Max Mednik
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Readings and musings

Lessons Learned from Week 4 of Fall Quarter

10/31/2011

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Ethics
  • Good managers can very easily make bad decisions due to several rationalizations: won't get caught, within the realm of law, what's allowed or typically done
  • Complexities in the decisions of laying off staff and interplay with affirmative action policies. One approach is a staged strategy where the initial round is according to one criteria like performance and the next is according to a different objective like diversity.
  • Building a good board: diversity of perspective, independence, skin in the game
Behavioral Finance
  • Analyst recommendations are a contrarian indicator, especially if employees of the underwriter
  • IPOs typically underpriced to give kicker to client on sell side and to give profit to preferred clients who buy on asset management side
  • In long run, IPOs underperform
  • Managers game EPS by manipulating earnings; way more times that EPS comes in a penny above a threshold than a penny below a threshold
  • Investors overreact to high-strength, low-weight recommendations and underreact to high-weight, low-strength recommendations
  • Can only make money investing if you have some informational advantage or understand sentiment better than others
  • Value works better than glamour
  • Avoid doing what the herd does
  • Stock rising witho good financial backing will not continue to rise for long
  • Value stocks: ROE + steady earnings growth + many positive earnings surprises; low debt; healthy or growing profit margins; not a homogeneous product; competitive advantage; public for at least 10 years; low P/B and P/E (P/B < 1); PEG < 1; current assets > current liabilities (can pay current bills)
  • Stocks heavily purchased by small investors do badly in following periods
  • Find proxies for retail sentiment (naive investors); contrarian indicator
  • High asset growth stocks underperform relative to low asset growth (naive extrapolation/overreaction)
  • High accounting accruals is bad sign (boosting income artificially)
  • Piotroski f-score works well, implies market not efficient; uses 20% of stocks with highest B/M ratios
  • f-score: sum of 9 binary signals (not risk related); healthy companies, less risky/non-interesting companies are undervalued but more profitable
  • High B/M can mean undervaluation or distress. f-score separates undervaluation from distress, works as investing strategy.
  • More evidence for non-efficient market than efficient market
  • Psychological biases affecting investors: confirmation bias, hindsight bias, representativeness, anchoring, conservatism, availability bias, overconfidence
Doing Deals
  • Employment compensation issues
  • Severance
  • Say for pay
  • Individual benefits
  • Cause vs. non-cause termination
  • Change of control terms in executive employment contracts
  • Perks
  • Benefits
  • Restricted stock vs. restricted stock units vs. incentive stock options vs. non-statutory stock options
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