Investing 101

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Investing 101
Presented by

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Sponsored by
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Todays Topics

• Investment Industry Overview
• Types of Investing
• Career Paths
• Sample Investments
• Basics of Investing

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Industry Overview

• Venture Capital
• Oak, Sequoia, Kleiner Perkins
• Equity/Debt (stocks/bonds)
• Citadel, Cerberus (hedge funds) Fidelity,
  Vanguard (mutual funds)
• Private Equity
• KKR, Blackstone, TPG

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Investment Types and Company Lifecycle
Launches
Goes Public
Growth slows
Stage in Company Life Cycle
Public Company
Mature Company
Start-up
Venture Capital
Equity/ Debt
Private Equity
Typical Investment Type
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Venture Capital
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Venture Capital

• Typical Entry strategy
• Acquire stake in young, start-up firm
• Value added
• VCs provide funding, networking, and advice to
  the companies they invest in
• Typical Exit strategy
• Take portfolio companies public or sell them to
  other companies
• Example
• Bessemer Venture Partners invested 1-2 million
  in Skype, and when Skype was acquired by eBay,
  Bessemer made a 100-fold return on its investment

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Top Venture Capital Firms

• Sand Hill Road, Menlo Park, CA
• Accel Partners
• Crosspoint
• Kleiner Perkins Caulfield Byers
• Oak Investment Partners
• Sequoia
• Softbank

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Debt/Equity Investing
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Debt/Equity Investing

• Typical Entry strategy
• Acquire position in stock or bonds of company
• Value added
• Investors can lobby companies to take measures to
  raise stock prices, such as share repurchases or
  divestitures
• Typical Exit strategy
• Unwind position in stock or bonds of company
• Example
• After doing comprehensive research on AutoZone,
  ESL, a hedge fund, concludes AutoZone is
  undervalued and buys shares in the company. In
  time the market comes to realize that the company
  is indeed undervalued and ESL sells its AutoZone
  shares after earning a 30 return.

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Top Debt/Equity Investors

• Hedge Funds
• Cerberus
• Citadel
• ESL
• SAC Capital
• Silverpoint (debt investing)
• Mutual Funds
• Fidelity
• Vanguard

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Debt/Equity Investing
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Private Equity

• Typical Entry strategy
• Borrow money to buy of a public companys shares
  and take it private again, in a Leveraged Buyout
  (LBO)
• Value added
• Improve companys operations through
  restructuring, divestitures, or refinancing
• Typical Exit strategy
• Take company public again or sell to other firm
• Example
• Nelson Peltz buys Snapple from Quaker Oats for
  300 million, turns company around within a few
  years, and sells it for 1.5 billion

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Top Private Equity Firms

• Bain Capital
• Carlyle Group
• Kohlberg, Kravis, Roberts (KKR)
• Texas Pacific Group (TPG)
• Thomas H Lee Partners
• Warburg Pincus

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Investing Basics

• Sponsored By Bank of America
• Presented by WIC WUFC

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Whats the Investment Universe?

• Stocks
• Bonds
• Derivatives
• Real Estate
• Commodities
• Currency

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Types of Analysis

• Fundamental
• A method of evaluating a security by attempting
  to measure its intrinsic value by examining
  related economic, financial and other qualitative
  and quantitative factors. 
• Value of a firm Discounted value of future cash
  flows
• Technical
• A method of evaluating securities by analyzing
  statistics generated by market activity, such as
  past prices and volume. Technical analysts do not
  attempt to measure a security's intrinsic value,
  but instead use charts and other tools to
  identify patterns that can suggest future
  activity.

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Where to Begin?

• Develop a differentiated view
• Top Down
• View on the economy or a sector
• Drill down into individual stocks, or trade a
  basket of companies
• Bottom Up
• Start with a company specific story
• Investigate the firms prospects based upon micro
  factors

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How to Evaluate a Business

• Sustainable competitive advantages
• Barriers to entry, Substitutes
• Buyer and Supplier Leverage
• Technology, Infrastructure, Human Capital
• Cost structure
• Fixed vs. variable
• Margin Analysis
• Management
• Opportunities for growth

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Valuation Methodolgy

• Discounted Cash Flows
• Determine cost of firms capital
• Estimate the firms future cash flows
• Add back value of non-operational assets
• Multiples
• P/E (EPS/(r-g))
• EBITDA/EV
• (EBITDA-Capex)/EV
• ROA, ROIC
• Net Debt/EBITDA

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Derivatives

• Contract that Derives its value from another
  security
• Future - Obligation to exchange cash at some
  specified date for the underlying
• Option - Right but not the obligation to buy/sell
  (call/put) underlying at specified price
• Derivatives often allow for enhanced leverage

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Options Continued

• A multitude of strategies
• Understand Greeks (Delta, Gamma, Theta, Rho,
  Vega)
• Basic idea is that payoff is asymmetric