Recommended Reading

I’ve had a request for a list of recommended reading, and here are a few pieces I’ve enjoyed pertaining to finance:

• Barbarians at the Gate- Bryan Burrough and John Helyar
  Often touted as one of the most influential finance novels out there, this account of the LBO takeover of RJR Nabisco is a page-turner. You won’t find a more interesting (or well-researched) book about leveraged buyouts. The story is laid out through a series of interviews, dialogues, and personal accounts by the major players in this deal.
• Liar’s Poker- Michael Lewis
  An autobiographical account of Lewis’s experience of becoming hired by Salomon Brothers as a bond trader, and the history of the company and mortgage-backed securities. Gives a “Law of the Jungle” view of Wall Street in the 1980s.
• When Genius Failed- Roger Lowenstein
  The story of the failure of Long Term Capital Management, a hedge fund started by John Meriwether. Meriwether previously had a career at Salomon Brothers as the head of the fixed income desk. This book outlines the investments moves that eventually killed this fund.
• Bringing Down the House-Ben Mezrich
  A true story of a group of MIT students who won millions of dollars gambling in a period of four years, using math strategies and card counting to win. A fascinating read.
• The Predators’ Ball- Connie Bruck
  A story of the junk-bond trader Michael Milken at Drexel Burnham and his rise and fall at the hands of the US government. Caught for insider trading and stock fraud, this book gives you a glimpse of the greedy world of Wall Street in the 1980s.
• The Millionaire Mind- Thomas Stanley (about entrepreneurship and the psychology behind the lifestyles of the wealthy)
  I enjoyed this book immensely- it was interesting to learn what the top income-producing households in this country did to earn their wealth and exactly how they spent it (and why!) One of the most interesting facts was that most millionaire entrepreneurs had an SAT score lower than 1300.
  

Interrogating the stock market: asking the right questions to select a high-performing stock

In past blogs I have outlined how to determine your risk profile and advice on constructing an economic outlook and the allocation of your assets in your portfolio. This article focuses on the “exciting” part- finding the perfect stock(s). I know you dream of them- that stock that is the equivalent of purchasing shares of Google when it first IPO’d for $85 (it’s at $461 today, 3/25/07). I am by no means an experienced expert on stock selection, but to get you started here are some of the ratios analyzed by the pros, and why they analyze them. This is known as fundamental analysis. This should help you in your approach to selecting stocks for your portfolio, should you have the time. If you don’t have the time, buy an index fund. Selecting a stock for the long-term takes time, analysis, and research. I’m not advising you to take up the practice of day trading or getting into options, because even if you are a finance major reading this, you want to experience those markets via second-hand experience/surveillance or on the job training before you jump in too soon and get slaughtered by the wolves. Everyone wants to make money, right? I’m sure the investment banker at Bear Stearns will have no problem taking you for all you’ve got for a nice yacht to add to his collection.

Where can you get the information for these ratios or the ratios themselves? Try the companies’ website, finance.yahoo.com, or the SEC website (which has the 10-K of all the companies publicly available)

Current Ratio: Current assets/current liabilities
This tells you if the company has enough cash to pay off all their short-term deb. Anything below 1 indicates negative working capital, while anything over 2 means that the company is not investing excess cash.

Debt/Equity Ratio: Total Liabilities/Equity
Indicates what proportion of equity and debt the company is using to finance its assets.
If the ratio is high (financed more with debt) then the company is in a risky position - especially if interest rates are rising.

P/E Ratio: Market Value per Share/Earnings per Share
Used to determine if the company is over or undervalued by the market.
Compare the P/E ratios of other companies in the same industry or against the company's own historical P/E ratios to determine whether or not it is really undervalued or if it is just not experiencing growth. Usually a high P/E ratio means that investors are expecting higher growth in the future. This ratio can be used to estimate earnings to get the forward looking P/E ratio.

Return on Equity (ROE): Net Income/Shareholders Equity
This ratio shows what return a company is generating on the owners' investment. For high growth companies you should expect a higher ROE.

Earnings Per Share: (Net Income - Dividends on Preferred Stock)/Average Outstanding Shares
Determines how much profit was generated on a per share basis. You should compare the EPS of a company to its previous EPS in past quarters to determine if the company is growing.

Cash Flow to Assets: Cash from Operations/Total Assets
This ratio indicates the cash a company can generate in relation to its size-it’s important to compare this ratio of a company from year to year, as a declining ratio could indicate cash flow problems for the company in the future.

Gross Margin: (Revenue - Cost of Goods Sold)/Revenue
This shows how much money on the dollar the company makes from its sales. Higher gross margins are usually better, indicating the pricing strategy of the company. Lower margins indicate the importance of even a penny cost-savings on the bottom line, and how little changes in demand or supply could affect their sustainability.

Tip: Only a novice buys shares in odd lots (i.e. telling your broker you want $2,000 worth of stock A so you end up with 94.3 shares). The pros buy in even lots (100 shares) so figure out approximately how many shares you can afford and round.

Health Insurance: Bridging the gap between college and work

If you are graduating in May, you probably aren’t starting work until June at the earliest. And if you’ve read the fine print of your employment contract, you might have noticed that your health insurance might not kick in until a month after you start. Mine is like that-and I’m assuming many have the same problem. Your health insurance under your parents usually stops covering you when you graduate, or if you have college health insurance that ends as well when you graduate. So what do you do for those two months that you are not covered? Just shrug it off and hope you don’t get sick? Hope that you don’t get into an accident for two months? This isn’t a smart risk to take- but you have some options.
You can either purchase short-term health insurance or a COBRA. Short-term health insurance is exactly that- insurance for unforeseen illness or a medical emergency. It does not cover routine medical exams, and is only insurance in case you come down with a virus or get into an accident. A COBRA (short for Consolidated Omnibus Budget Reconciliation Act) is continuation coverage of your current health insurance, which includes routine exams. This is generally more expensive than short term health insurance because it covers more and because you are taking on the entire premium yourself. Thus, you are paying the amount your parents used to pay plus what your employer (or in our case our parents employer) paid toward the premium. When you graduate, you technically lose your “dependant child status” under your parents insurance and you are no longer covered.
Short-term health insurance is usually for 30 to 180 days, but can be for up to one year and is a better option if you don’t need any routine care in the months after graduation. To get quotes on short term insurance, try gradmed.com or einsurance.com for policy and rate comparisons. The deductibles on short-term insurance are usually much higher than a Cobra ($250 vs. $40 or so) but remember you will be paying much higher premiums. Another note of caution is that they do not cover pre-existing conditions or pregnancy care.

Researching Investments: Asset Allocation (Part Three)

Asset Allocation:
Now that you know the return you desire, (make this realistic based upon your appetite for risk- you can’t get 20% returns if you hate risk and only want to buy T-bills) you can determine the allocation of your portfolio. Do a Google search for a Monte Carlo Portfolio Optimizer. The one I prefer is from Excel Business Tools, and you can get a free 30-day trial which has no usage restrictions. First you need to find historical data from the asset classes you are interested in investing in, such as corporate bonds, small-cap stocks, large-cap stocks, and sector ETF’s. You should be able to find indices for all of these asset classes and historical performance from individual ETF’s easily on yahoo finance. You need to copy/paste the pricing data from these asset classes into the optimizer. At the top of the optimizer, put in your target return, the risk-free rate, and any constraints you desire. Then run the optimizer. Your output should look like this below:





We used historical data from the Lehman Corporate Bond Index (LCAGYTW), the S&P600 (Small Cap stocks) and the S&P 500








If you look at this chart above, you will see our target return was 11%, and based upon this analysis we have a 58.07% chance of achieving this return. It also tells you how much of your total portfolio you should invest in the different asset classes to optimize your return. You can also use the optimizer once you have selected the stocks/ETF’s/index funds you’d like to purchase. Enter in the historical prices for each stock, etc, and the optimizer will tell you the optimal allocation of shares in each investment. Let’s say you have 10 million dollars to invest, and you’ve identified the stocks (below) you’d like to purchase. The optimizer should give you an output like the chart below:

Researching Investments: Economic Outlook (Part Two)

Once you’ve decided what your risk/return needs are and how long you plan to be investing in the market, you should come up with your own economic outlook. Purchasing any type of stock without analysis of the outside economic factors that could influence the return is not good. For example: let’s say you like a mortgage company- they’ve got a low P/E ratio, you like the revenue growth, and you’ve analyzed all their liquidity and debt ratios. However, since you’ve been reading the news in the past few days, you know that sub-prime lenders are taking a big hit right now, so you maybe you think that you should wait to purchase shares. If the lender is in the sub-prime market, you are right. But if the lender is in just the prime market, now may find this is not the case. Because interest rates have risen, a lot of sub-prime lenders are going under because a large number of consumers with adjustable-rate mortgages are defaulting on their loans. But the consumers with good credit and fixed-rate mortgages are still doing fine and able to make their payments. The stocks of the prime market are adversely (but unnecessarily) affected by the sub-prime market, and thus you may find that these stocks are under-valued.
You should read the Financial Times or Wall Street Journal daily, and I have my homepage set up to Bloomberg.com. Below from Bloomberg.com is today’s inverted yield curve, which shows investors expect the fed to cut interest rates in the next few months. The question is: do you?

You should also read the Chairman of the Federal Reserve’s speech to Congress, made semi-annually. This can be found at http://www.federalreserve.gov/boarddocs/hh/ . Ben Bernanke’s latest from February is posted now, as well as the two from last year. I would also visit http://www.aei.org/, which is the American Enterprise Institute of Public Policy Research. Economic papers are released monthly, with great analysis of the current market and the economic outlook of the markets in years to come. Identify all the factors you feel would have an impact on the stock/bond market, and be sure to familiarize yourself with each of these. Establishing your own opinion on the market in the next year, 5 years, and 10 years is crucial to assembling your portfolio. You should forecast the next 5-10 years in both the stock and bond markets.

Are you an international student looking for a job in finance?

To legally work in the United States, a foreign student must work for an employer that will sponsor their H1B visa. Your employer must file the application for you, and you cannot do so yourself. But how do you find out which companies will do so? First, targeting large companies that desire diversity and highly skilled employees will help. Usually it is harder for smaller companies to take the time to go through the process.
Below is an incomplete list of finance companies that previously have sponsored a H1-B visa, along with contact information. Should you have questions about a specific company, feel free to contact me. Also, check out http://flcdatacenter.com for information on other companies providing H1B visa’s and salaries for those positions.

AIG International Inc.
City: Greenwich
State: CT
Web: www.aig.com/careers/index.html
Country: USA

Bank of America
City: Boston
State: MA
Web: www.bankofamerica.com/index.cfm
Country: USA

Blackrock Inc.
City: New York
State: NY
Web: www.blackrock.com/blackrock/careers/careers.html
Country: USA

Boston Capital
City: Boston
State: MA
Web: www.bcv.com/
Country: USA

CB Richard Ellis Inc.
City: Chicago
State: IL
Web: www.cbre.com/USA/About+Us/Careers/
Country: USA

Citigroup Inc.
City: New York
State: NY
Web: careers.citigroup.com/
Country: USA

Researching Stocks: Determining your Investor Profile (Part One)

If you’re like me, you read the financial times everyday, you have your Bloomberg certification in equities, and you get a rush out of buying and selling stock. But if you are like many college grads, even finance majors, you might have not yet taken the plunge to actually purchase shares of stock. Or if you have, you feel like you did it all wrong and want more information to do it right this time. Here is what I suggest to get started in investing in the stock market.

I was fortunate enough to take a class entitled “Investments”, which gave us a hypothetical 10 million dollar portfolio to invest for “clients” (two members of the class). I will try to impart this valuable information as best I can in the space allotted me, but this is by no means a complete overview of everything you should look at. Start reading the Financial Times or the Wall Street Journal everyday. Educate yourself so you do not fall victim to the many financial advisors out there that really don’t know what they are doing. If you don’t have the time to do it yourself, at least initially take the time to find an advisor or financial planner with a proven track record. Ask older friends and acquaintances for referrals- especially those in the finance industry. And whatever you do, please don’t just walk into Bank of America and talk to one of their advisors. They do not have your best interests in mind and most likely have only a limited list of investments to choose from. They don’t make any money off of ETF’s or index funds, so all you will hear about is mutual funds. They don’t want you to know that other, more profitable, more efficient investments are out there.
But if you do want to try it yourself and register at Scott Trade, Etrade, or another online brokerage firm, here is what I suggest to do. Researching a stock should be a long and methodical process, and investing in stocks based upon a “whim”, a “hot stock tip from your friend”, or what BusinessWeek tells you isn’t the best method.

The first thing you must do is determine your investing profile. Do you want small companies with higher risk but more potential for higher returns?(small-cap stocks) Do you want more stable, less risky stocks positioned for growth?(large-cap stocks?)
You want to figure out your own:
a. Target return.
b. Investment horizon.
c. Maximum risk.
d. Constraints.
To find out your risk profile and what returns you can expect based upon that level of risk, try one of these investor questionnaires:
http://www.alpha-omega-inc.com/CalcQuest.htm
http://www.movidea.com/BP_educ/html/question.htm
http://cgi.money.cnn.com/tools/assetallocwizard/assetallocwizard.html
http://www.smartmoney.com/oneasset/index.cfm?story=intro

These tools will also help you determine what allocation of your portfolio you should have in each asset class. If you are a college graduate, you know I’ve said earlier to start early. If you have a lot of time to invest, now is the time to try riskier investments such as small-cap stocks, index funds, or ETF’s and international stocks, index funds, or ETF’s.

Interview Tips continued

To continue my article about finance interviews, here are a few more companies I have interviewed with:

XL Capital
The interview: very laid back. I interviewed with this company in their Hartford office, and the people there are very friendly and relaxed. To give you an idea, the Professional underwriters (insuring CEO's and board of directors) wear shorts and t-shirts to the office, have a pool table and ping pong table in their lounge, and generally do whatever they want. They can, because they bring in millions of dollars of business a year. For this interview, it is important to fit in with that culture, and not appear too uptight. They are not going to ask you any tough questions, and from what I've found they go on the quality of your resume. However, just to put into context, my interview was for an internship (which I got) and I never had to interview for a full-time job.

Liberty Mutual:
Liberty Mutual's first interview isn't tough in terms of finance, but they want to hear you are good in teams, are goal-driven, ambitious, etc. The second and final round is at their office, and you are among a group of about 10 people from various schools. First you have three interviews with various people in the organization, they feed you, and then you have a case study. You also have to take an online tutorial "test", but it is nothing to worry about- basically you read about insurance, and then answer questions based upon what you read. The case study is individual, and they give you a calculator- it is somewhat calculation intensive (given that they give you raw data and you can do whatever calculations you choose with that data) and definetly taxes your analytical skills. Make sure you have solid reasoning for any type of decisions and as long as you can back it up, you'll be fine.

I've interviewed with a lot of companies, so if you have questions about a specific one I haven't covered here, feel free to ask. My advice is not to limit yourself to "only investment banking" or whatever catagory you feel makes the most money, because I've learned a lot about myself and what I do/don't want to do with my life in interviews. Remember that you must be critical- you are deciding how you want to spend 40+ hours of your life a week.

Odds & Ends- Q&A

In this week’s blog, I want to first direct your attention to a conference for business students in the Florida area called RISE. The website is http://sba.udayton.edu/rise
The conference is from March 29-31, and includes keynote speakers such as the COO of McDonalds, the Commissioner of the SEC, and many other executives in the finance industry. Many thanks to Jeff Sanders from Memphis University for sharing this opportunity.

Also, on Monday March 5th I will be appearing very briefly on CNBC’s Fast Money at 8 pm. I will be asking the financial guru’s of the show, Guy Adami, Eric Bolling, Jeff Macke and Tim Strazzini an investment question. The four are experienced Wall Street Traders. Their combined experience includes positions at Merrill Lynch, Goldman Sachs, director of a hedge fund, as well as running their own wealth management companies.

This blog is going to be a Q & A, as I’ve received a few questions that might be helpful to others.

Question:
“In reading one of your posts on Experience, I was wonderingwhether you ever noticed on your corporate finance interviews ifanyone had their CFA. I signed with International Paper as financialanalyst but never found anyone who had their CFA.”

Answer:
The CFA shows your seriousness and competency in the field of finance, and will certainly advance your career. Almost all of the interviewers I met had their CFA- and those who didn't were analysts studying for it. In the corporate finance world, especially at consumer product companies (like International Paper), it may be possible that the CFA is not as widely held by employees as in other finance positions. However, specifically at Unilever, most of the management had their CFA. Just because your colleagues don’t have a CFA does not mean you don’t need it- it will distinguish you from the rest of the pack and increase your salary potential.

Question:
“I read your blog on the experience network, very well written and interesting stuff. Congrats on your job with Cambridge Associates, it's a great company. Have you done extensive research on Roth IRA's? I'm going to start putting money into one, I wanted to check if you had done any research as to which are the best? It's good to see we have ambitious undergrads like yourself who will boost the Babson brand.”

I know I didn’t have to include the whole email…but I couldn’t help the Babson plug.

Answer:

You don't invest in a IRA like you would invest in a Fidelity mutual fund. There are not IRA's that are the "best"- they are constructed by each individual investor. An IRA is really just a tax shell under which you can make any investment you choose. That said, there are some things that are not appropriate for an IRA account, such as municipal bonds (since they are tax-exempt) and insurance annuity contracts. If you were interested in the Vanguard International Index Fund you could open an IRA account at Vanguard and purchase shares in the fund. However, you could also purchase shares in their other funds at Vanguard if you wanted to. Another good choice is to open an IRA through a brokerage firm, like Scottrade, and then you can diversify your IRA portfolio through any investment you choose, whether it's a Fidelity index fund, a Vanguard mutual fund, or individual shares of Microsoft. It's often called a "self-directed" IRA. That would be what I advise for you. You could also do it through a bank, but often banks have a limited list of investments you can choose from and I generally don't trust them- they tend to push certain investments and you have to be careful about fees.