second annual value investing academic and practitioner … · 2019-05-14 · second annual value...
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Second Annual Value Investing Academic and Practitioner
Research Consortium
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Agenda
9:00-10:00 a.m.:
Bruce Greenwald and Eric Kirzner “Introduction to Research Consortium: Review of Mission”
Introduction of Participants – Presentation of Ideas
Eric Kirzner “Some Perspectives on Value Investing”
10:00-10:45 a.m.:
Paper: Randy Cohen, Harvard Business School “Finding Outperforming Managers. ”
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Agenda
10:45-11:00 a.m. Break
11:00-12:00 p.m.
Paper: Jim Scott and George Murillo, Columbia Business School, “The Rational Part of Momentum.”
12:00-12:30 p.m. Initial discussion on research ideas
12:30-1:30 p.m. Lunch
1:30-4:00 p.m. Open discussion- Research ideas in Value Investing for PhD students and junior faculty
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The Value Investing Consortium
The Heilbrunn Center for Graham and Dodd Investing at Columbia Business School and the Value Investing department at the Rotman School of Management at the University of Toronto is committed to improving the theory and practice of investing. To that end, the two institutions have established a committee of leading finance academics and investing professionals to continue to build bridges between theorists and practitioners.
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The Value Investing Consortium
The consortium will consist of academics from various Universities and research practitioners from value investing firms. The group will convene once a year to:
Share insight and discuss trends in the investment industry and security analysis
Present research to the group
Brainstorm ideas to add to the research agenda
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Mission Statement
The mission of this „research consortium‟ is to generate a research agenda that will complement and advance research already done by value investing pioneers such as Ben Graham and David Dodd and modern day academics. Our annual meetings are designed to discuss and jointly develop research in the context of that agenda.
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Introduction
Consortium Participants
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Great Moments In Investment Finance History
Professor Eric Kirzner
John H. Watson Chair in Value Investing
Rotman School Of Management
University Of Toronto
June 8, 2007
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Investment Finance History
1. Are notions of market efficiency and value investing compatible?
2. Do hedge funds fit in a value approach! What can we learn about hedge fund theory that is applicable to value investing?
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Great Moments In Investment Finance History
The holy grail of investing is the search for intrinsic value
From Roman Times to the present
DPV concept at least over 2000 years old
Annua traced back to ancient Rome
• these contracts promised to pay the buyers a fixed yearly payment for life or term
• Life annuities!
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Tontines
Named for Lorenzo Tonti who first recommended a tontine form of government financing in 1652
special annuity pools: In return for an initial lump-sum payment, purchasers of tontines received life annuities.
amount of the annuity was increased each year for the survivors who received the payouts that would otherwise have gone to those who died.
When the last participant in a tontine pool died, the sole survivor received the entire remaining principal.
The tontine thus combined insurance with an element of lottery-style gambling.
First Option Pricing Model!
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Great Moments In Investment Finance History Edmond Halley (1656-1742)
Astronomer, mathematician
• Paid for publication of Newton‟s Principia Mathematica
• 1695 predicted that comet of 1531, 1607 and 1682 was periodic
Edmond Halley “ Of Compound Interest” (1761)
• Formula for present value of a regular annuity
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Early 1900‟s
Accounting book values widely used re valuation
Stock market crash
• DCF gains popularity re valuation approach
• Irving Fisher, John Burr Williams
• However not until 1951 that NPV accepted as model for in capital expenditure decision Joel Dean, “Capital Budgeting” 1951.
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Early 1900s: Two Paths to Security Analysis
Value Investing and the accounting
approach
Growth Models and The DPV approach
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Great Moments In Investment Finance History: Market Efficiency
1907 “ Random Walk”
Nature Magazine
How Do You Find A Drunk in a Vacant Field?
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Intrinsic Value Price = Value
Efficient Market?: What do we mean by
market efficiency?
• Security prices reflect all available information
• Security prices efficiently adjust to new information
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Benjamin Graham
Benjamin Graham (1894-1976)• 1928 taught course on security analysis at
Columbia
• Observes Great Crash
• focuses on crunching numbers not on qualitative factors
• Techniques that could be universally applied
• Available from publicly available sources
• price-to-earnings (P/E) ratios, debt-to-equity ratios, dividend records, net current assets, book values, and earnings growth.
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Great Moments In Investment Finance History : Graham and Dodd and Fritzmeier
1934 Benjamin Graham and David Dodd• “Security Analysis”• Birth of organized approach to fundamental analysis
1936 Louis H. Fritzmeier (JB April 1936, pp, 133-154)• Classic paper on price-level analytics• First of anomaly papers?
1949 Graham, “ the Intelligent Investor”
• (Warren Buffett claims best investment book ever written)
1952 Graham, “Toward a Science of Security Analysis,” The Analysts Journal
• The background on Benjamin Graham’s approach; foundation for a disciplined approach to security analysis
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Benjamin Graham
“Many common stocks do involve risks of deterioration. But it is our thesis that a properly executed investment in common stocks does not carry any substantial risk of this sort and that therefore it should not be termed “risky‟ merely because of the element of price fluctuation.”
The Intelligent Investor pp.121-122.
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Great Moments In Investment Finance History : Margin of Safety
Margin of safety!
Graham and Dodd
• If price established by Mr. Market is lower than intrinsic value by a sufficient margin of safety stock is a buy for the value investor!
Price
Intrinsic
Value
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Great Moments In Investment Finance History : 1948/1949
Markowitz (’48, ’52); Tobin (1957); Sharpe, Lintner, Mossin et. al. (1964)
Portfolio Theory
Capital Asset Pricing Model
• Splitting risk into systematic and unique
• Pick your portfolio; beta!
Alfred Jones (1949)
• market exposure =
(long exposure-short exposure) capital
• Buy the stock/short the market
• get the hedge ratio right!
Pick your stock!
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Basis of Hedge Fund Returns
Wide variety of hedge funds: single finance belief or proposition
Find mispriced securities/ commodities/currencies and exploit temporary mis-pricing
• undervalued/overvalued
• Spread trading
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Pure Theory of Hedge Funds
Prices and value can diverge: search for intrinsic value: compare to actual price
• Pricing anomalies exist
• Behavioral finance
• Regulatory constraints
• New investment ideas creates new information
Manager skill in identifying opportunities• Focused on “imperfect” market sectors
• Depend critically upon special skills and knowledge
• Markets long run tendency to efficiency
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1950s
Chairman Sen. William Fulbright• Fulbright Q: “What causes a cheap stock to find its
value?”
Graham A: “That is one of the mysteries of our business, and it
is a mystery to me as well as to everyone else. But we know from experience that eventually the market catches up with value.”
• Benjamin Graham testimony to the Committee on Banking and Commerce, 1955
• Paper: Jim Scott and George Murillo, Columbia Business School, “The Rational Part of Momentum.”
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Basis of Hedge Fund Returns
The Time Travelers Paradox
• Scientific American Black Hole Special March 2007
• So where does the idea Come from?
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The Theory of Hedge Funds
Depend upon the tendency of markets towards efficiency:
• Hedge funds discover and define the frontiers of finance universe
• They exploit temporary deviations from economic value.
• Basic economics: idea once discovered, analyzed and used, the frontier recedes, extraordinary profit replaced by modest gains.
• If the model is right, market drives prices to model.
• Replicators replace innovators
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Hedge Funds Theory: Exploiting the Finance Universe
Steady State
Efficient frontier
Diversification is generally good
Unstable
Asset pricing
Market efficiency
Central tendency of asset class returns
Equity risk premium
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Macro Universe The macro financial
universe.• Global supply and
demand for money.
• Political economy of sovereign debt.
• Evaluating developing markets
• Exploit imperfect diffusion across borders.
• Interest rate parity, forward pricing
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Micro Universe
Micro-structure of how security prices formed.
• Supply and demand in a complex, strategic time-series of interactions.
• Do exploitable patterns in security prices develop?
• Do technical analysis models work?
• Do momentum traders create efficiency?
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Manager Selection
Operating at the edge
• Who are the great managers in the finance universe
• Paper: Randy Cohen, Harvard Business School “Finding Outperforming Managers. ”
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Some discussion topics for today
1. What are the issues in security analysis/value investing that students should be thinking about?
2. Why are these important?
3. How should they pursue their research?
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