Investing 101
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Transcript of Investing 101
Investing 101Investing 101
&
Presented by
Sponsored bySponsored by
Today’s TopicsToday’s Topics
Investment Industry OverviewInvestment Industry Overview– Types of InvestingTypes of Investing– Career PathsCareer Paths– Sample InvestmentsSample Investments
Basics of InvestingBasics of Investing
Industry OverviewIndustry Overview
Venture CapitalVenture Capital– Oak, Sequoia, Kleiner PerkinsOak, Sequoia, Kleiner Perkins
Equity/Debt (stocks/bonds)Equity/Debt (stocks/bonds)– Citadel, Cerberus (hedge funds); Citadel, Cerberus (hedge funds);
Fidelity, Vanguard (mutual funds)Fidelity, Vanguard (mutual funds)
Private EquityPrivate Equity– KKR, Blackstone, TPGKKR, Blackstone, TPG
Investment Types and Investment Types and Company LifecycleCompany Lifecycle
VentureCapital
Equity/Debt
PrivateEquity
Launches Goes Public Growth slows
Start-up Public Company Mature Company
Stage in Company Life Cycle
Typical InvestmentType
Venture CapitalVenture Capital
VentureCapital
Equity/Debt
PrivateEquity
Launches Goes Public Growth slows
Start-up Public Company Mature Company
Stage in Company Life Cycle
Typical InvestmentType
Venture CapitalVenture Capital Typical Entry strategyTypical Entry strategy
– Acquire stake in young, start-up firmAcquire stake in young, start-up firm Value addedValue added
– VCs provide funding, networking, and advice to VCs provide funding, networking, and advice to the companies they invest inthe companies they invest in
Typical Exit strategyTypical Exit strategy– Take portfolio companies public or sell them to Take portfolio companies public or sell them to
other companiesother companies ExampleExample
– Bessemer Venture Partners invested $1-2 Bessemer Venture Partners invested $1-2 million in Skype, and when Skype was acquired million in Skype, and when Skype was acquired by eBay, Bessemer made a 100-fold return on by eBay, Bessemer made a 100-fold return on its investmentits investment
Top Venture Capital FirmsTop Venture Capital Firms
Sand Hill Road, Menlo Park, CASand Hill Road, Menlo Park, CA Accel PartnersAccel Partners CrosspointCrosspoint Kleiner Perkins Caulfield & ByersKleiner Perkins Caulfield & Byers Oak Investment PartnersOak Investment Partners SequoiaSequoia SoftbankSoftbank
Debt/Equity InvestingDebt/Equity Investing
VentureCapital
Equity/Debt
PrivateEquity
Launches Goes Public Growth slows
Start-up Public Company Mature Company
Stage in Company Life Cycle
Typical InvestmentType
Debt/Equity InvestingDebt/Equity Investing Typical Entry strategyTypical Entry strategy
– Acquire position in stock or bonds of companyAcquire position in stock or bonds of company Value addedValue added
– Investors can lobby companies to take measures to raise Investors can lobby companies to take measures to raise stock prices, such as share repurchases or divestituresstock prices, such as share repurchases or divestitures
Typical Exit strategyTypical Exit strategy– Unwind position in stock or bonds of companyUnwind position in stock or bonds of company
ExampleExample– After doing comprehensive research on AutoZone, ESL, After doing comprehensive research on AutoZone, ESL,
a hedge fund, concludes AutoZone is undervalued and a hedge fund, concludes AutoZone is undervalued and buys shares in the company. In time the market comes buys shares in the company. In time the market comes to realize that the company is indeed undervalued and to realize that the company is indeed undervalued and ESL sells its AutoZone shares after earning a 30% ESL sells its AutoZone shares after earning a 30% return.return.
Top Debt/Equity InvestorsTop Debt/Equity Investors
Hedge FundsHedge Funds CerberusCerberus CitadelCitadel ESLESL SAC CapitalSAC Capital Silverpoint (debt investing)Silverpoint (debt investing)
Mutual FundsMutual Funds FidelityFidelity VanguardVanguard
Debt/Equity InvestingDebt/Equity Investing
VentureCapital
Equity/Debt
PrivateEquity
Launches Goes Public Growth slows
Start-up Public Company Mature Company
Stage in Company Life Cycle
Typical InvestmentType
Private EquityPrivate Equity Typical Entry strategyTypical Entry strategy
– Borrow money to buy of a public company’s shares and Borrow money to buy of a public company’s shares and take it private again, in a Leveraged Buyout (LBO)take it private again, in a Leveraged Buyout (LBO)
Value addedValue added– Improve company’s operations through restructuring, Improve company’s operations through restructuring,
divestitures, or refinancingdivestitures, or refinancing Typical Exit strategyTypical Exit strategy
– Take company public again or sell to other firmTake company public again or sell to other firm ExampleExample
– Nelson Peltz buys Snapple from Quaker Oats for $300 Nelson Peltz buys Snapple from Quaker Oats for $300 million, turns company around within a few years, and million, turns company around within a few years, and sells it for $1.5 billionsells it for $1.5 billion
Top Private Equity FirmsTop Private Equity Firms
Bain CapitalBain Capital Carlyle GroupCarlyle Group Kohlberg, Kravis, & Roberts (KKR)Kohlberg, Kravis, & Roberts (KKR) Texas Pacific Group (TPG)Texas Pacific Group (TPG) Thomas H Lee PartnersThomas H Lee Partners Warburg PincusWarburg Pincus
Investing BasicsInvesting Basics
Sponsored By Bank of Sponsored By Bank of AmericaAmerica
Presented by WIC & WUFCPresented by WIC & WUFC
What’s the Investment What’s the Investment Universe?Universe?
StocksStocks BondsBonds DerivativesDerivatives Real EstateReal Estate CommoditiesCommodities CurrencyCurrency
Types of AnalysisTypes of Analysis
FundamentalFundamental– A method of evaluating a security by attempting to A method of evaluating a security by attempting to
measure its measure its intrinsicintrinsic value by examining related value by examining related economiceconomic, , financialfinancial and other and other qualitativequalitative and and quantitativequantitative factors. factors.
– Value of a firm = Discounted value of future cash flowsValue of a firm = Discounted value of future cash flows
TechnicalTechnical– A method of evaluating securities by analyzing statistics A method of evaluating securities by analyzing statistics
generated by market activity, such as past prices and volume. generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. identify patterns that can suggest future activity.
Where to Begin?Where to Begin? Develop a differentiated viewDevelop a differentiated view
Top DownTop Down– View on the economy or a sectorView on the economy or a sector– Drill down into individual stocks, or trade a Drill down into individual stocks, or trade a
basket of companiesbasket of companies
Bottom UpBottom Up– Start with a company specific storyStart with a company specific story– Investigate the firm’s prospects based upon Investigate the firm’s prospects based upon
micro factorsmicro factors
How to Evaluate a BusinessHow to Evaluate a Business
Sustainable competitive advantagesSustainable competitive advantages– Barriers to entry, SubstitutesBarriers to entry, Substitutes– Buyer and Supplier LeverageBuyer and Supplier Leverage– Technology, Infrastructure, Human CapitalTechnology, Infrastructure, Human Capital
Cost structureCost structure– Fixed vs. variableFixed vs. variable– Margin AnalysisMargin Analysis
Management Management Opportunities for growthOpportunities for growth
Valuation MethodolgyValuation Methodolgy
Discounted Cash FlowsDiscounted Cash Flows– Determine cost of firm’s capitalDetermine cost of firm’s capital– Estimate the firm’s future cash flowsEstimate the firm’s future cash flows– Add back value of non-operational assetsAdd back value of non-operational assets
MultiplesMultiples– P/E = (EPS/(r-g))P/E = (EPS/(r-g))– EBITDA/EVEBITDA/EV– (EBITDA-Capex)/EV(EBITDA-Capex)/EV– ROA, ROICROA, ROIC– Net Debt/EBITDANet Debt/EBITDA
DerivativesDerivatives
Contract that “Derives” its value from Contract that “Derives” its value from another securityanother security
Future - Obligation to exchange cash at Future - Obligation to exchange cash at some specified date for the underlying some specified date for the underlying
Option - Right but not the obligation to Option - Right but not the obligation to buy/sell (call/put) underlying at specified buy/sell (call/put) underlying at specified priceprice
Derivatives often allow for enhanced Derivatives often allow for enhanced leverageleverage
Options ContinuedOptions Continued
A multitude of strategiesA multitude of strategies Understand Greeks (Delta, Gamma, Understand Greeks (Delta, Gamma,
Theta, Rho, Vega)Theta, Rho, Vega) Basic idea is that payoff is Basic idea is that payoff is
asymmetricasymmetric