Max Mednik
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Readings and musings

Lessons Learned from Week 5 of Fall Quarter

11/2/2011

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Ethics
  • The role of the corporation in community issues
  • The role of the corporation in choosing locations, making decisions that affect workers in various cities (where to build a plant, where to shut down a plant)
  • Law, morals, and ethics. Is it always right to obey the law? Who decides?

Behavioral finance
  • Investors overestimate precision of private info.
  • People attribute investment profits to their own abilities, losses to external noise.
  • Market underreacts to Seasoned Equity Offerings; prices drift over 90 days.
  • Private opinions are overweighted, so public info is underweighted, implying underreaction to public info.
  • Private info overweighting explains why BM forecasts return.
  • Public info underweighting explains return drift.
  • People extrapolate from small sequences but shouldn't (no law of small numbers).
  • Trend chasing is bad.
  • Don't buy or sell on news without looking at the price.
  • Regress returns on past intangible component of return (that which is unexplained by accounting performance) rather than tangible component; intangible component is high when price has risen due to something other than fundamentals, so it's a contrarian indicator (like share issuance/IPO).
  • Momentum strategies work best for smaller firms, lower analyst coverage, past losers.
  • Optimist analysts do more buys than pessimists do sells (upward price pressure).
  • Investor sentiment does affect individual stocks that are hard to value and hard to arb (small, young, no profit, no dividends, high growth, distressed, volatile stock returns).

Doing deals
  • Economics of alternative energy deals
  • Large economies of scale; in large scale projects, get better execution and support from bigger bank financing.
  • Put together right management team.
  • License proven technology.
  • Partner with the right people.
  • Finance with maximal debt and government guarantees and programs.
  • Banks are willing to accept risk when have big technology partners with prior experience.
  • Could finance next development phase with others’ money; ask future partners/investors whether if they owned some technology, would they invest and at what pricing (tested this before did deal).
  • Truly unique part of what investor got in this deal: access to exclusive license and knowledge to really build the thing; both really blocking things.
  • Risk: figure out what is really new versus what now new.
  • Assign risk to the parties to lay off as much risk as possible.
  • Focused their time on how to lay off as much of the new technology risk to others as possible
  • Get others to guarantee their work. If they don’t, they have the right to go to other people.
  • Pit the bank against the tech provider; bank won’t lend unless tech provider will guarantee (via liquidated damages); always say bank is asking for more (even if not).
  • Get some very large names around table as quickly as possible because large utilities like talking to big names only.
  • For banks, reliability is more important than newness.
  • Struggle with tech vendors for “good” while vendor wants “perfect.”
  • Large companies driven by earnings; if they spend money and it doesn’t create earnings, then it’s a negative EPS potential.
  • When they were negotiating with big companies, they knew big companies wouldn’t be willing to put up development risk and didn't want income flowing through to consolidated income statement so actually preferred smaller ownership stake.
  • They knew they could mark the deal up because put together critical components (license, management team, relationship with tech provider to get it built).
  • Take in investor money only when need at last possible minute so don’t need to pay interest out and maximize IRR.
  • The way to get large corporation to do something you want is to withhold payment until end of quarter.
  • Utilized milestone concept
  • When people would miss milestones, they would renegotiate the contract and push them.
  • If you’re not as big as they are, you must manage them.
  • Figure out structure and assign liability throughout the chain.
  • Key to getting financing: many years operating history and knowing that the technology works.
  • Use and ask for liquidated damages whenever possible.
  • Deal is pretty much like specialized real estate.
  • Power plant is like someone who rented the entire building (power utility they’re selling the power to); if you deliver the power, they’ll pay.
  • Single tenant is rated as lower risk.
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Matt Karatz on Real Estate and City Government

6/7/2011

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Matt Karatz spoke to our leadership and ethics class a few weeks ago, and it was an interesting discussion that reinforced a lot of things other speakers mentioned. Karatz has worked in the Office of Economic and Business Development for the City and in the field of real estate development as well.

He graduated from Claremont college and went to New York to become a journalist. After a lot of hard work in calling many news agencies, ABC News World Report Investigative Reporting hired him. Most of his work ended up causing him to write stories about the bad in people, and he quickly got tired of it, even though he was successful at it, receiving an Emmy for one of his stories.

He transitioned to real estate and worked for KBHome. After that, he went to work for Caruso, the owner of the Grove shopping mall. Austin Beutner, whom we also heard speak in our class, reached out to him and offered him the opportunity to help him in his City post. Karatz took the position for $1 salary and ended up getting a lot done. Beutner really inspired Karatz to believe he could actually change local politics. Now, Karatz is going back to real estate.

The biggest lessons he told us he learned from his experience were the following:
  • Perceived power is real power.
  • You need to have a clear idea of your end game.
  • Politics should be like business.
  • Civic workers should be trained like managers.
  • Give bonuses according to performance and 360 reviews.
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Urban Investing by Bobby Turner of Canyon Capital

5/10/2011

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Bobby Turner was another guest speaker in my class on Leadership and Ethics, taught by former Mayor Richard Riordan. Bobby is Chairman of Canyon Capital Realty Advisors, which manages $21 billion and invests in many types of real estate opportunities. The focus of the class was on Bobby's initiatives to invest in urban neighborhoods in order to improve them and give back.

Bobby led Canyon's initiatives to partner with Magic Johnson and Andre Agassi in developing urban neighborhoods and charter schools. Bobby was trained by Mike Milken at Drexel and graduated from Wharton School of Business.

Bobby explained that there are four ways to create wealth:
  • Inheriting
  • Marrying
  • Speculating
  • Value investing
At Drexel, he learned value investing, a strategy often overlooked, and mis-assessed. The keys to doing it right are quantifying and mitigating risk.

Bobby said that your first million dollars is the hardest to make, and wealth doesn't make happiness.

He said there are four types of happiness:
  • Materialism
  • Love
  • Accomplishment 
  • Power (to change the world, have positive impact on people's lives)
It is the last type of happiness that he pursued in partnering with Johnson to raise an urban investing real estate fund. They succeeded in doing this: they raised $275 million in 2.5 years, invested it all, and made an 18% return. Bobby explained that there is a huge demand for housing and retail space in dense urban communities, so not only were their investments sound financially, but they also generated jobs and improved the neighborhoods. They raised a second fund of $600 million in one year to continue their work, and later on they raised a third fund of $1 billion in one week. Overall, their initiatives created 10,000 jobs.

The investment criteria they used were the 6 D's:
  • Density of population: 300,000 per 3 miles
  • Diversity
  • Demand (for housing, retail)
  • Developer: real estate is a relationship business, so it matters who you know and work with
  • (De)Leadership: getting the Mayor's support is critical
  • Do good
After the urban investing work, Bobby partnered with Agassi to fight for charter education. They're raising $250 million to build 50 more charter schools. He thinks he must raise private, for-profit capital in order to be successful, as the only sustainable schools will be those that make money.

Bobby considers a fair return on capital to be 10% unlevered (levered up to 18%); after incentives, they return 12% net to investors.

It was neat to hear a person so successful in real estate and for-profit investing find ways to make money while investing in projects that served a drastic need in the community even though they were unpopular. It was also fun to hear the stories of how he convinced Johnson and Agassi to get on board.
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