week: Fixed Income Investing CANCELED

Portfolio Update

Portfolio Update- IDT

Portfolio Update- AAPL

Market Update Upbeat earnings: -39 of the SP500 reported earnings today: -Average revenue growth of 3.5% -Average earnings growth of 5.7% -Positive home sales numbers -Slightly weak industrial production numbers -Everyone waiting to hear from the Fed meeting on Wednesday about more easing

Market Update BX: +79% KKR: +61%

Market Update

NDAQ: +67% NYX: +77%

Market Update

Asset Pricing

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Asset Pricing Firm Value =Cash Flow Next Year +Cash Flow The Year After + Etc. *EXPECTED* Expected growth rate of 5% for 2013 Company reports an actual growth rate of 4% at the end of 2013, what happens? All things held equal, stock price will go down

Why? Because if a company’s stock value is just the sum of its future cash flows, then the future cash flows just became smaller, so stock value goes down. Asset Pricing Expected growth rate of 5% for 2013 Company reports an actual growth rate of: 4%: 5%: 6%: Stock price goes down Stock price stays the same Stock price goes up Investing is about finding a stock where your opinion differs from the opinion of all other investors (the EXPECTED performance opinion)

Asset Pricing So if I have to understand a company better than the experts to find a 6% growth rate when the experts expect 5%, how can I hope to compete as a college student? There aren’t an infinite number of experts – small companies aren’t as intensely followed Accounting has major flaws that hide value that not everyone has the time to sift through You are the expert Pension accounting Tax Accounting GAAP Accounting

Asset Pricing Sanity Check 1.) The value of a firm, and thus the firm’s stock is determined by EXPECTED future cash flows for the rest of its life 2.) We look for investments where we have an edge on everyone else to find investments where the reality is going to be better than the expectation

Asset Pricing Investing is all about having a variant view - thinking differently than everyone else.

Cheating Accounting I buy land for $100,000 dollars- what gets recorded on my accounting books? Land account +100,000 If the land goes up in value by 5% every year, what is the value of the land at the end of the year? 100,000 * (1+.05) = 105,000

Cost Basis Accounting Under GAAP accounting, land is recorded at what you pay for it (cost basis), and is never adjusted to reflect its REAL value. Most companies don’t hold that much land for a long time or in huge amounts, so this isn’t really a big deal. 50 years from today, land I bought today for $100,000 will still be listed as worth $100,000 in my accounting statements

Land Accounting So… Land Value Everyone Believes: $100,000 (From financial statements, the number one source of information for analysts) = Actual Land Value: $100,000 x (1 + value growth rate) ^ (number of years held) Example of a variant view- what you see as the real value differs from what others see

Land Value Land Value on Books: $100,000 Actual Land Value: 100,000 x (1 + 5%) ^ (50 years) $1.14M

Small enough so that only a few people look at the company and actually realize the land account has value Land was held for a long time so it has had the chance to appreciate in value significantly Company plans on selling the land soon Small enough that the land sale represents a significant part of the company’s value The Company We Like

Application When does this not work? Large companies- Land values are generally too small relative to the company value to have an impact and most analysts catch these kinds of mispricings for big companies Companies that use land for operations- Banana producers use land to host their plantations, so they never really plan to sell the land. Companies planning to use the land for corporate headquarters- a lot of companies will buy land and hold for a year or two to build corporate headquarters, so it’s never being sold.

Pitch GY

Pitch Sign-Ups