2. General Meeting 8 10.29.2013

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

5. Announcements

8. Free Wall Street Journal Subscription for Paid Members E-mail TREASURER@USITEAM.ORG

9. Announcements Register at usiteam.org/events Fall Portfolio Challenge $5$5 entry fee

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

11. Portfolio Update

13. Portfolio Update- IDT

14. Portfolio Update- AAPL

15. 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

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

17. Market Update

18. NDAQ: +67% NYX: +77%

19. Market Update

21. Asset Pricing

22. 2013 2014 2015 ∞?

23. 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

24. 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)

25. 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

26. 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 2013 2018

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

28. 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

29. 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

30. 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

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

32. 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

33. 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.

34. Pitch GY

35. Pitch Sign-Ups