Max Mednik

My second year is off to an incredibly busy start. Though my class load is not heavy, working on launching Ridacto, being a career coach, and TAing a class together make life pretty crazy.

Below are some of my biggest takeaways from my classes last week:

Ethics

This is a really challenging class that poses way more questions than it answers. In TAing the class, I'm lucky to hear the varying opinions of my classmates and consider my own viewpoint on how to act in various difficult situations.

• Integrity between personal and company values is key.
• Leadership and the Quest for Integrity argues that having prejudices or predispositions to handling various scenarios in specific, predefined ways can help solve many of the most challenging dilemmas.
• Three styles of leadership: political, directive, value-driven
• Ethics, optimization, and public policy (strive to find the intersection)
  
• Matrix to consider: 3 viewpoints (utilitarian, contractarian, pluralist) and 3 targets (individual, company, society)

Behavioral Finance

This class basically overturns everything taught in traditional finance classes and explains how the "real world" works in terms of actual trading behavior and stock performance results. We're going through the main academic articles in the field over the past 20 years and combining finance with psychology to better understand how people make (and should make) investment decisions.

• CAPM and APT are blatantly wrong (they aren't good theories for explaining or predicting reality).
  
• Market does not have any level/strength of efficiency.
• Psychology of investors and company fundamentals much better determining factors of performance
• Size and book-to-market ratios much better at explaining why returns vary from stock to stock than beta
• Characteristics of stocks (like fundamental ratios) have much more power to explain returns than risk factors (like beta).
• Value and contrarian investing work.

Doing Deals

This class is a very interesting blend between business and law and covers both the theoretical and real-world aspects of "making it rain [not in the club]." We work in teams of 2 business students and 2 law students to dissect unedited deal documents for a different deal each week, varying from financing, to acquisitions, to partnerships in a variety of different industries. I absolutely love being able to see real-world documents and understand how they evolved and see how the negotiations progressed. It's also really neat to hear from the principals of the transactions in each class what it was like from their perspective and what lessons they learned.

• Key elements in every deal: risk, reward, control, duration, trust
• View of the firm as a nexus of contracts
• Deals/acquisitions often purely to thwart competitor moves (one of us will buy, so it should be me)
• Structure returns based on performance hurdles.
• Ethics of pulling out of deals (it's interesting how this class ties in with my ethics class)
• Ethics of full disclosure
• Establish trust first. Trust is often the most important factor in determining who does deals with whom.
• Desperation hurts. Should your vacation rush your deal close?
• Keep backup deals in place through closing.
• Don't shortcut the documents (pay your lawyer a little now or a lot later).
• Time and lifestyle can't be recovered, so those are often more important than negotiating the best possible deal.

Chris Lewis from Riordan, Lewis, & Haden spoke to our leadership class about how he evaluates potential private equity investments.

The firm operates somewhat like Berkshire and uses little leverage. They buy private companies and over the last 20 years have averaged generous returns without leverage.

They started the firm to invest in VC-type opportunities (pre-revenue) but now have more of a buyout mentality but still earlier stage ($40M revenue companies). They buy these companies with the goal to build them to $200M revenue companies.

Chris grew up in LA and was the national tennis champion at USC. He even played on the pro tour and was something like 60th in the world. Nice! After going to business school at USC, he worked at Bank of America in money management. Chris met Mayor Riordan who had been doing VC for 10 years and that's what led to them starting RLH.

He emphasized that the most important component they look at is people. Successful businesses almost always will pivot their business, so having a long-term perspective and dedicated, flexible people is key. The top "people" qualities they look at are the following:

• Listening skills
  
• Curiosity
• Confidence
• Teamwork
• Good judge of people
• Creative
• Clear vision
• Empowering, caring for people
• Realistic

In evaluating an opportunity, the 4 questions they always ask are the following:

• Are the people capable?
• Are growth attributes there?
• Do they do something different?
• If they execute on their vision, will it be valuable?

Chris was a fun speaker, and it was interesting to hear him recap these points through a number of stories that he told us.