Investing 101


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Investing 101

  1. 1. Investing 101 & Presented by
  2. 2. Sponsored by
  3. 3. Today’s Topics <ul><li>Investment Industry Overview </li></ul><ul><ul><li>Types of Investing </li></ul></ul><ul><ul><li>Career Paths </li></ul></ul><ul><ul><li>Sample Investments </li></ul></ul><ul><li>Basics of Investing </li></ul>
  4. 4. Industry Overview <ul><li>Venture Capital </li></ul><ul><ul><li>Oak, Sequoia, Kleiner Perkins </li></ul></ul><ul><li>Equity/Debt (stocks/bonds) </li></ul><ul><ul><li>Citadel, Cerberus (hedge funds); Fidelity, Vanguard (mutual funds) </li></ul></ul><ul><li>Private Equity </li></ul><ul><ul><li>KKR, Blackstone, TPG </li></ul></ul>
  5. 5. Investment Types and Company Lifecycle Venture Capital Equity/ Debt Private Equity Launches Goes Public Growth slows Start-up Public Company Mature Company Stage in Company Life Cycle Typical Investment Type
  6. 6. Venture Capital
  7. 7. Venture Capital <ul><li>Typical Entry strategy </li></ul><ul><ul><li>Acquire stake in young, start-up firm </li></ul></ul><ul><li>Value added </li></ul><ul><ul><li>VCs provide funding, networking, and advice to the companies they invest in </li></ul></ul><ul><li>Typical Exit strategy </li></ul><ul><ul><li>Take portfolio companies public or sell them to other companies </li></ul></ul><ul><li>Example </li></ul><ul><ul><li>Bessemer Venture Partners invested $1-2 million in Skype, and when Skype was acquired by eBay, Bessemer made a 100-fold return on its investment </li></ul></ul>
  8. 8. Top Venture Capital Firms <ul><li>Sand Hill Road, Menlo Park, CA </li></ul><ul><li>Accel Partners </li></ul><ul><li>Crosspoint </li></ul><ul><li>Kleiner Perkins Caulfield & Byers </li></ul><ul><li>Oak Investment Partners </li></ul><ul><li>Sequoia </li></ul><ul><li>Softbank </li></ul>
  9. 9. Debt/Equity Investing
  10. 10. Debt/Equity Investing <ul><li>Typical Entry strategy </li></ul><ul><ul><li>Acquire position in stock or bonds of company </li></ul></ul><ul><li>Value added </li></ul><ul><ul><li>Investors can lobby companies to take measures to raise stock prices, such as share repurchases or divestitures </li></ul></ul><ul><li>Typical Exit strategy </li></ul><ul><ul><li>Unwind position in stock or bonds of company </li></ul></ul><ul><li>Example </li></ul><ul><ul><li>After doing comprehensive research on AutoZone, ESL, a hedge fund, concludes AutoZone is undervalued and buys shares in the company. In time the market comes to realize that the company is indeed undervalued and ESL sells its AutoZone shares after earning a 30% return. </li></ul></ul>
  11. 11. Top Debt/Equity Investors <ul><li>Hedge Funds </li></ul><ul><li>Cerberus </li></ul><ul><li>Citadel </li></ul><ul><li>ESL </li></ul><ul><li>SAC Capital </li></ul><ul><li>Silverpoint (debt investing) </li></ul><ul><li>Mutual Funds </li></ul><ul><li>Fidelity </li></ul><ul><li>Vanguard </li></ul>
  12. 12. Debt/Equity Investing
  13. 13. Private Equity <ul><li>Typical Entry strategy </li></ul><ul><ul><li>Borrow money to buy of a public company’s shares and take it private again, in a Leveraged Buyout (LBO) </li></ul></ul><ul><li>Value added </li></ul><ul><ul><li>Improve company’s operations through restructuring, divestitures, or refinancing </li></ul></ul><ul><li>Typical Exit strategy </li></ul><ul><ul><li>Take company public again or sell to other firm </li></ul></ul><ul><li>Example </li></ul><ul><ul><li>Nelson Peltz buys Snapple from Quaker Oats for $300 million, turns company around within a few years, and sells it for $1.5 billion </li></ul></ul>
  14. 14. Top Private Equity Firms <ul><li>Bain Capital </li></ul><ul><li>Carlyle Group </li></ul><ul><li>Kohlberg, Kravis, & Roberts (KKR) </li></ul><ul><li>Texas Pacific Group (TPG) </li></ul><ul><li>Thomas H Lee Partners </li></ul><ul><li>Warburg Pincus </li></ul>
  15. 15. Investing Basics Sponsored By Bank of America Presented by WIC & WUFC
  16. 16. What’s the Investment Universe? <ul><li>Stocks </li></ul><ul><li>Bonds </li></ul><ul><li>Derivatives </li></ul><ul><li>Real Estate </li></ul><ul><li>Commodities </li></ul><ul><li>Currency </li></ul>
  17. 17. Types of Analysis <ul><li>Fundamental </li></ul><ul><ul><li>A method of evaluating a security by attempting to measure its intrinsic value by examining related economic , financial and other qualitative and quantitative factors.  </li></ul></ul><ul><ul><li>Value of a firm = Discounted value of future cash flows </li></ul></ul><ul><li>Technical </li></ul><ul><ul><li>A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. </li></ul></ul>
  18. 18. Where to Begin? <ul><li>Develop a differentiated view </li></ul><ul><li>Top Down </li></ul><ul><ul><li>View on the economy or a sector </li></ul></ul><ul><ul><li>Drill down into individual stocks, or trade a basket of companies </li></ul></ul><ul><li>Bottom Up </li></ul><ul><ul><li>Start with a company specific story </li></ul></ul><ul><ul><li>Investigate the firm’s prospects based upon micro factors </li></ul></ul>
  19. 19. How to Evaluate a Business <ul><li>Sustainable competitive advantages </li></ul><ul><ul><li>Barriers to entry, Substitutes </li></ul></ul><ul><ul><li>Buyer and Supplier Leverage </li></ul></ul><ul><ul><li>Technology, Infrastructure, Human Capital </li></ul></ul><ul><li>Cost structure </li></ul><ul><ul><li>Fixed vs. variable </li></ul></ul><ul><ul><li>Margin Analysis </li></ul></ul><ul><li>Management </li></ul><ul><li>Opportunities for growth </li></ul>
  20. 20. Valuation Methodolgy <ul><li>Discounted Cash Flows </li></ul><ul><ul><li>Determine cost of firm’s capital </li></ul></ul><ul><ul><li>Estimate the firm’s future cash flows </li></ul></ul><ul><ul><li>Add back value of non-operational assets </li></ul></ul><ul><li>Multiples </li></ul><ul><ul><li>P/E = (EPS/(r-g)) </li></ul></ul><ul><ul><li>EBITDA/EV </li></ul></ul><ul><ul><li>(EBITDA-Capex)/EV </li></ul></ul><ul><ul><li>ROA, ROIC </li></ul></ul><ul><ul><li>Net Debt/EBITDA </li></ul></ul>
  21. 21. Derivatives <ul><li>Contract that “Derives” its value from another security </li></ul><ul><li>Future - Obligation to exchange cash at some specified date for the underlying </li></ul><ul><li>Option - Right but not the obligation to buy/sell (call/put) underlying at specified price </li></ul><ul><li>Derivatives often allow for enhanced leverage </li></ul>
  22. 22. Options Continued <ul><li>A multitude of strategies </li></ul><ul><li>Understand Greeks (Delta, Gamma, Theta, Rho, Vega) </li></ul><ul><li>Basic idea is that payoff is asymmetric </li></ul>