My Investment Management and Trading Strategies class has moved into the trading strategies portion of the curriculum, and we have been talking a lot about the tradeoff between execution costs and opportunity costs. This discussion has helped flesh out some of the classic arbitrage examples behavioral investors like to point out, as we quantify the frictions in the efficient market system which can give rise to these mispricings. While the big mispricings are interesting to study, I think the magic lies in all of the small mispricings.
It struck me in class that the biggest weakness of any valuation activity is the time period of applicability. On one had you have the trade-off every science deals with. The more exact the measurement, the more time the measurement takes, and thus the staler it gets. But finance struggles with another application hurdle; even if you can solve for the 'true' price of an asset instantaneously, you have no idea when the market price will move to that value or if in fact it ever will. You are subject to two independent risks, the market can stay wrong or get 'wronger' (move against you), or your true price estimate becomes untrue as information enters the market about the asset and the valuation changes.
You might say, sure but we do know that the market moves to the true price in the long run. I'd agree, but that true price is always changing. If the market price of X is higher than you think it should be, you might short X. Let’s say X is trading at 15, and you think it's worth 12. Your expectation is that X will drop from 15 to 12. You might even hedge your short with a long on the S&P to protect from systematic changes in the stock’s value, and only short the 'firm specific' valuation of the stock. What is to say the following doesn't happen: positive idiosyncratic information enters the market, and the market and true price rise to 17. The S&P doesn't change (by much) because only the stock reacted to the firm specific information, your short is a loss of $2, and your hedge didn't protect you. Even with absolute knowledge about the true price, you can lose money.
I think this is why some very successful asset managers seem to know very little about valuation, or sometimes even seem to care about it. Successful investment seems to be much more about the interaction between the market price and the true price over time. Decent money managers can get by with only knowing how one of the sides works. Traders only focus how the market price changes over time, 'deep value' investors focus intently on the derivation of the true price and somewhat haphazardly jump in when they feel the spread between the market price and the true price is big enough to warrant the risk of jumping in. A true master of investments should know both.
I'm trying to develop a checklist for investments that will focus my efforts on balancing these two fields. It will need to balance both fundamental and behavioral considerations. As luck would have it some much brighter minds are working on accomplishing exactly that!
Showing posts with label behavioural. Show all posts
Showing posts with label behavioural. Show all posts
Saturday, March 5, 2011
Monday, October 18, 2010
A perspective on applying to MSc Business degrees, right after a business undergrad
40 years ago a relatively small part of the population went on to study after high school, now it is the norm. Because having an undergrad is the norm, firms are having to get pickier on how they select their candidates. They do this by raising the minimum GPA, establishing dedicated recruitment campus, and starting to hire more Masters students for Analyst positions. In another 40 years you might need a Ph.D. to grab those elusive top paying jobs. Here is a road map on how to make the Masters choice today.
Motivation
If you are considering more education after graduating your business degree you need to settle on your motivation. Do you want to get a MSc to break into a top firm? Or do you want to work towards a Ph.D. and teach someday. Each path needs a masters, however each path needs a much different education, and its time to choose which path is right for you.
The GMAT
This was the achilles heal of my applications, I did not prep enough. If you are serious in pushing into a top b-school you need a GMAT score in the 700's with a balanced quant/verbal split. For most of us in North America, we have done the better part of the last 10 years with a calculator in our hands - the GMAT is all by hand. If you've been reading business publications like the economist then you've already prepped for the verbal, but if not, verbal scores are the slowest to improve. Buy a book, take a prep course, allocate 100 hours, do what you need to become 90th+ percentile.
The Search
When you have your GMAT and can ballpark your GPA you can start setting your sights on schools. Generally if you are anywhere in the median 80% you have a real shot at making it in. Use b-school ranking lists, and understand how they are calculated. Most ranking lists incorporate incoming GMAT scores, exit salary, and % students placed 90 days after graduation, but each has their own take.
If you are focusing on getting hired, it's these ranking lists you need to look at, along with asking / looking at who recruits on campus. If you know your dream job, may as well go to the school that they recruit from. If your looking for research heavy programs for a Ph.D. you'll need to follow an entirely different screening method that I don't know anything about.
Quantity or Quality
I chose to focus on only three schools and spend a lot of time tailoring each essay to exactly what the school was looking for. Some choose to do the scatter-shot approach which makes sense statistically but remember you need tailored on-line recommendation letters for all these schools. Make sure to apply to at least one school that is out of your league. When you get into all of your schools, the "what if" thought often nags at you a bit. Of course also have a backup school for the worst case scenario. I strongly recommend applying in the first round because that is where most of the scholarship money is handed out, and it works best with the "eager for success" story you're going to need to tell.
Your Brand
The nice thing about business schools is that they are businesses. When you graduate you are their product, and when you are applying you are their supply. Everything you need to know about how to tell your story to get in, you can get by thinking about what they want from you when you get out. Namely, they want you to get a great job that has a really high pay so that you can boost their rankings, give lots of money back to the school when you make it big, and help following graduates land at the same firm. So in the essay's interview ect, focus a lot on how the education at this school is going to allow you to achieve your dreams. Focus on the particulars of that school, what about it specifically will give you wings ect. Also talk a lot about what you can contribute to the class, b-school is all about team so you can't be to "me me me" when talking about your candidacy. You are already a business student so your landing potential is high, it's just communicating it all and showing the admissions team you're [school name] material.
Interview Prep
Besides the advice above I would practice the common questions a lot with willing profs and friends, especially if your not a great public speaker. A lot of applicants will publish the questions they received on-line, grab what you can, but know all the general ones too. The behavioral questions need to answered genuinely, talk with friends and family to flesh out your real strengths and weaknesses and think about your 'story' around them.
The cut above
Just like dating a real 'catch', getting into b-school is all about going the extra mile. By the time I had my offer I was engaged in about 8 different email conversations with different people in admissions and in the school, asking about different facets of the program and the post graduation opportunities. Don't be annoying, be eager. When the admissions team sits down and opens your file you want positive mind share with as many people as possible before they start going over the quant aspects of the application. I strongly believe that if you can get one person to fight for you, you're in, even if your GMAT and/or GPA was sub median 80%. Networking is really respected at b-school and using it to get into the program will just underline why you will likely score the great job when your actually enrolled.
If you can get a job you are happy with out of undergrad you're setting yourself up for the much more practiced approach of 3 years work experience then MBA. The MSc is a gamble on jumping the que a little bit, delaying real life one more year, and grabbing a top job away from a would be candidate at a top tier undergrad school. But with a CFA you likely won't need an MBA anyways so it's really just compressing the inevitable Masters into one year and getting it out of the way!
Motivation
If you are considering more education after graduating your business degree you need to settle on your motivation. Do you want to get a MSc to break into a top firm? Or do you want to work towards a Ph.D. and teach someday. Each path needs a masters, however each path needs a much different education, and its time to choose which path is right for you.
The GMAT
This was the achilles heal of my applications, I did not prep enough. If you are serious in pushing into a top b-school you need a GMAT score in the 700's with a balanced quant/verbal split. For most of us in North America, we have done the better part of the last 10 years with a calculator in our hands - the GMAT is all by hand. If you've been reading business publications like the economist then you've already prepped for the verbal, but if not, verbal scores are the slowest to improve. Buy a book, take a prep course, allocate 100 hours, do what you need to become 90th+ percentile.
The Search
When you have your GMAT and can ballpark your GPA you can start setting your sights on schools. Generally if you are anywhere in the median 80% you have a real shot at making it in. Use b-school ranking lists, and understand how they are calculated. Most ranking lists incorporate incoming GMAT scores, exit salary, and % students placed 90 days after graduation, but each has their own take.
If you are focusing on getting hired, it's these ranking lists you need to look at, along with asking / looking at who recruits on campus. If you know your dream job, may as well go to the school that they recruit from. If your looking for research heavy programs for a Ph.D. you'll need to follow an entirely different screening method that I don't know anything about.
Quantity or Quality
I chose to focus on only three schools and spend a lot of time tailoring each essay to exactly what the school was looking for. Some choose to do the scatter-shot approach which makes sense statistically but remember you need tailored on-line recommendation letters for all these schools. Make sure to apply to at least one school that is out of your league. When you get into all of your schools, the "what if" thought often nags at you a bit. Of course also have a backup school for the worst case scenario. I strongly recommend applying in the first round because that is where most of the scholarship money is handed out, and it works best with the "eager for success" story you're going to need to tell.
Your Brand
The nice thing about business schools is that they are businesses. When you graduate you are their product, and when you are applying you are their supply. Everything you need to know about how to tell your story to get in, you can get by thinking about what they want from you when you get out. Namely, they want you to get a great job that has a really high pay so that you can boost their rankings, give lots of money back to the school when you make it big, and help following graduates land at the same firm. So in the essay's interview ect, focus a lot on how the education at this school is going to allow you to achieve your dreams. Focus on the particulars of that school, what about it specifically will give you wings ect. Also talk a lot about what you can contribute to the class, b-school is all about team so you can't be to "me me me" when talking about your candidacy. You are already a business student so your landing potential is high, it's just communicating it all and showing the admissions team you're [school name] material.
Interview Prep
Besides the advice above I would practice the common questions a lot with willing profs and friends, especially if your not a great public speaker. A lot of applicants will publish the questions they received on-line, grab what you can, but know all the general ones too. The behavioral questions need to answered genuinely, talk with friends and family to flesh out your real strengths and weaknesses and think about your 'story' around them.
The cut above
Just like dating a real 'catch', getting into b-school is all about going the extra mile. By the time I had my offer I was engaged in about 8 different email conversations with different people in admissions and in the school, asking about different facets of the program and the post graduation opportunities. Don't be annoying, be eager. When the admissions team sits down and opens your file you want positive mind share with as many people as possible before they start going over the quant aspects of the application. I strongly believe that if you can get one person to fight for you, you're in, even if your GMAT and/or GPA was sub median 80%. Networking is really respected at b-school and using it to get into the program will just underline why you will likely score the great job when your actually enrolled.
If you can get a job you are happy with out of undergrad you're setting yourself up for the much more practiced approach of 3 years work experience then MBA. The MSc is a gamble on jumping the que a little bit, delaying real life one more year, and grabbing a top job away from a would be candidate at a top tier undergrad school. But with a CFA you likely won't need an MBA anyways so it's really just compressing the inevitable Masters into one year and getting it out of the way!
Sunday, October 17, 2010
A Typical Interview Process for an Investment Banking Analyst
Investment banks hire their Analysts about 10 months before they start. The exact process varies from bank to bank but generally an applicant should expect the process to begin in the middle of August and end in the middle of September for the top firms. These are the big multinational bulge bracket investment banks like Credit Suisse, Goldman Sachs (although they are a bit later), UBS, Barclays Capital, Morgan Stanley, and so on.
The theory I've heard is that the top firms pay top dollar to get what they think is the best talent coming out of this years business school graduate class at the undergrad (analyst) and grad (associate) level. After this hiring cycle is done the next tranche of banks on the league table grab their candidates for a little less money and it trickles down through the fall and winter as mid-market and boutique firms make their play for graduates. Come spring all the firms open their doors again if they want to fill a spot or two and offer unemployed grads a direct hire position. There are of course on the spot hires for teams that are in heavy need of more hands throughout the year but most graduates are recruited in one of these cycles.
Round One
The first round is the screening round. Resumes flood the firm through online applications, campus recruiting, and in firm recommendations. In my fall push I was 1 for 2 on an in firm push through approach, and 1 for 15 on the only online application approach - even then the 1 that bit was something I don't think I would have taken if it was offered. So if your serious in your landing attempts you need to reach somebody in the firm who can place your resume on the right stack. If you're successful you'll be given a call to line up a behavioral interview; I was given about 12 hour notice, so its good to be on your toes in your interview prep as soon as you are applying.
Round Two
Unbeknownst to me at the time I actually did my behavioral interview before I was screened. My contact in the firm had gathered enough on our 'informational interview' to form an opinion on my fit in the firm that he must have given me a pass on this round. The general questions you can expect here are the classic ones like: "Walk me through your resume", "Why investment banking?", "Why [firm name]", "Why this team?", "Do you think you can take the hours?", "What three of your strengths and weaknesses", "What are some questions you have for me?". The list goes on; generally if you take some time to think about your motivations and skills you will be equipped with genuine answers to give to the interviewer. If you are just memorizing what you think they want to hear because you think they wouldn't like your answer then perhaps you are applying to the wrong line of work?
Round Three
When I was given my 12 hour heads up for my behavioral interview, what I was actually being notified for was my third round technical interview. This became pretty clear after the second question, and I had to lean hard on my undergraduate knowledge and CFA I prep to answer valuation questions on the fly. Keeping in mind that I was applying to an M&A role in a office that deals primarily with large oil and gas firms here are some technical questions you can expect in the third round.
1. Walk me through your resume
2. How do you value a company?
3. How do you value a pure play oil and gas firm?
4. How do you value a firm before it IPO's?
5. Should you expect your DCF value to be higher or lower than your comparable's value?
6. What multiples should you use to value Oil and Gas companies? Be as specific as possible. (He wanted to hear Enterprise Value over Reserves, and I got likely got the next question as a follow up to see if I could incorporate the 'right answer')
7. You have been researching a firm and have a solid grasp of BPD [barrel per day] numbers, and their current and historical reserves. They are a pure play upstream O&G firm. How do you use this information to help you value the company?
8. A firm in the same geographical region and with normal firm activities (no blow ups ect) has a stock that is under-performing peers. What are the possible explanations for this / what would you check for?
9. Talk to me about LBO's. Should the precedent value set by other deals be higher or lower than your DCF valuation?
10. Any questions for me?
Round Four
And now the final round. They usually do this one on-site and so expect to be flown to the location at a moments notice. I learned of my Friday morning interview on a Wednesday afternoon, and had Thursday travel booked by Thursday morning; everything is last minute. You get to see a bit of how the firm values your candidacy at this point, everything is paid for and you are put up in very nice hotels. The day of the interview begins with a gathering of the prospective candidates. I expect each office does this their own way, but for my final round I ended up talking to the other three candidates for about 20 minutes while the team assembled for the rolling interview rounds.
There was four stations, or offices, that had two different people that would test you on different things, except for one office that housed the managing director. All of the interviews would start with "walk me through your resume" and the interviewers would focus in on different things as you made your pitch. I started with the MD and it was a behavioral / interest interview. It was my responsibility to ask most of the questions, and go into a bit of explanation of why I thought I was a good fit and could handle the work. Each interview would last about 40 minutes and then you would immediately transition to the next interview.
My second interview was with two members of the team - the interviewers ranged from the Analyst to VP / Director level. This one went technical quickly and I quickly sensed it was going to take an accounting bent. Like some young financiers I look at accounting like pilots look at radio protocol. Necessary to do the job, but always an unpleasant experience. So after covering as much ground as I could on the more interesting projects I was bringing to the table, it was time to tackle their questions. They went something like this:
1. Walk me though your resume
2. How do you value a company
3. Walk me through a DCF valuation from Revenue.
4. I just bought a piece of equipment for $100, $50 was cash, $50 was debt. Walk me though every accounting transaction that occurs during the year. And fill out the financial statements starting at net income.
This last question in particular is a tricky one and I heard it replicated in a interview prep course I ended up sitting in on after landing so I assume it's industry standard. I asked if I could write things on their white board and I was told no. I got them as far as the depreciation tax shield and change in retained earnings but it was a bit slow and painfully confusing to do all in my head. I solved it on paper on the plane ride home and it is actually a tricky question that looks deceptively simple to do in your head.
My third interview was another fit interview after being a bit shaken from my accounting interview I hit this one as hard as I could. In the moment it felt like it went well, and it was passion filled. It was one of those moments that you realize your dream might be slipping from your finger tips and the adrenalin kicks up yet another gear. It was in that interview that I realized how crushed I would be if I didn't land at this particular firm, and how much I really did want the job. From what I can remember it was a re-hash of the behavioral questions that should have been my round one.
My fourth and final interview was a valuation interview, something I've taken to be a personal strength, but after 2+ hours of grilling I was losing my crispness. Questions I recall being asked were:
1. Quickly walk me through your resume
2. What stock would you buy today?
3. How would you value it?
4. How do you measure investment risk?
5. Why Investment Banking?
6. You experiences lean towards investment management, why not pursue that?
7. Why Canada after studying in the USA?
And that was it. I raced out of the office to catch my flight home and my emotions swung a bit as I re-ran questions in my mind. In particular the accounting questions ate at me, and I felt I had definitely given them enough to say no.
Mercifully the offer call came in the next day on a Saturday afternoon and I worked with HR Sunday evening to iron out all the details - yet another indication that anyone in an investment firm never sleeps.
The theory I've heard is that the top firms pay top dollar to get what they think is the best talent coming out of this years business school graduate class at the undergrad (analyst) and grad (associate) level. After this hiring cycle is done the next tranche of banks on the league table grab their candidates for a little less money and it trickles down through the fall and winter as mid-market and boutique firms make their play for graduates. Come spring all the firms open their doors again if they want to fill a spot or two and offer unemployed grads a direct hire position. There are of course on the spot hires for teams that are in heavy need of more hands throughout the year but most graduates are recruited in one of these cycles.
Round One
The first round is the screening round. Resumes flood the firm through online applications, campus recruiting, and in firm recommendations. In my fall push I was 1 for 2 on an in firm push through approach, and 1 for 15 on the only online application approach - even then the 1 that bit was something I don't think I would have taken if it was offered. So if your serious in your landing attempts you need to reach somebody in the firm who can place your resume on the right stack. If you're successful you'll be given a call to line up a behavioral interview; I was given about 12 hour notice, so its good to be on your toes in your interview prep as soon as you are applying.
Round Two
Unbeknownst to me at the time I actually did my behavioral interview before I was screened. My contact in the firm had gathered enough on our 'informational interview' to form an opinion on my fit in the firm that he must have given me a pass on this round. The general questions you can expect here are the classic ones like: "Walk me through your resume", "Why investment banking?", "Why [firm name]", "Why this team?", "Do you think you can take the hours?", "What three of your strengths and weaknesses", "What are some questions you have for me?". The list goes on; generally if you take some time to think about your motivations and skills you will be equipped with genuine answers to give to the interviewer. If you are just memorizing what you think they want to hear because you think they wouldn't like your answer then perhaps you are applying to the wrong line of work?
Round Three
When I was given my 12 hour heads up for my behavioral interview, what I was actually being notified for was my third round technical interview. This became pretty clear after the second question, and I had to lean hard on my undergraduate knowledge and CFA I prep to answer valuation questions on the fly. Keeping in mind that I was applying to an M&A role in a office that deals primarily with large oil and gas firms here are some technical questions you can expect in the third round.
1. Walk me through your resume
2. How do you value a company?
3. How do you value a pure play oil and gas firm?
4. How do you value a firm before it IPO's?
5. Should you expect your DCF value to be higher or lower than your comparable's value?
6. What multiples should you use to value Oil and Gas companies? Be as specific as possible. (He wanted to hear Enterprise Value over Reserves, and I got likely got the next question as a follow up to see if I could incorporate the 'right answer')
7. You have been researching a firm and have a solid grasp of BPD [barrel per day] numbers, and their current and historical reserves. They are a pure play upstream O&G firm. How do you use this information to help you value the company?
8. A firm in the same geographical region and with normal firm activities (no blow ups ect) has a stock that is under-performing peers. What are the possible explanations for this / what would you check for?
9. Talk to me about LBO's. Should the precedent value set by other deals be higher or lower than your DCF valuation?
10. Any questions for me?
Round Four
And now the final round. They usually do this one on-site and so expect to be flown to the location at a moments notice. I learned of my Friday morning interview on a Wednesday afternoon, and had Thursday travel booked by Thursday morning; everything is last minute. You get to see a bit of how the firm values your candidacy at this point, everything is paid for and you are put up in very nice hotels. The day of the interview begins with a gathering of the prospective candidates. I expect each office does this their own way, but for my final round I ended up talking to the other three candidates for about 20 minutes while the team assembled for the rolling interview rounds.
There was four stations, or offices, that had two different people that would test you on different things, except for one office that housed the managing director. All of the interviews would start with "walk me through your resume" and the interviewers would focus in on different things as you made your pitch. I started with the MD and it was a behavioral / interest interview. It was my responsibility to ask most of the questions, and go into a bit of explanation of why I thought I was a good fit and could handle the work. Each interview would last about 40 minutes and then you would immediately transition to the next interview.
My second interview was with two members of the team - the interviewers ranged from the Analyst to VP / Director level. This one went technical quickly and I quickly sensed it was going to take an accounting bent. Like some young financiers I look at accounting like pilots look at radio protocol. Necessary to do the job, but always an unpleasant experience. So after covering as much ground as I could on the more interesting projects I was bringing to the table, it was time to tackle their questions. They went something like this:
1. Walk me though your resume
2. How do you value a company
3. Walk me through a DCF valuation from Revenue.
4. I just bought a piece of equipment for $100, $50 was cash, $50 was debt. Walk me though every accounting transaction that occurs during the year. And fill out the financial statements starting at net income.
This last question in particular is a tricky one and I heard it replicated in a interview prep course I ended up sitting in on after landing so I assume it's industry standard. I asked if I could write things on their white board and I was told no. I got them as far as the depreciation tax shield and change in retained earnings but it was a bit slow and painfully confusing to do all in my head. I solved it on paper on the plane ride home and it is actually a tricky question that looks deceptively simple to do in your head.
My third interview was another fit interview after being a bit shaken from my accounting interview I hit this one as hard as I could. In the moment it felt like it went well, and it was passion filled. It was one of those moments that you realize your dream might be slipping from your finger tips and the adrenalin kicks up yet another gear. It was in that interview that I realized how crushed I would be if I didn't land at this particular firm, and how much I really did want the job. From what I can remember it was a re-hash of the behavioral questions that should have been my round one.
My fourth and final interview was a valuation interview, something I've taken to be a personal strength, but after 2+ hours of grilling I was losing my crispness. Questions I recall being asked were:
1. Quickly walk me through your resume
2. What stock would you buy today?
3. How would you value it?
4. How do you measure investment risk?
5. Why Investment Banking?
6. You experiences lean towards investment management, why not pursue that?
7. Why Canada after studying in the USA?
And that was it. I raced out of the office to catch my flight home and my emotions swung a bit as I re-ran questions in my mind. In particular the accounting questions ate at me, and I felt I had definitely given them enough to say no.
Mercifully the offer call came in the next day on a Saturday afternoon and I worked with HR Sunday evening to iron out all the details - yet another indication that anyone in an investment firm never sleeps.
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