This document provides an overview and introduction to a course on value investing strategies and fundamental analysis. It discusses key concepts in value investing including identifying undervalued stocks, understanding business fundamentals, and allowing for a margin of safety. The document outlines the course topics, instructor's background, and different investment strategies over a business cycle. It also provides examples of analyzing company financials and defines common stock terminology.

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2652 - Value-Investing
Strategies and Fundamental
Analysis
Module 1

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• 1.1 Course Overview
• 1.2 Introduction to Value Investing
• 1.3 Investment Strategies in a Business Cycle
Topics for this Module

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Icebreaker
1) Find a partner in the class and ask him/her the following
questions:
– What is your name?
– What is your academic/professional background?
– Why are you taking this course?
– What kind of experience do you have in stock trading?
– What is your top investment strategy for the next 12 months?
2) Report to the class what you have found

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• Background in financial engineering, derivatives trading and risk
management
• Currently Head of Capital Markets at the Financial Services of
Regulatory Authority of Ontario
• Former Managing Director of Capital Markets/Risk Measurement &
Analytics Division at the Office of the Superintendent of Financial
Institutions Canada
• Former Canadian representative on the Basel Committee of Banking
Supervision’s Trading Book Groups
• Instructor at the University of Toronto’s School of Continuing Studies
responsible for financial trading and risk management courses
• Recipient of the school’s “Excellence in Teaching Award” in 2008
• Recipient of the Queen Elizabeth II Diamond Jubilee Medal for
significant contribution to Canada through personal and professional
achievements in 2013
Quick Bio of Tim Fong

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Finance Courses Taught by Tim
• Certificate in Financial Trading & Option Strategies
– Technical Analysis of the Financial Markets (SCS2023)
– Value-investing Strategies and Fundamental Analysis (SCS2652)
– Option Trading and Strategies (SCS2191)
– Advanced Technical Analysis and Algo Trading Strategies
Workshop (SCS3331)
• Passing the FRM Exams LV1 and LV2 (SCS2336 &SCS
2337)
• Bitcoin and Cryptocurrency Investing Workshop (SCS3437)

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Finance Courses Taught by Tim

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Module 1 – Section 1
Course Overview

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Course Overview
• Weekly lesson plan
• Textbook for the course → Value Investing: From Graham to Buffett and
Beyond
• Reference book → The Winning Investment Habits of Warren Buffett
and George Soros by Mark Tier
• Evaluation
• Certificate in Financial Trading and Option Strategies
• Access to internet and Microsoft Excel
• Practical approach through case studies and real life examples
• Refer to http://learn.utoronto.ca/registration.htm and the calendar for
general information on registration, grading and other school polices

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Quote of the week
“Diversification may preserve wealth,
but concentration builds wealth.”
– Warren Buffett

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Module 1 – Section 2
Introduction to Value-Investing

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Stock Trader’s Mindset
Fundamental Analysis & Value-
Investing Strategies
(Long Term Forecasting)
Algorithmic Trading
(Automatic Execution)
Option Trading Strategies
(Leverage and Risk Mgmt)
Technical Analysis
(Short Term Forecasting)

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Types of Trader
• Day Traders:
– Intraday
– Use simple technical analysis including
support/resistance and patterns
• Swing Traders:
– 1 day to 1 month
– Use technical analysis including oscillators
• Position Trader:
– 1 month to 1 year
– Use technical analysis and fundamental analysis

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Three Versions of Efficient Market Hypothesis
• Market efficiency → how quickly can all sources of
information can be reflected into the market price
• Weak efficiency → past information is reflected into the
current prices (i.e. no need to do technical analysis)
• Semi-strong efficiency → all public information is reflected
into the current prices (i.e. no need to fundamental analysis)
• Strong efficiency → all private and public information is
reflected into the current prices (i.e. no need to do any
analysis)

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Evidences of Market Inefficiency
• Adaptive Market Hypothesis (by Prof. Andrew Lo at
MIT) which suggests that the market is predictable
to some degree
• Importance of behavioral finance (such as Nobel
laureate Daniel Kahneman’s work)
• Superior returns achieved by investment gurus,
hedge funds and professional traders

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Adaptive Market Hypothesis (from Prof. Andrew Lo)
1. To the extent that a relation between risk and reward exists, it is unlikely
to be stable over time.
2. Contrary to the classical EMH, there are arbitrage opportunities from
time to time.
3. Investment strategies will also wax and wane, performing well in certain
environments and performing poorly in other environments. This
includes quantitatively-, fundamentally- and technically-based methods.
4. Innovation is the key to survival because as risk/reward relation varies
through time, the better way of achieving a consistent level of expected
returns is to adapt to changing market conditions.
5. Survival is the only objective that matters while profit and utility
maximization are secondary relevant aspects.

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Warren Buffett and George Soros
• Based on the book “The Winning Investment Habits of Warren Buffett &
George Soros”, their annual rate of return is about 25%.
• If you have a value-investing strategy that generates an annual rate of
return of 25% consistently for 10 years, you can grow your $10000
investment into $93000.
• FV = PV(1+r)t = 10000(1.25)10 ≈ 93000
• In others words, the effect of a multiplier of 9X.
• The key is consistency and that could only be achieved with a solid and
proven value-investing strategy or system.
• What are Warren Buffett and George Soros holding in their portfolios?
– Click here to access Insider Monkey’s Hedge Fund section

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Time Value of Money (at 25% return per year)

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Introductory Example – IMN.TO (Inmet Mining)

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Investment Strategy – Demographics vs. Stock
Prices
• What is the relationship between demographics and stock
prices?
• What are the implications of this relationship to investment
returns going forward?

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What is the #1 thing in common among the
master investors of the century?
• Rely on simple rules of thumb and key principles.
• Develop their own personal systems for buying and selling
investments.
• Follow his own “investment/trading system” religiously.
• Only invests in what they understand.
• Look for deep “margin of safety”.
• When they buy, they buy as much as they can.
• There are also a number of winning habits that will be
explored in lecture 6 & 7.

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3-Step Value-Investing Approach
1. Initial screening → rules of thumbs , magic formulas and
tips from other sources
2. Understand the business → analysis of the fundamentals
i.e. assets, earnings and growth
3. Margin of safety in absolute and relative terms
→ valuation

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Introduction to Value Investing
The three key characteristics of financial markets:
1. The prices of financial securities are subject to
significant and unpredictable movements.
2. The underlying fundamental values could be relatively
stable and can be measured with reasonable accuracy
by a diligent and disciplined investor → intrinsic value
and market price may diverge
3. A value investing strategy is about buying securities
only when their market prices are significantly below
the intrinsic value → margin of safety

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Two Types of Fundamental Investors
1. Macrofundamentalists
– Analyze broad macroeconomic factors such as interest
rate, unemployment rates, etc that affect the security
values in general
2. Microfundamentalists
– Most value investors in the Graham/Dodd camp are
microfundamentalists.
– Analyze the fundamentals of companies and look at
them one by one.

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Does Value Investing Work?
There are three distinct sources of evidences:
1. Many studies that employ different versions of the
value investing approach e.g. low market-to-book and
price-to-earnings ratios generate better than average
returns in almost all periods and all kinds of market.
2. Some large investment management firms that
adopted the value investing approach have superior
returns.
3. Track records from value investors e.g. Warren Buffett
and Peter Lynch.

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Past Pick - Visa

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Qualities Essential for Success
1. Value investing involves operating within his or her circle
competence → needs to be knowledgeable in something,
not everything
2. Value investing requires patience → needs to develop a
target price to guide you when to sell

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Four Important Types of Variables
1. Variables that refer to price changes to the stock without
any reference to fundamental data e.g. relative strength
→ Technical Analysis
2. Variables that refer to a company’s fundamental
performance e.g. profit margin → Fundamental Analysis
3. Variables that relate the price of shares to the
fundamental performance e.g. price to earnings (P/E) ratio
→ Fundamental Analysis
4. Variables that measure the size of a company e.g. market
capitalization

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Where are the Hunting Grounds?
• Stocks with deep margin of safety
• Stocks that are obscure
• Companies that spun off from larger firms
• Boring companies
• Companies in bankruptcy or financial distress
• Companies that are involved in lawsuits
• Stocks that are mispriced due to institutional
constraints or mandates

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Investment Strategy Case Study: SINA
Based on the “key statistics” available from Yahoo
Finance and the chart on the next page, please
answer the following question:
1. Does this company look undervalued or overvalued?
2. Why?

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SINA

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Market Capitalization
• The total dollar market value of all of a company's
outstanding shares.
• It is equal to the share price times the number of shares
outstanding (shares that have been authorized, issued, and
purchased by investors) of a publicly traded company

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Classification by Categorization
• Mega-cap: Over $100 billion
• Large-cap: $10 billion–$100 billion
• Mid-cap: $1 billion–$10 billion
• Small-cap: $100 million–$1 billion
• Micro-cap: $10 million-$100 million
• Nano-cap: Below $10 million

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1. Yahoo Finance
– http://screen.yahoo.com/stocks.html
– News & Info → Company Events
– Company → Key Statistics
– Analyst Coverage → Analyst Opinion
2. Finviz
– Click here to access Finviz’s Free Stock Screener
3. Stockhouse
– Bullboard → Stock Tips
Tools for Initial Screening

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Sources of Company Information
• Corporate Presentations
• Financial Statements
– Balance Sheet
– Income Statement
– Retained Earnings Statement
– Cash Flow Statement
• Notes to Financial Statements
• Management Discussion and Analysis
• Other Regulatory Filings

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Balance Sheet
• Lists a company’s assets, liabilities and shareholder’s equity
at a point in time.
• Assets = Liabilities + Equity
• Assets are owned by the company (e.g. cash, accounts
receivables, inventories, capital assets, goodwill, etc).
• Liabilities are owed by the company (e.g. accounts payable,
dividend payable, current portion of long-term debt, long-
term debt, etc).
• Equity is the total capital invested plus the companies
accumulated profit and loss over time.

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Income Statement
• Lists all revenue and expenses over a period of time.
• It could further be broken down into the following sections:
– Operating section
– Non-operating section
– Irregular items
– Disclosures

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Cashflow Statement
• Lists a company’s sources and uses of cash over a period
of time.
• Cash flow from operating activities
– = cash received from sale of goods/services – cash used to
generate the sales
• Cash flow from investing activities
– = cash received from long-term investments – cash spent on long-
term investments
• Cash flow from financing activities
– = cash received from the issuance of new shares or new debt – cash
paid to buy back share or repay debt

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Financial Statement Analysis
• Be aware of the limitations of the financial statements.
• Financial statement analysis involves:
– Analysis of key drivers of the company’s performance (Assignment
1)
– Financial Ratio Analysis (Lecture 2)
– Earnings Projection (Lecture 3)

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Common Share
• Common shares are issued by a corporation and represent
ownership interest in the corporation.
• Common share investors receive their funds after preferred
stock holders, bondholders and creditors in the event of
bankruptcy.
• Common share is usually voting shares, though not always.
• Returns from common stock include dividends and capital
gain.

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Module 1 – Section 3
Investment Strategies in a
Business Cycle

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Investment Strategy: Financial Markets and
Business Cycles
• In the context of a business cycle, there are basically three
financial markets: bonds, stocks and commodities.
• Each market has two turning points and therefore there are
conceptually six turning points in a typical cycle.
• The chronological sequence of turning points can be used
as a conceptual framework for identifying the secular trend
(bull or bear) in the bond, stock and commodity markets
during a business cycle.
• Key question: Where are we now in the business cycle?

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The Six Stages of a Typical Business Cycle
(by Martin Pring)
Equilibrium
Economy is growing
Economy is contracting

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S&P 500 Performance and the Economic Cycle

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