Fully Franked Issue I 2014

FULLY FRANKED Issue 1 2014

Acknowledgements

Editor in ChiefBotong Cheng

EditorsJeremy Chang

Lee Kadish

Design and Covers Karen Pan

WritersAaron Bassin

Angus BowmerJeremy ChangBotong Cheng

Andrew Gaffney Lee Kadish

Julia Lee (Bell Direct)

Sponsors (UNIT is proudly sponsored by)

ABC BullionBell DirectBloomberg

Citi Eclipse Trading

FINSIAGFIN Group

Intelligent InvestorMacquarie

Propex Saxo Capital Markets

UBS

Letter from the EditorWelcome to the first edition of Fully Franked of 2014. We’ve been working very hard to get this issue out on time for the UNIT Stock Pitch Competition, where many of you will be reading this right now. In this issue Julia Lee from Bell Direct, tells us how to gain an inside edge on the market, we demystify Investment Banking and take a look at history, by examining the first ever speculative bubble- The Tulip Bubble. There is much more in store for you in the following pages and we hope you enjoy reading it as much as we enjoy putting it together.

A big thanks to everyone involved with this publication as well as UNIT. The publications team has big plans for this year so look out for our projects in the coming few months!

Botong Cheng

4 Getting an Edge in the MarketJulia Lee

8 Generating Investment IdeasLee Kadish

10 An Inside Look into the Life of Elon MuskBotong Cheng

12 A Simplified Summary of How the Economy WorksJeremy Chang

14 China’s Minsky MomentAndrew Gaffney

18 Investment Banking DemystifiedAngus Bowmer

22 Market ManiaAaron Bassin

FULLY FRANKED Issue 1 2014

contents

GETTING AN EDGE IN THE MARKET

Julia LeeEquities Analyst, Bell Direct

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When it comes to investing, there are many gurus and methods that endorse a particular way of thinking for success. There are also strategies that have stood the test of time.

After Fama & French (1996) and Carhart (1997), the standard has become to adjust results in the market for the known effects of value, momentum and size. So what are these effects of value, momentum and size and how can it help your long term portfolio strategy?

Value effectNumerous academics have published studies investigating the effects of buying value stocks including studies from McWilliams, Midder and Widmann, Nicholson, Dreman and Basu. These studies have consistently found that value stocks outperform growth stocks and the market as a whole.

Dreman and Berry in their paper “Overreaction, Underreaction, and the Low P/E ratio effect” talk about the value effect being due to the market’s tendency to overreact to recent information and discount older information.

One way to implement this strategy is to examine the performance of simple value strategies, such as buying:

• Low P/E ratio stocks• Low price-to-cash-flow ratio stocks or• Low price-to-book ratio stocks

Momentum effectMomentum has been found to work across different markets including the US, UK and emerging markets. It tends to be strongest in small cap stocks and stronger in stocks with

bad news. (Hong H Lim, Stein J C “Bad news travels slowly: size, analyst coverage, and the profitability of momentum strategies”)

So what is a momentum strategy?

A momentum strategy looks to make money on the high probability that existing trends in the market will continue. That is a stock that is trending higher will most likely continue to move higher and conversely a stock that is moving lower is most likely to continue to trend lower. Size effect (Banz)The impact that the size of the company has on returns is explained by ‘size effect’. This is where small cap stocks in general tend to outperform larger cap stocks and the market.

The size effect was first published by Banz who looked at performance returns from 1926 to 1980. He divided the market into ‘quintiles’, where each quintile holds 20%, or one fifth of companies across the market. He found that the smallest quintile, i.e. those companies with the smallest capitalisation, outperformed larger quintiles and indeed the market as a whole.

However, the study was based on US stocks and not Australian stocks. So if you are investing in US stocks, consider that US small cap stocks tend to outperform. In Australia, once you account for the impact of dividends, large cap stocks have outperformed from 1994-2014 whereas the small ordinaries have underperformed.

“studies have consistently found that value stocks outperform growth stocks and the market as a whole”

“In Australia... large cap stocks have outperformed from 1994-2014 whereas the small ordinaries have underperformed”

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And here are the results:

Putting it into practiceBell Active members can access strategy builder under the research and tools tab which allows them to search the market for:

• Value indicators: price to earnings, price to book, price to cash flow, price to sales

• Size indicators: market capitalisation • Price momentum: price performance

over 5 days, 4 weeks, 13 weeks, 52 weeks or year to date

• Earnings momentum: EPS growth, cash flow growth, revenue growth

The strategy builder tool will also allow you to back test your selection of stocks so you can identify if your criteria would have worked over the last 5 years.

Keep in mind that this is not a guaranteed method of investing but a starting point. From here, further research is needed to see whether the companies are investment quality and what factors would drive a rise in share price. Happy investing!


Generating Investment Ideas BY LEE KADISH

As a newcomer to the world of equity research and analysis you may find yourself in a situation where you don’t know where to start. You may only be aware of big businesses such as Woolworths, Telstra or BHP and find yourself asking the question “how does one identify companies worth conducting further research on?” This article seeks to answer that question by outlining the various sources of information that can be used to generate investment ideas.At this point it must be noted that the sources identified in this article are only one step of the investment process. After identifying a potential equity investment an investor must conduct thorough research to ensure that the investment is worthwhile. It is this process of diligent research that separates a prudent investor from a speculative gambler.

News WebsitesAs an investor is it critical that you keep up to date with the news, particularly the

financial news. To be a successful investor a sound understanding of the macroeconomic environment is essential. This will provide you with the tools to make a ‘top down’ judgement on which industries are likely to prosper in the future. Many news websites also report on specific companies and this can be a source of new investment ideas. Some examples of news (and other) websites that might be worth following include:

• The Australian Financial Review – www.afr.com

• The Sydney Morning Herald – www.smh.com.au

› See their “Under the Radar” section• Yahoo Finance - http://au.finance.yahoo.

com/• Business Spectator - www.

businessspectator.com.au/• The Motley Fool - http://www.fool.com.

au/ › This is targeted specifically at less


experienced investors and has a wealth of investment ideas. Ensure that you do your own research!

• The Bull - www.thebull.com.au• Roger Montgomery - http://

rogermontgomery.com/• Whilst not actually a website watching

television shows such as “Your Money, Your Call” on the Sky Business channel will often identify specific companies that may warrant further research.

Coat-tailingThis refers to the process of replicating the investment strategies of another investor (usually famous or an institutional investor) and can be an excellent source of investment ideas. This this article will just focus on one particular way which explains how to coat-tail a listed investment company. For simplicity, a listed investment company may be thought of as a managed fund which trades on the ASX. Listed investment companies publish a list of their largest investments and also announce to the ASX when they change their substantial holdings.

The investments made by a listed investment company are being made by investing professionals and may be worth conducting further research to determine if they represent a valuable addition to your personal portfolio. Keep in mind that these listed investment companies may be investing in a specific company as part of a much larger investment strategy, so ensure that you conduct your own research!Some examples of listed investment companies include:

• Wilson Asset Management - www.wamfunds.com.au

› Three listed vehicles – the ASX codes are WAM, WAX & WAA

• Contango Group - www.contango.com.au

› ASX code: CTN• A list of LICs can be found here: http://

indexfundinvestor.com.au/list-of-asx-listed-investment-companies/

Stock-ScreenersA stock screener is a software tool that will enable you as an investor to filter stocks based on criteria. Different stock screeners offer different filtering capabilities however some popular examples of filtering criteria are Price/Earnings, Return on Equity or EPS Growth. Commsec has a very comprehensive free stock screener, however you will need a Commsec account (which is free to open). Many other stock screeners exist and can be located through a Google search.

Other• A quick Google search on an industry

will help you to find a list of companies in that industry. Some of these companies might be worth researching and potentially even investing in. For example a list of consumer discretionary stocks can be found here: http://www.theage.com.au/business/markets/indices/share-listing/XDJ/sandpasx-200-consumer-discretionary-sector

• Forums such as Hot Copper can be a source of generating company ideas however one must exercise extreme caution as most sources on this website are thoroughly unreliable. http://hotcopper.com.au/


Every generation has a small group of people who completely revolutionise the way the world operates. Henry Ford forever changed transportation. Steve Jobs and Bill Gates brought the power of personal computing into everyday life. As we move deeper into the 21st century, an early contender for our generation is Elon Musk. Although still a relatively unknown name, he arguably has the most potential of any person today to make a lasting impact on the rest of the 21st century.

BACKGROUNDBorn and raised in South Africa, Musk migrated to Canada at the age of 17 and then later to America where he attended college at Univeristy of Pennsylvania and obtained a double degree in Physics and Economics. Just two days into a graduate program at Stanford, Musk dropped out to pursue his first web company, Zip2, which helped newspapers such as the New York Times move to online media. Zip2 was later acquired by Compaq for $334 million of which Musk received $22 million.

He then cofounded X.com, an online financial

services company. X.com merged with another company Confinity to become Paypal. When Paypal was acquired by Ebay for $1.5B, Musk received $180 million. He then poured this money into three ventures: SpaceX, Tesla Motors and SolarCity.

SPACEXSpaceX, which is short for Space Exploration Technologies, is a space transport company with the stated goal of reducing the cost of space travel to enable the colonisation of Mars. It is one of only four entities that has launched a capsule into space and safely brought it back to earth. The other three entities are the United States, Russia and China.

Musk is the CEO and Chief Designer for SpaceX and his main goal is to develop fully and rapidly reusable rockets in order to drive down launch costs. He often remarks on how expensive air travel would be if we had to dispose of the plane after each flight. In his mind, the same principle applies to rockets. His company has already made advances in reusability with the Grasshopper rocket, which is able to achieve lift-off and land

AN INSIDE LOOK INTO THE LIFE OF

ELON MUSK BY BOTONG CHENG

“The competitive environment for SpaceX can best be described as a small kid fighting a bunch of sumo wrestlers.”


back at its launchpad.

The competitive environment for SpaceX can best be described as a small kid fighting a bunch of sumo wrestlers. Its main commercial competitor is United Launch Alliance, a joint venture between military industrial heavyweights Boeing and Lockheed Martin. Its other competitors consist of the Chinese, Russian and European governments. SpaceX makes its money by sending private satellites into space as well as resupplying the International Space Station for NASA. SpaceX stands at the junction of two great eras in spaceflight. Spaceflight is slowly moving away from the domain of governments towards private companies and SpaceX is there leading the charge.

TESLA MOTORSTesla Motors is Elon Musk’s other major company. Its main goal is to accelerate the transition towards fully electric vehicles. It manufactures and sells all electric vehicles such as the Tesla Roadster, a fully electric sports car. Tesla’s strategy has been to sell high margin, low volume cars such as the Roadster which cost over $100K USD. It takes these profits and reinvests in designing a car with lower prices at higher volumes. It has released the Model S, a luxury sedan priced around 50-60K, which has been voted the Motor Trend’s Car

of the Year 2013 (Essentially the Oscars of the Automotive Industry). It hopes to release a true mass market car, codenamed Bluestar, in 3-4 years priced around the 30K at much higher volumes. But not everything has been rosy for this entrepreneur. SpaceX’s first 3 launches failed to reach orbit. During 2008, Musk was forced to plough all his remaining capital into Tesla to ensure it could make payroll. In his own words, he was “borrowing money for rent” throughout the second half of 2008. In the middle of September 2008 however, financial markets around the world imploded. It appeared that all 3 of Elon Musk’s companies would fail and he would be bankrupt. He fired the then CEO of Tesla and took on the reigns himself and was helped by venture funding from his old colleagues at Paypal who were now partners at Founders Fund. All 3 companies survive to this day and look to be thriving after emerging out of the financial crisis.

Elon Musk’s net worth has skyrocketed from $3B this time last year to $9B currently. However, money takes a back seat to his ambitious goals such as “making humanity a multi-planetary species.” Hopefully he can achieve these grandiose goals and in the future high school leavers will be talking about taking a gap year on Mars.

Ray Dalio is the founder of Bridgewater Associates, a hedge fund managing approximately $120 billion in global investments. He has developed a simplified framework for understanding how the economy works. You can find the video by googling ‘Ray Dalio How the Economic Machine Works’. We have attempted to distil his points into a very concise form.

An economy can be broken up into a set of transactions between people. These transactions represent exchanges of money, for goods or services between two parties. Money can come in the form of currency, as well as credit. A dollar spent by one person represents a dollar of income for another person. Economic activity in a country is driven primarily by three factors: productivity, the short term debt cycle and the long term debt cycle. This simplified approach does not take into account the

participation rate, or population growth, each of which are demonstrable drivers of growth. Nonetheless, understanding the role of credit in relation to spending is critical in order to understand the economy.

In the short term, people who wish to purchase an item which they cannot afford will choose to borrow. Conversely, lenders with available funds wish to earn a return in the form of interest. The extent to which borrowing and lending activity occurs is influenced by the cost of borrowing, or interest rates. This brings to light the role of the central bank in the economy, as it is responsible for controlling the money supply in an economy. When rates are low, people borrow more, and when rates are high, people borrow less. When people spend more, prices of goods and services go up, which is referred to as inflation. When people spend less, prices of goods and services go down,

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BY JEREMY CHANG

“Economic activity in a countryis driven

primarily by three factors:

productivity, the short term debt cycle and the

long term debt cycle.”

which is referred to as disinflation.

The central bank’s aim is to moderate inflation, such that the economy remains as close to full employment as possible, that leads to stable economic growth. If credit growth is strong, inflation is likely to accelerate, which the central bank will respond to by raising interest rates. As growth in spending and incomes begins to slow, the central bank will stimulate the economy once again by lowering interest rates. This ebb and flow characterises the short term debt cycle.

However, because of greed and over-optimism that debts can be repaid, the total debt burden tends to grow over time. This characterises the upswing in the long term debt cycle. At some stage, debt grows to an unsustainable level and cannot be paid back. At this point, a deleveraging is required. Debt is far greater than total income. Action must be taken in order to undo this. Although interest rates will have been lowered to zero by the central bank in the hope of stimulating economic activity, credit markets will have become illiquid as lenders are unwilling to lend, and borrowers are unwilling

to increase their leverage.

This can be brought about through four methods: 1. Reducing spending2. Debt restructuring, 3. Wealth redistribution4. Printing money

Reducing spending, or austerity, results in less debt being created. However, as one man’s spending is another’s income, this also reduces income. Although debt is reduced, this is disinflationary for the economy.

Debt reduction leads to lenders accepting smaller repayments, extending repayment periods, or lowering the interest rate charged on debt. This too, is disinflationary as income is lost.

Wealth redistribution from the more wealthy to the less wealthy can lead to social tension, and may result in disinflation if unrest leads to lower spending and national income.

In contrast, when the central bank prints money, this is inflationary. For it to be effective however, it must be performed in sync with the activities of the central government. This is because the central bank is only able to purchase financial assets as a means of creating new money. By purchasing bonds from the central government, the government can allocate money to unemployed workers and finance other spending initiatives to stimulate economic activity.

A balance must be struck between the disinflationary and inflationary strategies for deleveraging however. If done correctly, the economy can grow at a slow, but steady pace and the level of debt will be reduced back to a sustainable level but may take a number of years to play out.


CHINA’S MINSKY

MOMENTWill the boom end with a bang or a whimper?

Andrew GaffneySecretary of the University of Sydney

Political Economy Society


he Global Financial Crisis of 2007-8 has been christened a ‘Minsky moment’ by

macroeconomists who have rediscovered Hyman Minsky’s Financial Instability Hypothesis. According to this narrative, low interest rates and low standards of creditworthiness fuelled the housing market bubble in the United States. When it finally burst in 2008, it sent the US and European economies spiralling into a vicious debt-deflation cycle. While most of the developed world is stagnating as a result, China continues to grow, due in large part to the ability of the Chinese government to ‘command’ finance, facilitating a rapid expansion of credit by the People’s Bank of China (PBoC) and an increase in the investments of state-owned enterprises (SOEs) to compensate for the fall in external demand. Since 2013, however, Chinese growth has slowed while credit continues to expand at unprecedented rates. This has raised fears of financial instability. Is China on the brink of its very own ‘Minsky moment’?

What is a Minsky Moment?Minsky perceived the economy as fundamentally a financial system, in which the expansion of credit drives economic growth by financing new investments and consumption. ‘Upward instability’ is the expression used by Minsky to describe the growth in a financialised economy, as it proceeds from conditions of ‘hedge finance’ –

where most economic agents are capable of meeting their cash commitments– to a state of ‘fragile finance’, as agents take on more debt to finance riskier investments. Financial fragility exists when a significant portion of agents find themselves in a ‘Ponzi’ position where not only the principle on their debts, but also the interest payments must be rolled over by borrowing. As the cash commitments of each economic unit depend on the commitments of every other

unit, the tendency towards ‘fragile finance’ increases the likelihood of widespread failure to meet commitments. A ‘Minsky moment’ is an event that precipitates this failure; where ‘Ponzi’ units find themselves unable to roll over their debts and are forced to sell off financial assets at any ‘firesale’ price to survive. When the US housing bubble burst, and the price of residential mortgage-backed securities (RMBS) plummeted, a debt-deflation scenario followed, as cascading financial asset prices and rising market rates of interest put a break on

consumption expenditure and investment, respectively.

So is China in a similar position today? If we look at financial aggregates, the credit boom in China is unprecedented in scale. In 2008, before the PBoC opened the floodgates for credit, the total assets of the banking sector were US$11 trillion. It is now worth US$25 trillion, the increment being more than the total worth of the US commercial banking sector. Total credit has expanded by more than 30% of GDP each year since the GFC. Total debt is now in the order of 210% of GDP. Worryingly, almost a third of this credit expansion has been ‘off-balance-sheet’, as non-bank financial institutions flooded the market with ‘wealth management products’ (WMPs) – essentially high-interest deposit accounts. The WMPs allow these ‘shadow banks’ to circumvent the stringent regulations imposed by the PBoC, lending to risky customers, especially property developers and local governments. While the PBoC can slow bank lending to certain sectors by adjusting reserve requirements, shadow banks operate beyond its reach, entering gaps in the market that

T

“Is China on the brink of its very own ‘Minsky moment’?”


have been vacated by state-owned banks.

A Housing Bubble?The most obvious point of comparison between the US in 2007 and China today is the rise in urban property prices. Observers fear that speculation is driving this boom. The property price to median income ratio of cities like Shenzhen has reached 25:1, in Los Angeles in 2007 it was only 12:1.

Due to the rapid rise in property prices, many have been pushed out of the housing market. In seek of comparable returns, they have resorted to investing in WMPs. The shadow banks then channel these savings back to increasingly risky property developers, facilitating a vicious circle of speculation. They also finance local governments, whose debt has risen unsustainably to 25% of GDP.

Bang or Whimper?All of this evidence would suggest increasing financial fragility and potentially even a ‘Minsky moment’ of unparalleled severity. But a number of mitigating factors need to be taken into account. Firstly, the nature of rising property prices in China is fundamentally different to that of the subprime crisis. China is an industrialising economy, and as it undergoes the structural changes necessary to transform an agricultural economy into an urban, industrialised one, price distortions are inevitable. This is particularly so in housing, as hundreds of millions of people

move to the cities over the next few decades.

Secondly, fears that China’s growth has been fuelled by debt are exaggerated. From 2000-2007, consumption in the US rose even as real wages stagnated, due in large part to the borrowing of households and the wealth effects of rising financial asset prices. By contrast, the rising share of consumption in Chinese GDP since 2008 is attributable to rising – not stagnating – real wages.

Consumption remains low as a share of GDP because most investment is state-driven and incredibly large. This means that even in the event of a ‘Minsky moment’, investment would continue unabated, as in the GFC.

Thirdly, Chinese private debt is denominated in RMB. This means that the central bank can always act as lender of last resort. In June 2013 the Chinese government engineered its own ‘mini-Minsky’ moment by draining liquidity from the market to slow the pace of credit expansion. The interbank

interest rate peaked at 13%, up from 4%. It was quickly able to remedy the situation with targeted liquidity injections in financial markets. This signified two things: (1) that the government is serious about reining in credit; and (2) that it has the means to combat a financial crisis.

The PBoC is gradually allowing interest rates to rise, in order to divert savings away from shadow-banking institutions back into the formal banking system. While this may reduce

financial fragility in the medium-to-long-term, it has negatively impacted growth. Falling growth rates are also destabilising; By hampering the viability of existing investment projects it may even trigger a ‘Minsky moment’. If the Chinese government wants to reduce financial fragility without threatening growth, it must continue to allow real wages to rise, as well as spend more to fill the speculative demand gap. If the government follows this course, it is possible that the housing bubble will deflate not with a bang but a whimper.


WHAT IS AN INVESTMENT BANK?An investment bank (or ‘IB’ for short) is a provider of innovative financial products and services to corporations, high net worth individuals and the government.

HOW DOES IT DIFFER FROM AN “ORDINARY BANK”?An investment bank is not the same as an ‘ordinary’ bank that we typically use throughout our daily lives. An ‘ordinary’ bank, like the Commonwealth Bank, Westpac or one of the other ‘Big 4’ banks are referred to as retail or commercial banks within industry parlance. These types of banks are in the business of servicing retail customers, which include mums and dads, or everyday Australians and are involved mainly in two types of activities. Firstly, retail banks hold money in savings accounts for individuals and businesses, which are referred to as deposits, and allows them to form a depositor base. Secondly, these banks lend out money to customers so that they can finance the purchase of a house or a car. Essentially, by lending out these funds at a

higher interest rate than they pay on deposits, the bank is able to make a profit.

An investment bank is different however, as they do not have a depositor base and do not take deposits from individuals. You might be wondering, if investment banks don’t take deposits, then how do they make money and where do they get their money from? The answer is that instead of taking deposits, they raise funds in the international financial markets and specialise in providing off-balance sheet products and advisory services through which they generate fees.

WHAT TYPE OF WORK CAN YOU DO FOR AN IB?An investment bank is generally comprised of three areas that are known colloquially as ‘front office’, ‘middle office’ and ‘back office’ roles. Typically, front office work is revenue generating and involves direct interaction with clients, whilst middle office and back office roles are support functions and require minimal interaction with clients. Although

INVESTMENT BANKING DEMYSTIFIEDBY ANGUS BOWMER


they are very important, middle office and back office roles receive considerably less publicity, and include functions such as risk management, financial control, corporate treasury, corporate strategy, compliance, operations and technology.

This article will focus on the divisions located within the ‘front office’ of an investment bank.

In general, the ‘front office’ of an investment bank is comprised of three main areas: 1. Investment banking division

(IBD) – Yes, there is a division in an investment bank called the investment banking division. This may seem confusing and uncreative, but is the division where many young finance professionals want to start their careers.

2. Sales and Trading (S&T) – Multiple monitors, graphs, stock tickers, and rows of people sitting next to each - this is probably the section of the bank that is closest to what people describe as Wall Street. S&T is typically broken down into fixed income, commodities, currencies, and equities.

3. Asset Management - The management of a client’s investments. The investment bank will invest on behalf of its clients and give them access to a wide range of traditional and alternative product offerings that would not be available to the average investor.

The large global banks typically offer all three services, with smaller banks usually focusing more on the

investment banking division side covering advisory and mergers and acquisitions (M&A). The investment banking division (IBD) is generally the most popular so we will focus our attention on this.

THE INVESTMENT BANKING DIVISIONThe investment banking division is sometimes referred to as corporate finance and is broadly split into 2 sectors, products and industries. The purpose of both is to provide advisory services on transactions, mergers and acquisitions and to arrange and underwrite financing for these transactions.

Investment banking product groups comprise the following types of deals:

• Mergers and Acquisitions (M&A) – Advisory on sale, merger and purchase of companies

• Equity Capital Markets (ECM) – Advice on equity and equity-related products (IPOs, shares, capital raising, secondary offerings)

• Debt Capital Markets (DCM) – Advice on raising and structuring of debt to finance acquisitions and other corporate activities

• Capital Restructuring – Improving the structure of a company to make it more profitable or efficient

• Leveraged Finance - Issuance of high-yield debt to firms to finance corporate activities

Investment banking industry groups focus on one specific industry, such as Real Estate, Natural Resources, Healthcare, Energy etc.). These


industry groups perform all kinds of deals for firms within that sector. For example, the Natural Resources team will work with clients on raising debt, IPOs, acquisitions and so forth, but will only work with clients within that sector.

HIERARCHYThe hierarchy within the investment banking division is very well defined. Whilst the actual names of roles may differ between banks, it will follow this general pattern.

• Analyst – this is how you will enter banking once you have completed your degree. Typically the Analyst does all the ‘grunt’ work on projects such as valuing companies, creating models, putting together pitch books etc.

• Associate – you can break into investment banking as an Associate if you have been working in finance for several years or have done an MBA. It is also possible to be promoted to Associate directly from Analyst level after three years. Your work as an associate will be focused on co-ordinating the work of the Analysts to meet the expectations of the Vice President.

• Director/Vice President –Your role is to make sure that the work your Analysts and Associates produce is what your Senior Vice President and Managing Directors want. The work becomes more client relationship orientated.

• Executive Director/Senior Vice President – this is basically a mixture between Vice President and Managing Director. The focus is both on executing deals and client relationships.

• Managing Director – MD is the highest level you can achieve within a bank without becoming a group head or higher (CEO, CFO etc). Almost all of an MD’s time is spent on client relationships and sourcing new clients.

WHAT’S SO GOOD ABOUT IB?So what is so attractive about working for an investment bank? Why does everyone I meet seem to want to work for the likes of Goldman Sachs or J.P Morgan? Well I have broken down the

perks into three main categories.1. Professional Development & Training: The

large investment banks (often known as bulge bracket banks) provide excellent training and professional development. Working at an investment bank will enable you to learn a lot in your field, and generally very quickly.

2. Remuneration: Simply put, working at an investment bank pays very well.

3. Prestige: There is a certain allure associated with working at an investment bank. These are the main players on Wall Street, the heart of finance. There is a sense that if you work for one these banks, you’ve made it in the world of finance.

WHAT’S THE CATCH?While the perks sound pretty good, there is generally a cost associated with the good pay, prestige and great professional development. The two big costs of working at an investment bank are:

• Work-related Stress: The work that you will be doing will be very stressful, with deadlines to meet and a lot of work to do. The fast-paced world of finance means that you will need to be on top of your game at all times to survive in this industry.

• Hours: Very similar to work stress is the amount of hours you will have to work. It is not uncommon to work 80-100 hours a week as an Analyst. That equates to 9am-midnight, 6 days a week! While it’s not always like that, especially as you become more experienced and more efficient at your work, you can bet your life you will involves very long hours consistently for at least the first few years.

Often people burn out and the turnover of employees within the first few years can be quite high. So you must really love finance and want to be around it constantly in order to survive.

“There is a certain allure associated with working at an investment bank. These are the main players on Wall Street, the heart of finance.”


ver since the dawn of man, fear and greed have played a major role in the human experience. Nowhere else has this been

more apparent than within the realm of the financial markets.

It all started in 1593, when tulips were exported from Turkey and introduced to the Dutch. This soon led to a historical period which is commonly referred to as ‘Tulip Mania’, and is considered to be the first documented speculative bubble. A speculative bubble refers to a period of high trading volume in a particular asset or asset class that results in market values that are considerably higher than their true

value. Traditionally, market participants have two primary tools at their disposal to guide them in making their investment decisions. These are known as Fundamental and Technical Analysis.

FUNDAMENTAL ANALYSISAdvocates of the fundamental analysis approach to analysing investments believe that all assets have an underlying value or worth, known as an intrinsic value. This value

is determined by an analysis of the underlying characteristics of an asset, a method referred to as a ‘bottom-up’ analysis. The characteristics assessed include qualitative and quantitative factors, such as earnings or the quality of management. The value determined may or may not be the same as the current market price. When market prices fall below (or rise above) this intrinsic value, a buying (or selling) opportunity arises as this divergence should eventually be corrected.

TECHNICAL ANALYSISBy analysing statistics generated by market activity (such as price and volume) a market

E


participant can attempt to forecast future prices. However, it is behavioral finance that is crucial to predicting the direction of future changes. Technical analysts believe that the market is only 10 percent logical and 90 percent psychological.

John Maynard Keynes, a prominent economist coined the term “castle in the air” to explain the irrational behavior of investors. In Keynes’ eyes, investors have a tendency to metaphorically build ‘castles in the air’, or focus on the possibility of a future price rise rather than appraising the intrinsic value of a security. When purchased in substantial volumes, the prices of securities tend to increase. Investors who buy or sell based merely on the basis of trends in security prices would seek to establish a position before other investors, which can quickly lead to a self-perpetuating surge in stock prices. As best as the castle-in-the-air theory explains speculative splurges, predicting the behavior of unpredictable investors is a dangerous game. In essence, proponents of technical analysis aim to beat the crowd by trading investments which are most vulnerable to mass psychology.

TULIP MANIADuring Tulip Mania, roughly from 1634 to 1637, it was the rarity of the new flower that made it broadly sought after. Many of these tulips succumbed to a nonfatal virus known as mosaic, causing “flames” of colours to appear on the petals. The Dutch highly treasured these infected bulbs, and in no time popular taste dictated that the more bizarre a bulb, the greater the value of owning it.

Slowly, tulip mania began to set in. Everyone began to deal in bulbs, essentially speculating on the tulip market, which was believed to have no limits. It was hard to resist the temptation; few Dutchmen did. Even everyday common folk started to exchange their private properties, such as land, jewels and furniture to acquire the bulbs that would make them even wealthier. Bulb prices reached astronomical levels. A single flower exceeded the annual income of a skilled worker and became traded on the London Stock Exchange.

The tulip bulb prices during January of 1637 increased 20 fold. However, the next month prices plummeted at a rapid rate, making them worthless. As happens in all speculative crazes, prices got so high that investors began to liquidate their tulip bulbs to realize profits. Soon others followed. There was a panic in which the realisation became crystal clear; tulips were not worth the prices they paid.

It can be hard to understand why market manias occur. It seems strange to value tulips so much that you would sell your house in exchange for one. But it is not that different from other market manias. In these markets, investors start to act irrationally. They often begin to invest because they see other people making money.

History has taught us that quick increases in prices are rarely followed by a gradual return to stable prices. It is not hard to make money in the market. Rather it is difficult to escape the excitement of throwing away capital on easy and quick “get rich” speculative binges.

“Technical analysts believe that the market is only 10 percent logical and 90 percent psychological”

“A single flower exceeded the annual income of a skilled worker and became traded on the London Stock Exchange”

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Fully Franked Issue I 2014