Investment Philosophies

Course Description

        This course is designed to expose participants to a wide range of investment philosophies so as to give them a sense of what drives investors in each philosophy, how they attempt to put these philosophies into practice and what determines ultimate success. The objective is to provide an unbiased forum for the presentation of different investment styles, while supplying the tools and the empirical evidence for participants to make their own judgments about their relative value.

Rationale for the course

        Few investors beat the market consistently. There seem to be few common denominators, at least on the surface, among these successful investors. They use very different investment strategies and subscribe to very different, and at times, contradictory, views of how markets work and what leads to success. Some attest to the efficacy of charts and technical indicators, while others claim that fundamentals hold the key. Even within these broad groups, there are disagreements. Among those who subscribe to fundamentals, for instance, are both ‘value investors’, who trace their lineage back to Benjamin Graham, and ‘growth investors’.

        The coexistence of these investment philosophies in the market place raises several important issues –

Š        What are the themes that underlie each of these investment philosophies? What are the differences in the way investors in each of these camps view the way the market works?

Š        How do investors in each group, or at least the most successful among them, go about putting their philosophies into practice?

Š        What are the characteristics that most define success in each philosophy? Is it research or is it timing? Is it patience or speed?

Š        Is there any characteristic that investors who are successful share with each other, irrespective of investment philosophy? What is more important, consistency or flexibility?

This course will be a success if it provides you with the information that will allow you to make your own judgment on the investment philosophy that seems to best fit your specific goals, views of how markets work, and your strengths. In some of your cases, this course will cement an existing investment philosophy, in others, it will help sort out uncertainties and come up with a new philosophy.

Course Material

               There will be a lecture note packet that provides the lecture notes that will be used during the course. In addition, there will be readings each week from practitioner magazines on each of the investment philosophies. The textbook for the class will be

Investment Philosophies, Aswath Damodaran, John Wiley & Sons.

Course Grading

               The ultimate grading for this course will rest on a prospectus that each of you will prepare by the last week of course - you should, however, start working on it well before then. In the prospectus, you will lay out your investment philosophy and how you plan to put it into practice. In particular, as a potential investor in the fund that you are starting, I will be looking for the following –

1.       What is your investment philosophy and how is it related to your view of how markets work?

2.      How do you propose to convert this investment philosophy into an investment strategy or strategies?

3.      What specific constraints would you put on yourself? For instance, are there certain types of investors you would want investing in fund and certain types of investors you would dissuade from investing? Is there a minimum size for your fund to be viable? Is there a maximum size beyond which your fund will no longer be viable?

4.      Is there any evidence you can point to, either that you have done or others have done, that would suggest that your investment strategy will work?

5.      How would you propose that you should be evaluated? (How often? On what yardstick?)

6.      Based upon your investment strategy, develop a portfolio of at least 25 stocks that you would hold right now. You can use the Morningstar database for screening, or get the stocks from an alternative source.

There will be a page limit of 6 pages on the text component of this prospectus. The exhibits and the portfolio list can be in addition to this page limit.


Course Syllabus

Session

Topic

Lecture Notes

1

        Introduction to Course

Š        Overview of Portfolio Management

Š        Investment Philosophies

Introduction to Investment Philosophies

2

Elements of Risk

-         Equity Risk and Returns

-         Bond Default Risk and Return

Understanding Risk

3

Valuation Basics

-         Discounted Cashflow Valuation

-         Relative Valuation

Valuation

4

Trading Costs and Taxes

-         Components of Trading Costs

-         Taxes and Returns

Taxes

5-6

Market Efficiency

-         What is an efficient market?

-         Testing Market Efficiency

-         Performance Evaluation

Market Efficiency

7-8

Technical Analysis

-         The Random Walk Hypothesis

-         The Rationale for Technical Analysis

-         Strands in Technical Analysis

Technical Analysis and Charting

9-11

Value Investing

-         Passive Value Investing

-         Contrarian Value Investing

-         Activist Value Investing

Value Investing

12-14

Growth Investing

-         Passive Growth Investing

-         Activist Growth Investing (Private Equity and Venture Capital)

Growth Investing

15-16

Information Trading

-         Before information gets to market

-         After information reaches market

Information Trading

17-19

Arbitrage

-         Pure Arbitrage

-         Near Arbitrage

-         Pseudo Arbitrage

-         Long Short Strategies and Hedge funds

Arbitrage

20-22

Market Timing

-         Timing Strategies

-         The Record on Market Timing

-         Market timing and Security Selection

Market Timing

23-24

Indexing

-         Designing Index Funds

-         The performance of managed funds

-         Enhanced Index Funds

Indexing

25-26

The Closing

-         The Choices

-         Choosing an investment philosophy

-         Testing whether it works for you

Closing Presentation

27

Review Session