value investing emba block week – fall 2016 preliminary ... value...page 1 of 6 value investing...
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ValueInvesting
EMBABlockWeek–Fall2016
Preliminarysyllabus
TANOSANTOS
Classroom:TBD
ProfessorOfficeLocation:TanoSantos–Uris815
OfficePhone: 212-854-0489
Fax: 212-851-9509(HeilbrunnCenter)
E-mail:[email protected](TanoSantos)TAs:TBD
YoushouldcontacttheTAwithanyquestionsthroughoutthecourse.Allemailcommunicationswiththeteachingassistantormeshouldhave“EMBA-Saturday-ValueInvesting”inthesubjectline.
Youcanalsosubmitquestionsaboutclassmaterialtomeeverydayuntil8:00p.m.Iwillanswereitherbyemailornextdayinclass.QuestionsaboutanyoftheassignmentsshouldbesubmittedtotheTA.Asbeforeallemailsshouldread“EMBA-Saturday-ValueInvesting”inthesubjectline.
RECOMMENDEDCOURSEMATERIAL
RequiredTextbooks
Thereisonerequiredtextbook:
• ValueInvesting:FromGrahamtoBuffettandBeyond.BruceC.N.Greenwald,JuddKahn,PaulD.SonkinandMichaelvanBiema,WileyFinance,2004.
Otherimportantreferences
Thereisofcourseexcellentliteratureonthesubjectofvalueinvestingandrelatedtopics.IstronglyrecommendGraham’sclassic.• TheIntelligentInvestor:TheDefinitiveBookonValueInvesting.ABookofPracticalCounsel(RevisedEdition)
[withcommentsbyJasonZweigandintroductionbyWarrenBuffett].
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Otherinterestingbooksthatimmediatelycometomindare:
• TheLittleBookthatStillBeatstheMarket.JoelGreenblatt.JohnWiley&Sons,2010.• AccountingforValue,StephenPenman,ColumbiaBusinessSchoolPublishing,2011.• MarginofSafety:RiskAverseValueInvestingStrategiesfortheThoughtfulInvestor.SethKlarman.Harper
Business,1991.• TheMostImportantThing:UncommonSensefortheThoughtfulInvestor.HowardMarks,ColumbiaBusiness
SchoolPublishing,2011.• TheLittleBookofBehavioralInvesting.JamesMontier.JohnWiley&Sons,2010.• ValueInvesting:ToolsandTechniquesforIntelligentInvestment.JamesMontier.JohnWiley&Sons,2009.• ValueInvesting:ABalancedApproach.MartinWhitman.FrontiersinFinanceSeries,JohnWiley&Sons,2000.• BerkshireHathaway,Letterstoshareholders.WarrenBuffett.• TheessaysofWarrenBuffett.EditedbyLawrenceCunningham.CarolinaAcademicPress.
Therearetwobooksintheintersectionofaccountingandvaluationthatareusefulsupportingmaterial
• TheAnalysisandUseofFinancialStatements.GeraldWhite,AshwinpaulC.SondhiandDovFried.J.Wiley,2013,3rdedition
• FinancialStatementAnalysisandSecurityValuation.StephenPenman,5thedition
AllthematerialsrelatedtothecasesdiscussedinclasswillbepostedonCanvas.Thisincludes10Ks,andsupportingmaterials;IwillhavepresentationsaboutthecasesaftertheclassdiscussionbutIwillnotdistributethem.Thelecturesnoteshavetwoversions:Astudentonethatwillbedistributedinclassandaprofessoronewithadditionalmaterialandthatwillbetheoneprojectedinclass.Therearealsopresentationsassociatedwiththecasesbutthismaterialwillnotbeposted.
REQUIREDPREREQUISITESANDCONNECTIONTOTHECORE
Co-requisite:CapitalMarkets
Thelearninginthiscoursewillutilize,buildonandextendconceptscoveredinthefollowingcorecourses:
CoreCourse ConnectionwithCoreCorporateFinance 1. CostofCapital
2. Valuation3. FinancingOptions4. Timevalueofmoney5. Opportunitycost(ofcapital)6. TheCapitalAssetPricingModel(CAPM)7. FirmValuationModel
FinancialAccounting 1. The“accountingequation”2. Revenueandexpenserecognition3. Resourcesandobligations–measurementanddisclosure
GlobalEconomicEnvironment
1. RiskManagement2. WhatisGrossDomesticProductandhowisitmeasured?3. Whatcausesinflation?
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4. Whatcauseschangesinexchangerates?5. Whatarethecausesofbusinesscycles?6. Whataretheeffectsofmonetarypolicy?7. Whataretheeffectsoffiscalpolicy?8. Whatistheroleoffinancialmarketsintheeconomy?
ManagerialEconomics 1. Barrierstoentry2. Moats3. Maximizationandthinkingonthemargin4. Analyzingcomplexdecision-makingunderuncertainty5. Decision-basedcostanalysis6. Pricingwithmarketpower7. Marketsegmentationandotheradvancedpricingstrategies8. Understandingmarketcompetitionandequilibriumthinking(inthe
short-run)9. Marketequilibriumthinking(inthelong-run)andbarrierstoentry10. StrategicinteractionamongfirmsandNashequilibrium
StrategyFormulation 1. Trade-offs,value-added,efficiencies2. Creationofvaluevs.valuecapture3. Competingfirms4. Co-optitionandComplementors5. Strategicinteractionanalysis6. Diversificationandscope7. Ethics&IBS8. Behavioralandevidence-basedstrategy9. Management
COURSEDESCRIPTION&OBJECTIVES
Thiscourseaimstofamiliarizethestudentwiththeprinciplesandtechniquesofvalueinvesting,theinvestmentphilosophypioneeredbyGraham&DoddduringtheiryearsatColumbiaBusinessSchool.Thiswillbedonethroughacombinationofformallectures,inclassvaluationdiscussions(seebelow)andpresentationsbyleadinginvestors.Theareascoveredwillinclude:
1. Thefundamentalassumptionsandapproachestovalueinvesting2. Designingstrategiesforsearchingefficientlyforvalueinvestingopportunities3. Techniquesforassessingfundamentalvalueinarobustway4. Riskmanagementforthevalueinvestor
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CONTENTS
PartI:FoundationsofValueInvesting
1. Introduction• ValueInvesting:Adefinition• Comparisonwithotherapproaches• Whyvalueinvestingissorarelypracticedandsowidelypraised?
2. Thevaluepremiumandthevaluepremiumpuzzle
• Portfoliosorts• TheBook-to-Marketsortandthevaluepremium• Isitrisk?Thevaluepremiumpuzzle• Behavioralevidenceregardingthevaluepremium• Othersorts:Momentum,longtermreversals• Quantitativevaluestrategies
3. BehavioralFinance:WhyisMr.Marketthewayitis?
• Behavioralfinance:individualbiasesandtheirconsequenceso Lossaversionandreferencepointso Preferenceforskewnesso Therepresentativeheuristic:Extrapolationo Overconfidence
• Institutionalbiaseso Windowdressingo Herding
• Limitsofarbitrage:Theseparationofcapitalandknowledge• Theempiricalevidence
PartII:TheValueInvestingProcess
4. Introduction:Anoverviewofthevalueinvestingprocess
• Thecomponentsofthevalueinvestingprocess• Differenceswithotherapproaches• Adverseselection:Thefundamentalproblemofexchange
5. Search:Wheredoideascomefrom?
• Specialization:Searchinginthecircleofcompetence• Thevalueofsorts:BE/ME,E/P,…
o Doaccountingsortswork?o Doublesortso Anexample:Greenblatt’sMagicFormula
• Specialsituations• 13Fs:Imitatingwhatsmartinvestorsdo• News,periodicalsandothersources
6. Valuation–I:Assetandearningpowersvalues
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• Themainidea• Theapproach
o AssetValues1. Liquidationandnet-nets2. Reproductionvalues
o EarningsPowervalues1. Sustainableearnings2. Adjustments
o Comparingassetandearningspowervalues• Anexample:Walmart
7. Valuation–II:Growthandprofitability
• Evidenceonprofitability• Growthaccounting• Capexandgrowth• Howtocalculatethereturnonadditionalinvestedcapital?• Canfirmscapitalizeonmarketgrowth?
8. Anexampleindepth
PartIII:ValueInvestingandtheEconomicsofStrategicBehavior
9. TheeconomicsofStrategicBehavior:Acrashcourse
• Thelogicoffreeentry• Thelimitsofproductdifferentiation• Thelimitsoffirstmoveradvantages• Barrierstoentry
o Demandadvantageo Supplyadvantageo Othersourcesofadvantages
• Industrymaps:Performingstrategicanalysis
10. Assessingmanagement• Capitalallocation
o Incentivesforempirebuilding:Acquisitionso Theempiricalevidence
• Incentivesinsidetheorganization
PartIV:MacroeconomicRisksandValueInvesting:RiskManagement
11. Macroeconomicsrisksandvalueinvesting• TheGreatRecessionandthestateoftheUSeconomy• TheEurozoneCrisis• Case:Ferrovial• Thenextcrisis
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12. Riskmanagementandreview• RiskManagement
o Themarginofsafetyo Thecontinuousreviewprocesso Portfolioformation
1. Checklists2. Theroleofcash
o Exitstrategieso Hedgingo Theroleofleverageo Shorting
• Reviewo Analyzingsuccess:Wasitluckorwasitskill?o Analyzingfailure:
1. Whatdidyoumiss?2. Repeatingmistakes
NOTE
BecauseofthepeculiarpedagogicalneedsoftheEMBAblockweekthematerialhasbeensuitablyre-arranged:Valuationessentialsareintroducedearlyinthecoursesothatcasescanbetackledfromthefirstday.Thepreviousindexshowsthe“textbook”sequenceofthematerial.PleaseseetheEMBAgridto.
COMPANIESCOVERED
Amazon2016,Walmart2016,Deere2016,Nestle2016,Trimble2016,Magna2008,Ferrovial2011,DollarGeneral2016,Viscofán2016
METHODOFEVALUATION
Thegradewillbebasedon:
1. Classparticipation:Studentswillbeaskedquestionsthroughoutthesemester.Thisisintendedsimplytoelicitparticipationandattention.
2. Casesdueinclass.• Onesheetvaluationofacompanytobespecified.
3. Avaluationexerciseprojecttobechosenamongalistofnamesgiveninclassandtobedevelopedbyagroupofnomorethanfourstudents.Thebulkofthegradingwillbebasedonthelasttwoitems(about80%ofthegrade).
CLASSROOMNORMSANDEXPECTATIONS
ClassParticipation:Preparation,Discussion,Organization,Engagement