What I’ve Learned This Week: #AllFactorsMatter

I’ve stumbled upon a bunch of good research this past week or so. Everything from the evolution of Factor Investing to how much our current society owes to Rome conquering the Phoenicians. As always, I encourage anyone to send me their own research they’ve conducted or have found interesting. I’ll read it all!

No Pain, No Premium by Corey Hoffstein

The idea of risk v. reward should be pretty well seared into your psyche by the time you graduate, assuming you’ve gone for finance. For those of you that didn’t, the higher your risk, the higher your expected reward. Corey goes through the trenches on this one and really puts everything in layman terms.

Similarly, when we buy stocks, we are really trading a certain cashflow today (the price) for a stream of uncertain cash flows in the future.  The discount between the price we pay and the net present value of future cash flows is the premium we expect to earn.  And when we sell stocks, we are effectively paying that premium.

His work goes way more in depth and the whole reason I am including it, as well as the other pieces linked, is not for me to simply summarize the information but for YOU to read THEIR work and learn something…and for me to go back and learn some more too.

Activism Mergers by Nicole M. Boyson, Nickolay Gantchev, and Anil Shivdasani.

As it turns out, firms that are the targets of activism have a substantially higher probability of merger activity. That may sound obvious, but there’s more. When an activist hedge fund intervenes and then a third-party proposes an acquisition, the announcement returns, acq. premia, and rates of completion are substantially higher. However, if it is an activist hedge fund doing the acquisition proposal, the probability of completion is lower than those without activists involved. The paper goes way more in-depth and I encourage you all to read it.

Factor Investing is More Art, and Less Science by Wes Gray

This was great to find when I did. I highly recommend all Finance students read this around the time they learn about the Capital Asset Pricing Model (CAPM). Through this I learned that there is a lot I do not know and it pretty much busted things wide open.

The financial economics profession was suffering and needed answers. First, their cherished CAPM model, which was elegant and grounded in rational economic theory, was no longer believable on empirical grounds. And now there were the three- and four-factor models highlighting that the stock market is more confusing than originally thought. Asset pricing theorists needed to take on the challenge of putting more rigor around factor models to try understand why, for example, size and value, were able to describe stock market movements.

I started having discussions with my professors about asset pricing and came away with much more than I would have if I didn’t have this paper. If you want a good overview of the evolution of Factor Investing and how we got to every factor imaginable, this is for you #AllFactorsMatter.

EBITDA, EBITDA, EBITDA…that’s all, folks! by Doug Pugliese

I must have read this one at least 5 times. The way it reads is a nice change from the typical finance ANYTHING. There’s nothing I can say to summarize this properly just read it.

Like sausage, EBITDA is made in a grinder. It begins when a handful of ninjas, called a Deal Team, puts together a financial model for a company. From the far corners of the world, a company draws material inputs and talent, turning them into products or services. The deal team brings those numbers together in a financial model and begins to drape them in the Narrative. EBITDA always has a Narrative. Narratives are pitched, like horse shoes.

EBITDA is slave to Investment Bankers. The financial world is ruled by this sacred number. Learn the truth, don’t be a sheep. Learn from Doug.

What If Carthage Won the Punic Wars by Mario Bou Debes

Not everything I read is finance. To my knowledge, much of Western Civilization can be attributed to the Roman Empire. But what if Hannibal had succeeded in conquering his mortal enemy? This is a big “what if” but it’s a thought provoking piece nonetheless.


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