I confess. I send out a lot of emails and I am sure that you don't read some of them. Since they sometimes contain important information as well as clues to my thinking (deranged though it might be), I will try to put all of the emails into this file. They are in chronological order, starting with the earliest one. They are in chronological order, starting with the earliest one. So, scroll down to your desired email and read on, or if the scrolling will take you too long, click on the link below to go the emails, by month.
Happy new year!. This is the first of many, many emails that you will get for me. You can view that either as a promise or a threat. I am delighted that you have decided to take the corporate finance class this spring with me and especially so if you are not a finance major and have never worked in finance. I am an evangelist when it comes to the centrality of corporate finance and I will try very hard to convert you to my faith. I also know that some of you may be worried about the class and the tool set that you will bring to it. I cannot alleviate all your fears now, but here are a few things that you can do to get an early jump:
1. Pre-work for class
2. Class Details/Logistics
As things stand now, and this could quickly change, we will meet in Paulson Auditorium, a cavernous amphitheater with all of the charm of Madison Square Garden on a bad day (which would be any day that the Knicks actually play there) every Monday and Wednesday, starting on January 29, going through May 6, from 10.30 am to 11.50 am. I will not take attendance, but I would really, really, really like to see you in class. If you do miss a class, the sessions will be recorded and will be available in three places:
You can find out all you need to know about the class (for the moment) by going to the web page for the class:
You will note references to a project which will be consuming your lives for the next four months. This project will essentially require you to do a full corporate financial analysis of a company. While there is nothing you need to do at the moment for the project, you can start thinking about a company you would like to analyze and a group that you want to be part of.
3. Class Material
Now for the material for the class. The lecture notes for the class are available as a pdf file that you can download and print. I have both a standard version (one slide per page) and an environmentally friendly version (two slides per page) to download. You can also save paper entirely and download the file to your iPad or Kindle. The first packed can be found at the link below
There is a book for the class, Applied Corporate Finance, but please make sure that you get the fourth edition. It is exorbitantly over priced but you can buy, rent or download it at Amazon.com or the NYU bookstore
While I have no qualms about wasting your money, I know that some of you are budget constrained (a nice way of saying "poor") . If you really, really cannot afford the book, you should be able to live without it.
4. Final Thoughts
I know that In the last decade, we have been forced to reexamine accepted wisdom in pretty much aspect of life, and corporate finance is no exception. As we struggle with the new and the different, we have to incorporate the lessons learned, unlearned and relearned over this period into corporate finance, and I will tru. There are assumptions that we have made for decades that need to be challenged and foundations that have to be reinforced. In other words, the time for cookbook and me-too finance (which is what too many firms, investment banks and consultants have indulged in) is over. At the same time, there is a whole lot nonsense that has been bandied about as the “new way to run business” and I will not mince any words (or spare any feelings) in talking about them. To close, I will leave you with a YouTube video that introduces you (in about 2 minutes) to the class.
I hope you enjoy it. That is about it. I am looking forward to this class. It has always been my favorite class to teach (even more so than valuation, my other teaching venture) and I have a singular objective. I would like to make it the best class you have ever taken, period. I know that this is going to be tough to pull off but I will really try. I hope to see you on January 29th, in class. Until next time!
I hope that you have had a good week since my last email, and if your response is what last email, you may want to check this link:
Next week, at the first class, I will spend time laying out what the class is about, what I hope that we will accomplish during the semester, as well as establish the key themes that underlie corporate finance. You can download the syllabus ahead of time:
As you read the syllabus, you will notice mention of a project and in case you are curious, here is the link to the project resources:
Once we are through the syllabus in the first session, we will turn our attention to the lecture note packets, and every slide you see in class after this will be in that packet. The lecture notes are in two parts, and the first part can be obtained at this link (which I sent you last week as well):
It is also available in powerpoint form (though the file size is bloated), if you go to the lecture note page or webcast page of the class..
Now that I have drowned you in stuff, just a little aside. I don’t much care for academic research and almost everything that I write is for practitioners, and my blog (sounds new age, doesn’t it?) has become the first repository for my writing. I spend the first few weeks of each year, talking about the data that I update on my website:
The first two updates re on my blog. Please browse through them, because they are relevant for class:
I will see you in class next week (Monday. January 29, at 10.30 m, NY time on in Paulson Auditorium. I would obviously love to see you in person in class, but if for any reason, you are unable to make it to class, it will be carried as a live zoom session, and the zoom link for all of the sessions is below:
The sessions will also be available in recorded form. Until next time!
As we finish up the last weekend before class, I am sending this as a last pre-class email. When I start class tomorrow, it will be my 40th year teaching and I am thankful that I still look forward to the day. There is no other profession where you can start with a clean slate every few months, even though you may screw it up in the subsequent days and weeks. We will meet in Paulson from 10.30 am - 11.50 am for our first class, and it will be glorious (I have got to hype it up as much as I can). I do realize that some of you will not be able to make it in class for a variety of reasons, and worry not, since the class will be carried live on Zoom. The zoom link for the class is below:
The recorded versions of the session will also be accessible at the webcast page for the class (see link below).
During the first class, it would have been standard practice for me to hand out the syllabus and project description, but I think that if we truly live in a digital world, it is time to phase out this practice. So, please download the two packets and bring either a digital or physical copy to class tomorrow.
Project Description: https://pages.stern.nyu.edu/~adamodar/pdfiles/cfovhds/cfproj.pdf
At the risk of repeating myself, the lecture note packets for the class are also ready and you can find the links at the top of the webpage for the class sessions:
I last emailed you a week ago, and for those of you are wondering how much can happen in a week, the evidence is in front of you. The market has gone through contortions, and if you are thinking about places to hide from risk, you may want to start by reading my first four data posts for 2024:
Until next time!
I promised you with a ton of emails and I always deliver on my promises... Here is the first of many, many missives that you will receive for me….. First, a quick review of what we did in today's class. I laid out the structure for the class and an agenda of what I hope to accomplish during the next 15 weeks. In addition to describing the logistical details, I presented my view that corporate finance is the ultimate big picture class because everything falls under its purview. The “big picture” of corporate finance covers the three basic decisions that every business has to make: how to allocate scarce funds across competing uses (the investment decision), how to raise funds to finance these investments (the financing decision) and how much cash to take out of the business (the dividend decision). The singular objective in corporate finance is to maximize the value of the business to its owners. This big picture was then used to emphasize five themes: that corporate finance is common sense, that it is focused, that the focus shifts over the life cycle and that you cannot break first principles with immunity.
On to housekeeping details.
That is about it, for this email. Until next time!
In the first puzzle for this semester, I am going to focus on the objective in corporate finance, In class, I said that the end game is to maximize the value of the business and that objective has given corporate finance its focus, but has also given rise to criticism that it comes at the expense of other claimholders. That is a legitimate point, and even the Business Roundtable seemed to come around to a stakeholder point of view in this missive:
In a post shortly thereafter, I took issue with the Business Roundtable, and argued that it was the wrong message and that the messenger, Jamie Dimon, was singularly ill equipped to talk about shareholder interests, given how cavalierly he has ignored them over his tenure.
I know that many of you will disagree with me on my conclusions, but I think that this will be a great start for tomorrow’s class. So, please read both and try to answer these questions:
Since this is the type of discussion that is enriched by everyone joining, I have created a forum on the topic under Brightspace, for this class. Log in, check under content, and then under weekly puzzles and you should see the forum. You can post your thoughts, any interesting links or dissenting points of view there. U
In today's class, we started on what the objective in running a business should be. While corporate finance states it to be maximizing firm value, it is often practiced as maximizing stock price. To make the world safe for stock price maximization, we do have to make key assumptions: that managers act in the best interests of stockholders, that lenders are fully protected, that information flows to rational investors and that there are no social costs. We started on why one of these assumptions, that stockholders have power over managers, fails and we will continue ripping the Utopian world apart next class.
1. Other People's Money: Just a few added notes relating to the class that I want to bring to your attention. The first is the movie Other People's Money, which is one of my favorites for illustrating the straw men that people like to set up and knock down. You can find out more about the movie here:
But I found the best part on YouTube. It is Danny DeVito's "Larry the Liquidator" speech:
Watch it when you get a chance. Not only is it entertaining but it is a learning experience (though I am not sure what you learn). Incidentally, it is much, much better than Michael Douglas's "Greed is good" speech in the first "Wall Street " which was a blatant rip-off of Ivan Boesky's graduation address to the UC Berkeley MBAs in 1986 (which I happened to be at, since I was teaching there that year).
2. DisneyWar: In next week’s session, I will be talking about the dysfunctional state of Disney in the 1990s. If you want to review these on your own, try this book written by James Stewart. It is in paperback, on Amazon:
If you want a more contemporary version of how Disney’s corporate governance is playing out, and want an insider’s perspective, Bob Iger’s autobiography is a solid bet:
3. Company Choice: On the question of picking companies for your group, some (unsolicited) advice:
As a final reminder. Please pick your company soon... As you can see from today's class, we are getting started on assessing your company…
4. If you want to download the financial statements for your company, I would recommend that you start with the annual report for the most recent year. You should be able to pull it off the website for the company, under investor relations. If you want to keep going, and it is a US company, go to o the SEC site (https://www.sec.gov/edgar). If it is a non-US company, you will have to find the equivalent regulatory body in your country. For some of your companies, you will find less data than on others. Don’t fret. It is what it is. Finally, I am attaching the post class test and solution for today’s session
It is never too early to start nagging you about the project. So, let me get started with a checklist (which is short for this week but will get longer each week. Here is the list of things that would be nice to get behind you:
In doing all of this, you will need data and Stern subscribes to one of the two industry standards: S&P Capital IQ (the other is Factset). It is truly a remarkable dataset with hundreds of items on tens of thousands of public companies listed globally, including corporate governance measures. To get access to Capital IQ, you need to ask for it, and the attached document leads you through the process. As with all things IT related, I am sure that there are glitches and if you find them, let me know.
This is the seventh or eighth email for the class. If you have not been receiving these emails (which means that you are reading this in the chronicles), it is worth noting that I don’t keep an email list for the class. I use the Google groups that Stern creates. In theory, students registered for the class should be on Albert (the NYU official registration/grading site), Brightspace and Google Groups, and the three should be synced, but this is a university. What should be true in theory is not always the case in practice. I can do very little to alter the Google groups. If you are finding yourself locked out of the email list, start with IT, and if they won’t help, I will figure out a way to add you in. If you are a non-Stern student, and have an email address that does not end email@example.com, note that you were assigned a stern email address when you joined this class, and you should be able to find that address. Here is what I got from IT when I asked:
Since you are teaching a Stern course, all your students, exchange and non-Stern, are provided with a Stern account and Gmail.
You can have them all head over to 'start.stern.nyu.edu' to activate their account.
On a completely unrelated note, it may be a little early to be talking to me or the TAs, but here are the logistical details on office hours (for all of us) and the TA review sessions that will occur every week:
My office hours: You can come my office, in person, in KMEC 9-69 or on Zoom, since NYU is not allowing in-person yet, will be at:
12 pm- 1.15 pm, MW: https://nyu.zoom.us/j/97017751425
I will add on more hours as we get closer to quizzes and exams and project due dates.
TA office hours
Lambert and Jose will be having office hours as well. I will leave it to them to reach out to you (and they already might have) will details..
As promised, here is the first of the weekly in-practice webcasts. These are 10-15 minute webcasts designed to work on practical issues in corporate finance. This week’s issue is a timely one, if you are working on picking companies for your project (as you should be..). It is about the process of collecting data for companies, the first step in understanding and analyzing them. The webcast link is below:
It is a little dated (but I have been too lazy to update it), but I don’t think it is too painful to watch, and you may even find it useful. I have also put the link up on the webcast page for the class:
The webcasts for the first two classes should be on there, if you missed (physically, metaphysically or mentally) and the links to the project and syllabus that I handed out in the class. You can stream or YouTube the sessions, or download videos/audios. Also, if you joined the class late, you can get all emails sent up till today here:
Finally, have you had a chance to look at the weekly puzzle? If not, give it a shot by going here:
At the risk of nagging, please do get the lecture note packet 1 downloaded before Monday’s class. It is accessible on the webcasts page linked above.
As you start the weekend, I decided to butt in with the first of my newsletters. As you browse through it (and I hope you do), you will realize that this is not really news or even fake news. It is more akin to a GPS for the class telling you where we’ve been and where we plan to go. It is a good way to get a sense of whether you are falling behind on either the class or the project, especially as we get deeper into the class. On a different note, it looks like your groups and jelling and I will be playing matchmaker to get the rest of you in groups. So, the next step is to go into the class master list and enter the name of the company that you will be analyzing as soon as you have picked one:
Finally, during my description of the work for the class, I slipped up. I aplogize, but unlike the pope, I am fallible. I said that your project would be worth 40%. That is not true. It will be worth 30%, and there is case that I will be writing just for the class that will come due in late March. Details to follow. So, enjoy your weekend and I will see you on Monday!
Attached: Issue 1 (February 3)
|This week, we will complete our discussion of the objective function in corporate finance, continuing with stock price maximization tomorrow and alternatives to that objective thereafter. Along the way, we will look at shareholder wealth maximization and I may kill a few sacred cows (ESG. Stakeholder wealth maximization and Sustainability or the Theocratic Trifecta, as I call them) along the way. I would strongly recommend that if you have not tried the weekly puzzle for this week, you should. It is not only relevant to the classes to come but is at the foundation of the big debates we are having in business, politics and society. If you have no idea what I am talking about, here is the link to the weekly puzzle:
If you are wondering why I am not posting a solution, take a look at the puzzle again, and the answer should be fairly obvious. In the meantime, please do pick a company, and if you have picked a company, take a look at the board of directors and corporate governance. And don’t fall for performative corporate governance! (If you have no idea what I am talking about, we will start tomorrow’s class with an example…)
In today’s session, we spent almost a large chunk of out time on the assessment of where the power lies in a company. In the utopian world, the power lies entirely with shareholders, but in the real world, that is not often the case. It can lie with managers, if shareholdings are diffuse and shareholders are passive. It can lie with a subset of inside shareholders, who have large holdings and/or are part of incumbent management. In some cases, that power can come from having voting and non-voting shares. It can lie with governments, lenders or employees. The first step in understanding why a company does what it does is to assess the power structure, and I suggested that you look at the largest shareholders in the company. One source for this is Bloomberg, and while almost all of the information you will find on it can be found elsewhere, it does provide a convenient place to get information. The first step is finding a Bloomberg Terminal, and there are three on the fourth floor of KMEC, in the MBA Study Room. I have never used them, but reliable sources have told me that that the usernames and passwords are in the computer wallpers (they are BBREADING1, 2 or 3 and then a password that is Alpha, Delta or Gamma followed by numbers). Once you are able to get on the terminal, type in the name of your company and a bunch of listings on your company will show up. It may take a little trial and error, but you should eventually find your local listing of your stock. If you can get on a Bloomberg terminal, try this:
1. Press the EQUITY button
2. Choose FIND YOUR SECURITY
3. Type the name of your company
4. You might get multiple listings for your company, especially if it is a large company with multiple listings and securities. Try to find your local listing. For a US company, this will usually be the one with your stock symbol followed by US. For a non-US company, it will have the exchange symbol for your country (GR: Germany, FP: France, LN: UK etc...) It may take some trial and error to find the listing....
5. Type in HDS
6. Print off the first page of the HDS (it should have the top 17 investors in your company).
If you cannot get to a Bloomberg, much of that same information is available on Yahoo! Finance and other online financial data providers. .
As part of the discussion of what happens when power rests with another stakeholder group. I talked about my Petrobras post. The link is below:
We then turned our attention to the differences in interests between lenders and shareholders, when it comes to running a firm, and argued that lenders to businesses who don’t protect themselves risk being Nabiscoed. Moving on to the relationship between firms and markets, I noted the flaws in both parts of the Utopian assumption of free/honest information flow and rational markets, with information often delayed/gamed and sometimes fraudulent in a market that is often no rational, leaving us with the uneasy question of where to put our trusts - markets that may or may not be short, managers who claim to be long term but often are not or expert groups that when they make mistakes are unable to accept them. Next session, we will move past listing the problems to thinking about solutions.
At the outset, a quick note about office hours tomorrow. Since there ia faculty meeting from 12 pm - 1.30 pm, I will move the office hours to 9 am - 10 am. The zoom link for office hours remains unchanged. In this week’s puzzle, I thought I would use the recent kerfuffle at the Adani Group to talk about corporate governance in family group companies., You can find the puzzle described here:
That puzzle points you towards two posts from my blog. In the first post, I wrote a long time ago, where trouble was brewing at the Tata Group, the family group controlling Tata Motors:
I note the pluses and minuses for shareholders from investing in family group companies. I then turn to my last year's post on the Adani Grop, a first-generation family group company founded by Gautam Adani. It is heavily focused on infrastructure business, is connected strongly to political power in India and has seen its market cap zoom over the last two years in particular. In the post, I look at the Adani Group's growth over time, and examine how it has become the focus of a US-based short seller in Hindenburg, which contends that the group has indulged in earnings and price manipulation, and that institutions have looked away.
In the post, I also look at the ownership structure for the Adani Group and note that not only does the group control 73% of the shares outstanding in the company, but that statistic has barely budged over the last decade, even as the company has grown massively. There is a valuation in the post, but I would like your focus to stay on corporate governance at Adani specifically and at family group companies, in general. The puzzle ends with five questions:
In terms of mechanics, how does a family keep its ownership stake intact as a company is growing?
Give it a shot and you don’t need a finance background to do it. It is all about power.
he objective function matters, and there are no perfect objectives. That is the message of the last two classes. Once you have absorbed that, I am willing to accept the fact that you still don't quite buy into the "maximize value" objective. That is fine and I would like you to keep thinking about a better alternative with three caveats. First, you cannot cop out and give me multiple objectives - I too would like to maximize stockholder wealth, maximize customer satisfaction, maximize social welfare and employee benefits at the same time but it is just not doable. Second, your objective function has to be measurable. In other words, if you define your objective as maximizing the social good, how would you measure social good? Third, take your objective (and the measurement device you have developed) and ask yourself a cynical question: How might managers game this system for maximum benefit, while hurting you as an owner? In the long term, you may almost guarantee that this will happen.
Building on the theme of social good and stockholder wealth a little more, there are a number of fascinating moral and ethical issues that arise when you are the manager in a publicly traded firm. Is your first duty to society (to which we all belong) or to the stockholders (who are your ultimate employers)? If you have to pick between the two and you choose the former, do you have an obligation to be honest and let the latter know? What if you believed that the market was overvaluing your stock? Should you sit back and let it happen, since it is good for your stockholders, or should you try to talk the stock price down? On the question of socially responsibility, there are groups out there that rank companies based upon social responsibility. I have listed a few below, but they are a few of many:
JUST Capital: https://justcapital.com/rankings/
Calvert Social Index: https://www.calvert.com/calvert-indexes.php
Dow Jones Sustainability Index: https://www.spglobal.com/spdji/en/indices/esg/sp-500-sustainability-screened-index/#overview
And this is just the tip of the iceberg. Environmental organizations, labor unions and other groups all have their own corporate rankings. In other words, whatever your key social issue is, there is a way to stay true (as a consumer and investor). Notice how the rankings vary even across the ethics sphere. No surprise that no one has a monopoly on virtue. In the last few years, though, you have the ESG movement push for composite scores for companies, and that has created an eco system that I am cynical about, in terms of what will be ultimately accomplished. If you are interested in my perspective on ESG, please try these two posts that I have on the topic:
In addition, I did mention that the one thing that impact investing does not seem to measure itself on is actual impact, and here is the link:
While it may seem like we are paying far too much attention to these minor issues, I think that understanding who has the power to make decisions in a company will have significant consequences for how the company approaches every aspect of corporate finance - which projects it takes, how it funds them and how much it pays in dividends. So, give it your best shot.. On a different note, we will be start on our discussion of risk on Monday. As part of that discussion, we will confront the question of who the marginal investor in your company is. If you have already printed off the list of the top stockholders in your company (HDS page in Bloomberg or the Major Holders page from Yahoo! Finance), bring it with you again. If you have not, please do so before the next class. Also, watch for the in-practice webcast day after tomorrow, because I will go through how to break down the HDS page. I am also attaching the post-class test & solution for this session.
As for the project & class, time sure does fly, when you are having fun... We are exactly 15.38% (4 sessions out of 26) through the class (in terms of class time) and we will kick into high gear in the next two weeks. I am going to assume for the moment that my nagging has worked and that you have picked a company to analyze. Here is what you can be doing (or better still, have done already):
I will be putting up a webcast tomorrow on how to analyze the "top shareholder" list, using a range of companies. Hope you to get a chance to watch it. I also hope that you have had a chance to register for Capital IQ and if you have not, I am reattaching the directions on how to do so.
Ahead of Super Bowl weekend , I thought I would get in the in-practice webcast for this week and nag you about your project (yet again). Since these webcasts are directly connected to what you will or should be doing on the project, the best way to use them is to pick a company and use the webcasts to get the relevant parts of the project done. This webcast looks at ways to assess the corporate governance at your company, using HP from 2013 as an example. I use HP's annual report, its filings with the SEC and other public information to make my assessment of the company.
HP Annual Report: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/corpgovHP/HPAnnual.pdf
You can find these links in my webcast page, and it looks at what information to use and how to use it to assess the corporate governance structure of a company. (Sorry about the striped sweater… Should have known better)…..
2. Company choice & groups: I was checking the corporate finance master sheet:
I am glad that it is filling up, and thank you to those of you who have entered the company name. I will be emailing those of you who have no company choice yet, right after this email. So, please don’t panic when you get that email. I am just trying to push you towards a decision.
3. Corporate Finance Puzzles: I have been posting the puzzles that I send out each week on Brightspace in the discussion section. I know that you have lots of things to do, but if you want to discuss and debate, that forum works well. The first discussion was about stakeholders in companies and the second one about corporate governance at family group companies…
One final note. If you are having trouble opening links on my emails or my webpage, try switching browsers. Google Chrome has issues with links to stern server sites.. (Don’t ask… It will unleash a stream of frustration…)
I hope that you will be watching the Super Bowl this evening, not prepping for corporate finance. That said, my point about everything being corporate finance applies starting with the insane amount of money that it will cost a network to carry the Super Bowl today (and whether you can make it back on ad revenues or whether you need the show to boost other shows revenues), whether the halftime show will boost the earnings of the entertainer in question and whether the Super Bowl ads you see will be as predictive as the crypto ad that ran a couple of years ago with Larry David and Matt Damon. Inquiring minds want to know. In addition, we have a chance to assess how one person (Taylor Swift) t can alter the value of a sporting franchise. So, as you much your chips and watch Mahomes throw the ball from angles that look physically impossible, start tallying up the numberers.
Tomorrow, we will complete our discussion of corporate governance and start with a discussion of risk and how it plays out in hurdle rates. In the process, we will talk about the model that started the ball rolling, the capital asset pricing model (CAPM, how it is mystified by some and vilified for others, often in advancement of their agendas, and about alternatives to i5. We will move through this discussion in hyper speed for two reasons. One is that I have zero interest in reinventing modern portfolio theory and showing the mechanics of correlation and covariance. The second is that while I use the CAPM as a tool to estimate hurdle rates, I am not wedded to it and accept all kinds of alternatives (some of which we will talk about in class). If you are still shaky about even the assumptions that underlie the model, my suggestion is that you read chapter 3 from the applied corporate finance book before the class. If you don’t have the book, or not in the mood to read an entire chapter, please read my three data posts on hurdle rates from this year:
These posts will prepare you for what’s coming in the sessions after, we will start on the fun stuff of applying the model, starting with what should be a slam dunk (risk free rates) which is increasingly not and then turning to the equity risk premium, a number that analysts often turn towards services to look up but really has deep implications for both valuation and corporate finance. So, much to do and I hope that you come along for the ride.
We started the class by wrapping up the question of at the end game in business, and why I (and you don’t have have to) still trust markets, over managers and expert panels. Markets have no ego, and if allowed to play out, will devise corrections to almost every over reach in business, whether it be managers taking advantage of shareholders, borrowers ripping off lenders, companies lying to markets or creating large social costs. My view is that companies should run to maximize value, but that will involve accepts self-constraints on behavior, and even if the market does not recognize it right away, but that managers need to consider the messages in stock prices.
We then moved on to risk and some of you may be regretting the shift from the soft stuff , but trust me that it is still fun.. If it is not, keep telling yourself that it will become fun. Anyway, here are a few thoughts about today's class.
If you can, try to make your assessment of whether the marginal investors in your companies are likely to be diversified. Look at both the percent of stock held in your company and the top 17 investors to make this judgment. If your assessment leads you to conclude that the marginal investor is an institution or a diversified investor, you are home free in the sense that you can now feel comfortable using traditional risk and return models in finance. If, on the other hand, you decide that the marginal investor is not diversified, we will come back in a few sessions and talk about some adjustments you may want to make to your beta calculations.
In yesterday’s class, we went through the intuitive derivation of the CAPM. I thought that this week’s puzzle should be built around the central themes of portfolio theory, which is that diversification is the best weapon against risk, since it eliminates firm specific risk. That view, though, gets push back from some big name investors, including some value investing legends and Mark Cuban (who is also a legend, at least in his own mind). You can start the puzzle by reading the arguments for and against diversification:
The evidence, from looking at investor behavior, is that most individual investors side with the latter than the former (though that does not mean that it is right):
I am going to surprise you with my view. While I am more inclined to diversify than not, I can also see scenarios where not diversifying makes sense. In fact, I have a blog post on the question of how much diversification is good for you (and the answer will vary across individuals):
This is a topic that is important not just for your finance class, but for your personal portfolios, as you accumulate wealth (I am assuming that this Stern MBA, which you are paying a hefty price for, will pay off).
In many religions, serenity is the end game, and I am sure that some of you, at this stage in the class, are feeling overwhelmed. Some of the blame is mine, since I am drowning you with stuff to do and given your time constraints, you are unsure what you should do first. To help, I have created this flow chart on how you can best spend your time on the class. I hope it helps:
Work with whatever time you have, and use the priority list to decide what to do first. Obviously, I would like you to get through the entire list every week, but that is impractical.
We started today’s class by tying up the last loose ends with risk and return models, talking about how assuming that there are no transactions costs and private information can lead us all to hold the market portfolio, and how risk can be then measured as risk added to that portfolio. We did damn the CAPM with faint praise, arguing that it does not do very well at explaining differences in returns across companies, but that it does at least as well as the alternatives. We then started on the mechanics of the model, taking about risk free rates: how to estimate the risk free rate in a currency where there is no default free entity issuing bonds in that currency and why risk free rates vary across currencies. The key lesson is that much as we would like to believe that riskfree rates are set by banks, they come from fundamentals - growth and inflation. I have a post on risk free rates that you might find of use:
In fact, risk free rates turned negative in a few currencies, upending what we know about risk free rates in. Here is my post on negative risk free rates.
In the final few minutes of the session, we turned to equity risk premiums and how they are related to risk aversion. More on that in the next class. By the way, we have no class next Monday and next week’s class will be an entirely zoom class. The zoom link is below, but I will send it again next Tuesday, just in case:
Incidentally, today’s zoom had some audio issues that got fixed 15 minutes in. I am sorry, but I could not do much about the zoom problem, but I do have a back-up recording of the class, with the audio intact. The links are on the webcast page.
I had emailed you a list of things that you can do in this class, in priority. Since that priority list may still leave you uncertain, I repackaged it in terms of what your time status is from this class:
Busy, Multiple constraints on time including health, family etc.
Time available: <3 hours a week
1. Do post-class tests (10-15 minutes for each class)
2. Review lecture notes for the session (20-30 minutes for each class)
3. Bare minimum on project company, perhaps just collecting data and raw material to assess later (30 minutes/week)
4. In quiz week, work through at least three or four past quizzes (2018-2022) (3 hours every three or four weeks)
Busy, Significant constraints on time
Time available: 3-6 hours a week
1. Do post-class tests (10-15 minutes for each class)
2. Review lecture notes for the session (20-30 minutes for each class)
3. Watch in-practice video each week (30 minutes/week)
4. Get numbers crunched on project company (1 hour/week)
5. In quiz week, work through at least six to eight past quizzes (2015-2022) (5 hours every three or four weeks)
Busy, but class is key priority
Time available: 6-10 hours a week
1. Do post-class tests (10-15 minutes for each class)
2. Review lecture notes for the session (20-30 minutes for each class)
3. Watch in-practice video each week (30 minutes/week)
4. Get numbers crunched on project company & start narrative (1.5 hour/week)
5. Read and give weekly challenge a quick try (30 minutes/week)
6. Review practice problems for each section and try two or three in each section (30 minutes/week)
7. In quiz week, work through at least eight to ten past quizzes (2013-2022) (6 hours every three or four weeks)
Obsessed with this class
Time available: As many hours as needed
1. Do post-class tests (10-15 minutes for each class)
2. Review lecture notes for the session (20-30 minutes for each class)
3. Watch in-practice video each week (30 minutes/week)
4. Get numbers crunched on project company & start narrative + help other group members (2.5 hour/week)
5. Read and give weekly challenge a try and explore topic further (1 hour/week)
6. Review practice problems for each section and try four or five in each section (1 hour/week)
7. In quiz week, work through all past quizzes (1997-2022) (8 hours every three or four weeks)
8. Read stories in financial press, and craft your corporate finance response to each story (continuous)
With each of these, note that I have not set aside the time that it takes to read these long emails, and I am sorry for that. But I cannot think of a better tether to keep you connected to the class. (I could text you the emails, but I don’t think your phone can handle that barrage.)
If my nagging is paying off, you should have picked a company by now and if you have, you can move on to look at the marginal investors in you company, with the objective of assessing whether they are diversified, since it will let you know whether you are on safe ground using the CAPM or any other risk and return model. This will require a degree of judgment, but remember that you are not trying to identify a particular investor (Blackrock, Vanguard etc.) but a type of investor (institutional, insider, individual etc.). In making this assessment, having access to a Bloomberg terminal can speed the process, and if you get a chance, look at the YouTube video that I sent to you about using Bloomberg. If you don’t have access to a terminal, never fear, since much of the data is public. You can get both the breakdown of investors into insider and institutional, as well as the top holders of your stock. Here for instance is the page for PlugPower, a US company listed on the NASDAQ (under Holders): https://finance.yahoo.com/quote/PLUG/holders?p=PLUG
The assessment of who the marginal investor in PlugPower is easy to make. It is a large institutional investor, and very diversified. You can see that 55% of PlugPower’s shares (and 61% of the float, i.e., shares that are being traded at not locked away) are held by institutions, and if you are wondering whether that is high or low, I have data on insider and institutional holdings, by sector, for US, Global, European, Emerging (with China and India as separate date sets), Japan and Australia/NZ/Canada. You can find them here:
Scroll down to insider/institutional holdings and download the excel spreadsheets. If you have fallen behind in this class, there is nothing to fear. You have a whole week to catch up, and if it looks overwhelming, you should start with the entry page for the class:
Everything that we have done so far (from the class sessions, to weekly puzzles to even past emails) should be here.
Ahead of a long weekend, I decided that it would be a good time to send not one, but two, valuation webcasts this week. The first lt is on assessing who the top stockholders in your company are and thinking through the potential conflicts of interest you will face as a result. The webcast went a little longer than I wanted it to (it is about 24 minutes) but if you do have the list of the top stockholders in your company (the HDS page from Bloomberg, Capital IQ, Morningstar or some other source), I think you will find it useful.
Webcast link: http://youtu.be/x_H_4KTeOkc
Presentation link: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/holders.ppt
I hope that you get a chance to not only watch these webcasts but also try them out on your company.
The second one is on the first of the three inputs into your cost of equity, the risk free rate. If you want to get ahead of the curve, you can watch the webcast for this week, which looks at how to estimate risk free rates in different currencies, and how sovereign default spreads can be useful in getting there:
These datasets are from 2013. The 2024 versions are attached.
Last week, we put the objective function to rest and turned our attention to risk models. Next week, is a shortened week, since we will not have class on Monday and the Wednesday class will be a zoom class. We will start our discussion of risk free rates, and how best to estimate risk premiums and convert them into hurdle rates. This week’s newsletter is attached.
Attachment: Issue 3 (February 17)
As you can see from the heading, this is an email to all my classes, and it is about how to collect data, without getting overwhelmed by it. In particular, I want to focus on, and provide some help on data from three sources: the company itself (annual reports, financial filings), Capital IQ (a database of all publicly traded companies, with immense amounts of accounting and market data on each) and the physical Bloomberg terminals that are in the business school:
1. The Company: About 75% of the information, perhaps more, still come from annual reports and financial filings made by the company and the best source for this information is in the original documents (rather than on online sources, no matter how sophisticated). I usually start by finding the company’s webpage, going to the investor section and finding the most recent annual and quarterly report, as well as the analogous financial filings (10K and 10Q for US companies). Download them in pdf format, because you can then use the search box to search for the data you need in the pdf. (Warning: Do not read the annual report, until you are ready in terms of what data you want from the report)
2. Capital IQ: I have sent you many reminders that you have access to S&P Capital IQ. It is one of the premier global corporate datasets, and given how expensive it is to access, we are lucky to have access at Stern.
If you have not already done so, access Cap IQ, find your company, and it is pretty self-explanatory. I just download into excel the income statement, the balance sheets, the cash flow statement and the segment data, and I replace the default time period (which is the last few years with the maximum period, which can 30 years or more for some companies). You now have all of the historical data that you will need for your company. While you are in Capital IQ, you can also check out the industry grouping that your company is in, screen for other companies like it (by industry group, geography, market cap etc.) and download the data you might need on those companies (I would start with betas, market capitalizations, total debt and cash, but you may need to come back to this list again later in the class). I put together a YouTube video on how to do this, if you are interested:
3. Bloomberg terminal: Find the Bloomberg terminals in the building; for MBAs, there are four on the fourth floor of KMEC, and for undergraduates, there are four in Tisch 316 (accessed through 305). Since these are scarce, and hogging the machines is not a good idea, I thought I would create a guide specifying not only what you need to print off for your company, as well as where to find data on those print outs. I used BP as my company, and the print out should reflect what the pages should look like now for your company:
You will note that there are only six Bloomberg groupings you should print out, ten pages, in all.
HDS: Just the first page
BETA: One page
DES: Five pages
DDIS: One page
CRPR: One page
FA: One page
If you play this right, it should take you 10-15 minutes for your company, and you should do it as soon as you can. I know that this is my second email to you today, but to compensate, I will skip emailing you tomorrow and day after. See.. I am a compassionate person.
First things first. Tomorrow’s class will be a zoom class, and the zoom link is below. Please join this link at the regular class time:
See you there.
As we are navigate our way through a volatile economy and market, it is a good time to think about our views on risk and how it plays out in how we react to the crisis. Both economics and finance are built on risk aversion, i.e., that investors need to be paid extra (over and above an expected value) to take risks. That notion of risk aversion has been challenged and modified over time, but it still is at the heart of how we measure risk and come up with expected returns. Economists agree that not only does risk aversion vary across individuals but it also varies, for the same individual, across time. In this puzzle, which has no right answer, I would like you to wrestle with the question of how risk averse you, explanations that you can offer for that risk aversion and the consequences for your business and investment decision making. You can find the full details of the puzzle here:
One of the side products of the growth of robo advisors is a proliferation of tools that investors can use to assess how risk averse they are. This article in the New York Times nicely sets the table. In the article, though the links to free risk assessment services are no longer free. There are, however, plenty of risk aversion tests online. Here’re a couple that you can try at no cost (though the second one is longer):
University of Missouri: https://pfp.missouri.edu/research/investment-risk-tolerance-assessment/
Take the tests, both to get a measure of how risk aversion gets measured and how risk averse you are as an individual. Then, try to answer the following questions:
Today's class was spent talking mostly about equity risk premiums. The key theme to take away is that equity risk premiums don't come from models or history but from our guts. When we (as investors) feel scared or hopeful about everything that is going on around us, the equity risk premium is the receptacle for those fears and hopes. Thus, a good measure of equity risk premium should be dynamic and forward looking. We looked at three different ways of estimating the equity risk premium. It is with this objective in mind that we computed an implied equity risk premium for the S&P 500, using the level of the index. If you want to try your hand at it, here is my February 2024 update:
Play with the spreadsheet. In fact, try it with today’s index level and T.Bond rate and see what the ERP is right now. I also noted the path of historical implied equity risk premiums, and how they have become more unstable and higher since 2008, mentioning a greater fear of catastrophic risks than ever before. If you are interested in this topic, I wrote a piece about it last week:
I then extended this approach into other markets, and talked about how to (and tried to) estimate equity risk premiums for other markets, using the country ratings (default spreads) as a building block. You can get my 2024 start-of-the-year equity risk premiums at this link:
As a final step, see if you can find the geographic revenue distribution for your company. You can then use my latest ERP update to get the ERP for your company. If you can find production exposure, even better. You will then have to decide whether you want ERPs based upon production, revenues or a composite of the two.
Beta reminder: Pease do try to find a Bloomberg terminal (find the one on the fourth floor of KMEC). Click on Equities, find your stock (pinpoint the local listing; there can be dozens of listings....) and once you are on your stock's page of choices, type in BETA. A beta page should magically appear, with a two-year regression beta for your company. Print if off. If no one is waiting for the terminal, try these variations:
1. Time period: Change the default to make it about 5 years and the interval from weekly (W) to monthly (M). Print that page off
2. Index: The default index that Bloomberg uses is the local index (a topic for discussion next session). You can change the index. Replace your default index (usually the index of rte country in which your company is incorporated and traded with the MSCI Global Equity Ihdex in the index box and rerun the regression.
Bring the beta page (s) with you to the next class. Let's get the project done in real time, in class.
The post class test and solution for today are attached. Until next time!
As part of the weekly project nag, I am going to start by assuming that you have picked a company to analyze and that if you have not entered its name in the Google shared spreadsheet, it is an oversight that you will fix soon.
If you have not filled a company name, expect an email from me shortly, but it is more a nudge than a push. So, don’t freak out!
Here are some things to consider doing to catch up:
On a different note, the first quiz is a week from Monday (on March 4), and if you feel the urge, you can start preparing for it, though you may find the third question on each quiz a bit of a mystery at the moment. Here are some resources:
1. If you do want to practice, you can find the past quiz 1s that I have given for this class, with solutions, at the links below:
2. There is a review webcast that I did for the quiz. If you are interested, you can get it by going to:
My advice on the quizzes is that you start with the most recent quizzes and work backwards, and with time constraints in mind, here is what I would recommendL
On the earlier quizzes, you will notice that I don’t provide an ERP in problems, and that 5.5% shows up in the answer. That is because I expected people to look up the ERP in their lecture notes, and it was roughly 5.5% then, but I have learned my lesson the hard way and provide the ERP in the problem in recent years.
It is Friday and time for the in-Practice Webcasts. I have two for this week.
1. The first is on estimating implied equity risk premiums:
Updated ERP spreadsheet: http://www.stern.nyu.edu/~adamodar/pc/datasets/ctryprem.xlsx
One final note. If you have trouble opening links that I send or on my webpage, please try a different browser. Google Chrome, in particular, does not seem to work well with downloads.
Nothing much to report other than the fact that it is time to start building an ark in Southern California. The latest newsletter is attached. See you in class on Monday!
Attachment: Issue 4 (February 24)
I hope that you have had a productive (and fun) weekend. Three quick notes. First, this week, we will first look at where betas really come from (not from a regression) and devise a way of estimating betas for companies that will free us from the tyranny of regression betas. Second, as the quiz is a week from tomorrow, I will check in on you, to make sure that you have access to everything you need to get prepared for the quiz (both in terms of material and logistics). Third, if you are still struggling getting access to S&P Capital IQ (or have no idea what that is), please do get your access sooner rather than late
In this class, we first covered the estimation choices for betas: how far back in time to go (depends on how much your company has changed), what return interval to use (weekly or monthly are better than daily), what to include in returns (dividends and price appreciation) and the market index to use (broader and wider is better). We also looked at the three key pieces of output from the regression:
1. The intercept: This is a measure of how good or bad an investment your stock was during the period of your regression. To compute the measure correctly, you net out Rf(1-Beta) from the Intercept:
Jensen's alpha = Intercept - Riskfree rate (1- Beta)
If this number is a positive (negative) number, your stock did better (worse) than expected, after adjusting for risk and market performance.
2. The slope: is the beta, albeit with standard error
3. The R squared: measures the proportion of the risk in your stock that is market risk, with the balance being firm specific/diversifiable risk.
Finally, we used the beta to come up with an expected return for stock investors/cost of equity for the company, and talked about how it can be used in investment decision making. If you can get your hands on the beta page for your company, you should be able to make these assessments for your company. You can also get a guide to reading the Bloomberg pages for your company by clicking below:
Please try to strike while the iron is hot and get this section done for your company.
On a different note, the first quiz is a week from today. It is in-person and in the first 30 minutes of class, and you will get more details in another email. Meanwhile, though, you can get a look at a review session for the Quiz and all past quizzes/solutions in the links below:
I will have office hours on Sunday night (March 3), the night before the quiz, if you have any questions.
This week’s puzzle is on betas and I have used GameStop as my lab experiment. First, check out the description of the puzzle (with the beta pages for both companies):
Once you have browsed through it, here are the questions that I would like you to consider
Just a reminder again that the first quiz is on March 4 (next Monday). The TAs, Lambert and Jose, are both incredibly knowledgeable and helpful and I will add office hours this weekend for questions that you may have.