Investing 101Investing 101

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Today’s TopicsToday’s Topics

Investment Industry OverviewInvestment Industry Overview– Types of InvestingTypes of Investing– Career PathsCareer Paths– Sample InvestmentsSample Investments

Basics of InvestingBasics of Investing

Industry OverviewIndustry Overview

Venture CapitalVenture Capital– Oak, Sequoia, Kleiner PerkinsOak, Sequoia, Kleiner Perkins

Equity/Debt (stocks/bonds)Equity/Debt (stocks/bonds)– Citadel, Cerberus (hedge funds); Citadel, Cerberus (hedge funds);

Fidelity, Vanguard (mutual funds)Fidelity, Vanguard (mutual funds)

Private EquityPrivate Equity– KKR, Blackstone, TPGKKR, Blackstone, TPG

Investment Types and Investment Types and Company LifecycleCompany Lifecycle

VentureCapital

Equity/Debt

PrivateEquity

Launches Goes Public Growth slows

Start-up Public Company Mature Company

Stage in Company Life Cycle

Typical InvestmentType

Venture CapitalVenture Capital

VentureCapital

Equity/Debt

PrivateEquity

Launches Goes Public Growth slows

Start-up Public Company Mature Company

Stage in Company Life Cycle

Typical InvestmentType

Venture CapitalVenture Capital Typical Entry strategyTypical Entry strategy

– Acquire stake in young, start-up firmAcquire stake in young, start-up firm Value addedValue added

– VCs provide funding, networking, and advice to VCs provide funding, networking, and advice to the companies they invest inthe companies they invest in

Typical Exit strategyTypical Exit strategy– Take portfolio companies public or sell them to Take portfolio companies public or sell them to

other companiesother companies ExampleExample

– Bessemer Venture Partners invested $1-2 Bessemer Venture Partners invested $1-2 million in Skype, and when Skype was acquired million in Skype, and when Skype was acquired by eBay, Bessemer made a 100-fold return on by eBay, Bessemer made a 100-fold return on its investmentits investment

Top Venture Capital FirmsTop Venture Capital Firms

Sand Hill Road, Menlo Park, CASand Hill Road, Menlo Park, CA Accel PartnersAccel Partners CrosspointCrosspoint Kleiner Perkins Caulfield & ByersKleiner Perkins Caulfield & Byers Oak Investment PartnersOak Investment Partners SequoiaSequoia SoftbankSoftbank

Debt/Equity InvestingDebt/Equity Investing

VentureCapital

Equity/Debt

PrivateEquity

Launches Goes Public Growth slows

Start-up Public Company Mature Company

Stage in Company Life Cycle

Typical InvestmentType

Debt/Equity InvestingDebt/Equity Investing Typical Entry strategyTypical Entry strategy

– Acquire position in stock or bonds of companyAcquire position in stock or bonds of company Value addedValue added

– Investors can lobby companies to take measures to raise Investors can lobby companies to take measures to raise stock prices, such as share repurchases or divestituresstock prices, such as share repurchases or divestitures

Typical Exit strategyTypical Exit strategy– Unwind position in stock or bonds of companyUnwind position in stock or bonds of company

ExampleExample– After doing comprehensive research on AutoZone, ESL, After doing comprehensive research on AutoZone, ESL,

a hedge fund, concludes AutoZone is undervalued and a hedge fund, concludes AutoZone is undervalued and buys shares in the company. In time the market comes buys shares in the company. In time the market comes to realize that the company is indeed undervalued and to realize that the company is indeed undervalued and ESL sells its AutoZone shares after earning a 30% ESL sells its AutoZone shares after earning a 30% return.return.

Top Debt/Equity InvestorsTop Debt/Equity Investors

Hedge FundsHedge Funds CerberusCerberus CitadelCitadel ESLESL SAC CapitalSAC Capital Silverpoint (debt investing)Silverpoint (debt investing)

Mutual FundsMutual Funds FidelityFidelity VanguardVanguard

Debt/Equity InvestingDebt/Equity Investing

VentureCapital

Equity/Debt

PrivateEquity

Launches Goes Public Growth slows

Start-up Public Company Mature Company

Stage in Company Life Cycle

Typical InvestmentType

Private EquityPrivate Equity Typical Entry strategyTypical Entry strategy

– Borrow money to buy of a public company’s shares and Borrow money to buy of a public company’s shares and take it private again, in a Leveraged Buyout (LBO)take it private again, in a Leveraged Buyout (LBO)

Value addedValue added– Improve company’s operations through restructuring, Improve company’s operations through restructuring,

divestitures, or refinancingdivestitures, or refinancing Typical Exit strategyTypical Exit strategy

– Take company public again or sell to other firmTake company public again or sell to other firm ExampleExample

– Nelson Peltz buys Snapple from Quaker Oats for $300 Nelson Peltz buys Snapple from Quaker Oats for $300 million, turns company around within a few years, and million, turns company around within a few years, and sells it for $1.5 billionsells it for $1.5 billion

Top Private Equity FirmsTop Private Equity Firms

Bain CapitalBain Capital Carlyle GroupCarlyle Group Kohlberg, Kravis, & Roberts (KKR)Kohlberg, Kravis, & Roberts (KKR) Texas Pacific Group (TPG)Texas Pacific Group (TPG) Thomas H Lee PartnersThomas H Lee Partners Warburg PincusWarburg Pincus

Investing BasicsInvesting Basics

Sponsored By Bank of Sponsored By Bank of AmericaAmerica

Presented by WIC & WUFCPresented by WIC & WUFC

What’s the Investment What’s the Investment Universe?Universe?

StocksStocks BondsBonds DerivativesDerivatives Real EstateReal Estate CommoditiesCommodities CurrencyCurrency

Types of AnalysisTypes of Analysis

FundamentalFundamental– A method of evaluating a security by attempting to A method of evaluating a security by attempting to

measure its measure its intrinsicintrinsic value by examining related value by examining related economiceconomic, , financialfinancial and other and other qualitativequalitative and and quantitativequantitative factors.  factors. 

– Value of a firm = Discounted value of future cash flowsValue of a firm = Discounted value of future cash flows

TechnicalTechnical– A method of evaluating securities by analyzing statistics A method of evaluating securities by analyzing statistics

generated by market activity, such as past prices and volume. generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. identify patterns that can suggest future activity.

Where to Begin?Where to Begin? Develop a differentiated viewDevelop a differentiated view

Top DownTop Down– View on the economy or a sectorView on the economy or a sector– Drill down into individual stocks, or trade a Drill down into individual stocks, or trade a

basket of companiesbasket of companies

Bottom UpBottom Up– Start with a company specific storyStart with a company specific story– Investigate the firm’s prospects based upon Investigate the firm’s prospects based upon

micro factorsmicro factors

How to Evaluate a BusinessHow to Evaluate a Business

Sustainable competitive advantagesSustainable competitive advantages– Barriers to entry, SubstitutesBarriers to entry, Substitutes– Buyer and Supplier LeverageBuyer and Supplier Leverage– Technology, Infrastructure, Human CapitalTechnology, Infrastructure, Human Capital

Cost structureCost structure– Fixed vs. variableFixed vs. variable– Margin AnalysisMargin Analysis

Management Management Opportunities for growthOpportunities for growth

Valuation MethodolgyValuation Methodolgy

Discounted Cash FlowsDiscounted Cash Flows– Determine cost of firm’s capitalDetermine cost of firm’s capital– Estimate the firm’s future cash flowsEstimate the firm’s future cash flows– Add back value of non-operational assetsAdd back value of non-operational assets

MultiplesMultiples– P/E = (EPS/(r-g))P/E = (EPS/(r-g))– EBITDA/EVEBITDA/EV– (EBITDA-Capex)/EV(EBITDA-Capex)/EV– ROA, ROICROA, ROIC– Net Debt/EBITDANet Debt/EBITDA

DerivativesDerivatives

Contract that “Derives” its value from Contract that “Derives” its value from another securityanother security

Future - Obligation to exchange cash at Future - Obligation to exchange cash at some specified date for the underlying some specified date for the underlying

Option - Right but not the obligation to Option - Right but not the obligation to buy/sell (call/put) underlying at specified buy/sell (call/put) underlying at specified priceprice

Derivatives often allow for enhanced Derivatives often allow for enhanced leverageleverage

Options ContinuedOptions Continued

A multitude of strategiesA multitude of strategies Understand Greeks (Delta, Gamma, Understand Greeks (Delta, Gamma,

Theta, Rho, Vega)Theta, Rho, Vega) Basic idea is that payoff is Basic idea is that payoff is

asymmetricasymmetric