Spend a lot of time here discussing innovation and creative thought. Paul Schrader’s words resonated the most with me. The idea that true creativity comes from restriction and limitation. As the old adage goes, necessity breeds invention. But perhaps that’s the engineer in me coming out.
Strategic Behavioural Finance
Nutshell: Applications of behavioural finance and the study potential areas of market inefficiency.
Keywords: utility maximization, expected utility theory, allais paradox, framing, agency theory, prospect theory, weighting function, riskless loss aversion, mental accounting, small-firm effect, momentum and reversal, theoretical requirements for market efficiency , limits to arbitrage, shiller model, ease of processing heuristics, ambiguity aversion, diversification heuristic, status quo bias and endowment effect, conjunction fallacy, base rate neglect, bayesian updating, gambler’s fallacy, salience, recency, overestimating predictability, anchoring, better-than-average effect, excessive optimism, home bias, disposition effect, house money effect, conformity, Daniel- Hirshleifer-Subrahmanyam Model, Grinblatt-Han Model, Barberis-Shleifer-Vishny Model, Fama-French Three Factor Model, equity premium puzzle
Favourite Takeaway: Check out Project SIFYC
My time in venture capital was a opportunity to work with some extremely bright professionals. Although analytical methods were applied whenever possible, there are huge analytical limitations when comparing this investment class to others. Many find the industry glamorous because of the ambiguity and uncertainty involved.
One secret is that venture capitalists invest in product & management; with a preference for the latter. Meaning: they will support great management with a mediocre product. But almost never support a phenomenal product with mediocre management.
Sometimes after a seemingly normal pitch, a director would have a definitive opinion. Which made me wonder, “What did I miss?” With investees of numerous appearance, race, socioeconomic status, and professional background – these professionals focused on economics not bias. Also sometimes companies had similar products, and performance metrics. So again, “What did I miss?”. What made one investment sound better than a another somewhat similar one?
Subconsciously, I carried this question with me. Nothing serious, because it didn’t happen often. But still worth noting.
Strategic Business Analysis and Valuation
Nutshell: Using concepts from financial economics, business strategy, accounting, and other business disciplines for valuing businesses and business interests.
Keywords: asset based valuation methodology, deemed taxable dividends, adjusted net book value, estimated proceeds for distribution, tax pool shields, economic value of loan, multiples valuation methodology, temporary excess assets, redundant assets, one-time adjustments, capitalized cash flow methodology, discounted cash flow methodology, minority and other transactional discounts, sustaining capital reinvestment, capitalized earnings methodology, capitalized asset pricing model
Favourite Takeaway: A model is just a model. Focus on justifications of assumptions and forecasts rather than the arithmetic and process.
Last post jabbed at the use of statistics. In fact, I’ve already discussed the importance of statistical pragmatism. It’s no secret that I’m highly critical of linkedin’s “influencer” posts. We always see feel good articles about positivity, perception, and soft power. But aside from anecdotes, these posts have little substance.
I’m fascinated with valuing unorthodox options, prospects, and opportunities. Coming from an applied science background; I always try to apply the scientific method and other structured problem-solving techniques to real-world applications. The operative word being “applied”, meaning not necessarily purely scientific/academic but moreso along the lines of practicality/efficiency.
Relating back to positivity, perception and soft power. With the help of a partner (alot of help!), we conducted a brief study on how positive vocal tone can impact the perception of greater confidence/certainty. In particular..
high intensity and positive non-verbal cues of affective state in the form of tone, will contribute to investor forecasts of higher confidence and price – signified by higher investment allocations.
This is by no means meant to be a full scientific/academic study, but it is a practical/efficient observation of information that one can make inferences from.
Financial Statement Analysis
Nutshell: Understanding the uses and limitations of both financial statements and the traditional methods used in analysing them.
Keywords: value chain analysis, revenue recognition methods, classification of income, asset quality index, hidden assets and liabilities, off balance sheet financing, FIFO inventory valuation, LIFO inventory valuation, common size financial statements, metrics of earnings quality, alternative metrics for profit, capital asset pricing model, valuation by multiples, discounted cash flow valuation, Edward Bell Ohlson valuation, depreciation characteristics, betterments, pension liability types, asset impairment, dividend valuation model, metrics of liquidity risk
Favourite Takeaway: Financial statements are documents constructed for management’s benefit. To gain meaningful perspective, one must determine management’s objective and the appropriate techniques needed to rectify accounting decisions.