Sunday, December 29, 2019

The Market is Huge! Revisiting the Big Market Delusion

For the high-profile IPOs that have reached the market in 2019, with apologies to Charles Dickens for stealing and mangling his words, it has been the best and the worst of years. On the one hand, you have seen companies like Uber and Slack, each less than a decade old, trading at market capitalizations in the tens of billions of dollars, while working on unformed business models and reporting losses. On the other, many of these new listings have not only had disappointing openings, but have seen their market prices drop in the months after. In September 2019, we did see an implosion in the value of WeWork, another company that started the listing process with lots of promise and a pricing to match, but melted down from a combination of self-inflicted wounds and public market scrutiny. While these companies were very different in their business models (or lack of them), they shared one thing in common. When asked to justify their high pricing, they all pointed to how big the potential markets for their products/services were, captured in their assessments of market size. Uber estimated its total accessible market (TAM) to be in excess of $ 6 trillion, Slack’s judgment was that it had 5 million plus prospective clients across the world and WeWork’s argument was that the commercial real estate market was massive. In short, they were telling big market stories, just as PC makers were in the 1980s, dot com firms in the 1990s and social media companies a decade later. In this post, we will start by conceding the allure of big markets, but argue that the allure can lead to delusional pricing. (This post is a not-so short summary of a paper that Brad Cornell and I have written on this topic. You can find it by clicking here.)

The Ingredients
There is nothing more exciting for a nascent business than the perceived presence of a big market for its products and services, and the attraction is easy to understand. In the minds of entrepreneurs in these markets, big markets offer the promise of easily scalable revenues, which if coupled with profitability, can translate into large profits and high valuations. While this expectation is not unreasonable, overconfidence on the part of business founders and their capital providers can lead to unrealistic judgments of future profits, and overly high estimates for what they think their companies are worth, in what I will term the “big market delusion”. That initial overpricing is a common feature of these markets, but results in an inevitable correction that brings the pricing back to earth. In fact, there are three pieces to this puzzle, and it is when they all come together that you see the most egregious manifestations of the delusion.
  1. Big Market: It is the promise of a big market that starts the process rolling, whether it be eCommerce in the 1990s, online advertising between 2010 and 2015, cannabis in 2018 or artificial intelligence today. In each case, the logic of impending change was impeccable, but the extrapolation that the change would lead create huge and profitable markets was made casually. That extrapolation was then used to justify high pricing for every company in the space, with little effort put into separating winners from losers and good from bad business models. 
  2. Overconfidence: Daniel Kahneman, whose pioneering work with Amos Tversky, gave rise to behavioral finance as a disciple described overconfidence as the mother of all behavioral biases, for three reasons. First, it is ubiquitous, since it seems to be present in an overwhelming proportion of human beings. Second, overconfidence gives teeth to, and augments, all other biases, such as anchoring and framing. Finally, there is reason believe that overconfidence is rooted in evolutionary biology and thus cannot be easily countered. The problem gets worse with big markets, because of a selection bias, since these markets attract entrepreneurs and venture capitalists, who tend to be among the most over confident amongst us. Big markets attract entrepreneurs, over confident that their offerings will be winners in these markets, and venture capitalists, over confident in their capacity to pick the winners. 
  3. Pricing Game: We will not bore you with another extended discourse on the difference between value and price, but suffice to say that young companies tend to be priced, not valued, and often on raw metrics (users, subscribers, revenues). As a consequence, there is no attempt made to flesh out the "huge market" argument, effectively removing any possibility that entrepreneurs or the venture capitalists funding them will be confronted with the implausibility of their assumptions.
The end result is that young companies in big markets will operate in bubbles of overconfidence, leading them to over estimate their chances of succeeding, the revenues they will generate if they do and how much profit they can generate on these revenues:

This does not mean that every company in the big market space will be over priced, since a few will succeed and exploit the big market to full effect, but it does mean that the companies will be collectively over priced. As is always the case with markets, there will be a time of reckoning, where investors and managers will wake up to the reality that the big market is not big enough to accommodate all their growth dreams and there will be a correction. In the aftermath, there will be finger-wagging and talk of "never again", but the process will be repeated, albeit in a different form, with the next big market.

Case Studies
We will not claim originality here, since the big market delusion has always been part of market landscapes, and big markets have always attracted overconfident start ups and investors, creating cycles of bubble and bust. In this section, we will highlight three high profile examples:

1. Internet Retail in 1999
The Big Market: As the internet developed and became accessible to the public in the 1990s, the promise of eCommerce attracted a wave of innovators, from Amazon in online retail in 1994 to Ebay in auctions in 1995, and that innovation was aided by the arrival of Netscape Navigator's browser, opening up the internet to retail consumers and PayPal, facilitating online payments. New businesses were started to take advantage of this growing market with the entrepreneurs using the promise of big market potential to raise money from venture capitalists, who then attached sky-high prices to these companies. By the end of 1999, not only was venture capital flowing in record amounts to young ventures, but 39% of all venture capital was going into internet companies.
The Pricing Delusion: The enthusiasm that entrepreneurs and venture capitalists were bringing to online retail companies seeped into public markets, and as public market interest climbed, many young companies found that they could bypass the traditional venture capital route to success and jump directly to public listings. Many of the online retail companies that were listed on public markets in the late 1990s had the characteristics of nascent businesses, with small revenues, unformed business models and large losses, but all of these shortcomings were overwhelmed by the perception of the size of the eCommerce market. In 1999 alone, there were 295 initial public offerings of internet stocks, representing more than 60% of all initial public offerings that year. One measure of the success of these stocks is that data services created indices to track them. The Bloomberg Internet index was initiated on December 31, 1998, with a hundred young internet companies in it, and it rose 250% in the following year, reaching a peak market capitalization of $2.9 trillion in early 2000. Because the collective revenues of these companies were a fraction of that value, and most of them were losing money, the only way you could justify these market capitalizations was with a combination of very high anticipated revenue growth accompanied by healthy profit margins in steady state, premised on successful entry into a big market. 
The Correction: The rise of internet stocks was dizzying, in terms of the speed of ascent, but its descent was even more precipitous. The date the bubble burst can be debated, but the NASDAQ, dominated in 2000 by young internet companies, peaked on March 10, 2000, and in the months after, the pricing unraveled as shown in the collapse of the Bloomberg Internet Index:
The Bloomberg Internet Index
Of the dozens of publicly traded retail companies in existence in March 2000, more than two-thirds failed, as they ran out of cash (and capital access) and their business models imploded. Even those that survived, like Amazon, faced carnage, losing 90% of their value, and flirting with the possibility of shutting down. 

2. Online Advertising in 2015 & 2019
The Big Market: The same internet that gave birth to the dot com boom in the nineties also opened the door to digital advertising and while it was slow to find its footing, the arrival of search engines like Yahoo! and Google fueled its growth.  The advent of social media altered the game even more, as businesses realized that not only were they more likely to reach customers on social media sites, but that social media companies also brought in data about their users that would allow for more focused and effective advertising. The net result of all these innovations was that digital advertising grew in the decade from 2005 to 2015, both in absolute numbers and as a percent of total advertising:

As digital advertising grew, firms that sought a piece of this space also entered the market and were generally rewarded with infusions of capital from both private and public market investors.
The Pricing Delusion: In a post in 2015, I looked at how the size of the online advertising market skewed the companies of companies in this market, by looking at publicly traded companies in the space and backing out from the market capitalizations what revenues would have to be in 2025, for investors to break even. To do this, I made assumptions about the rest of the variables required to conduct a DCF valuation (the cost of capital, target operating margin and sales to capital ratio) and held them fixed, while Ie varied the revenue growth rate until I arrived at the current market capitalization. With Facebook in August 2015, for instance, here is what I estimated:

Put simply, for Facebook's market capitalization in 2015 to be justified, its revenues would have to rise to $129,318 million in 2025, with 93% of those revenues coming form online advertising. Repeating this process for all publicly traded online ad companies in August 2015:
Imputed Revenues in 2025 in millions of US $
The total future revenues for all the companies on the list totals $523 billion. Note that this list is not comprehensive, because it excludes some smaller companies that also generate revenues from online advertising and the not-inconsiderable secondary revenues from online advertising, generated by firms in other businesses (such as Apple). It also does not include the online adverting revenues being impounded into the valuations of private businesses like Snapchat, that were waiting in the wings in 2015. Consequently, we are understating the imputed online advertising revenue that was being priced into the market at that time. In 2014, the total advertising market globally was about $545 billion, with $138 billion from digital (online) advertising. Even with optimistic assumptions about the growth in total advertising and the online advertising portion of it climbing to 50% of revenues, the total online advertising market in 2025 comes to $466 billion. The imputed revenues from the publicly traded companies in August 2015 alone exceeds that number, implying that the companies in were being overpriced relative to the market (online advertising) from which their revenues were derived.
The Correction? The online ad market has not had a precipitous fall from the heights of 2015, but it has matured. By 2019, not only had investors learned more about the publicly traded companies in the online advertising business, but online advertising matured. Using the same process that we used in 2015, we imputed revenues for 2029 using data up through November 2019. Those calculations are presented in the table below:

Imputed Revenues in 2029 in millions of US $
There are signs that the market has moderated since 2015. First, the number of companies shrank, as some were acquired, some failed, and a few consolidated. Second, the market capitalizations had been recalibrated and starting revenues in 2019 are much greater than they were in 2015. As a result, the breakeven revenue in 2029 is $573 billion, only slightly higher than the imputed revenues from the 2015 calculation, despite being four years further into the future. This suggests that the market is starting to take account of the limits imposed by the size of the underlying market. Third, more of the companies on the list have had moments of reckoning with the market, where they have been asked to show pathways to profitability and not just growth numbers. Two examples are Snap and Twitter. For both companies the market capitalizations have languished because of the perception that their pathways to profitability are rocky. In short, if there is a correction occurring in this market, it seems to be happening in slow motion.

3. Cannabis in October 2018
The Big MarketUntil recently, cannabis, in any of its forms, was illegal in every state in the United States in most of the world, but that is changing rapidly. By October 2018, smoking marijuana recreationally and medical marijuana were both legal in nine states, and medical marijuana alone in another 20 states. Outside the United States, much of Europe has always taken a more sanguine view of cannabis, and on October 17, 2018, Canada became the second country (after Uruguay) to legalize the recreational use of the product. In conjunction with this development, new companies were entering the market, hoping to take advantage of what they saw as a “big” market, and excited investors were rewarding them with large market capitalizations.  The widespread view as of October 2018 was that the cannabis market would be a big one, in terms of users and revenues. There were concerns that many recreational cannabis users would continue to use the cheaper, illegal version over the regulated but more expensive one, and that US federal law would be slow to change its view on legality. In spite of these caveats, there remained optimism about growth in this market, with the more conservative forecasters predicting that global revenues from marijuana sales will increase to $70 billion in 2024, triple the estimated sales in 2018, and the more daring ones predicting close to $150 billion in sales.
The Pricing DelusionIn October 2018, the cannabis market was young and evolving, with Canadian legalization drawing more firms into the business. While many of these firms were small, with little revenue and big operating losses, and most were privately owned, a few of these companies had public listings, primarily on the Canadian market. The table below lists the top ten cannabis companies as of October 14, 2018, with the market capitalizations of each one, in conjunction with each company’s operating numbers (revenues and operating income/losses, in millions of US $).
Cannabis Stocks on Oct 14, 2018 ($ values in millions of US$)
Note that the most valuable company on the list was Tilray with a market cap of over $13 billion. Tilray had gone public a few months prior, with revenues that barely register ($28 million) and nearly equal operating losses, but had made the news right after its IPO, with its stock price increasing ten-fold in the following weeks, before subsequently losing almost half of its value in the following weeks. Canopy Growth, the largest and most established company on the list, had the highest revenues at $68 million. More generally, all of them trade at astronomical multiples of book value, with a collective market cap in excess of $48 billion, more than 20 times collective revenues and 10 times book value. For each company, the high market capitalization relative to any measure of fundamental value was justified using the same rationale, namely that the cannabis market was big, allowing for huge potential growth. 
The Correction: In the of the cannabis market, the overreach on the part of both businesses and their investors caught up with them. By October 2019, the assumptions regarding growth and profitability were being universally scaled back, business models were being questioned, and investors were reassessing the pricing of these companies. The best way to see the adjustment is to look the performance of the major cannabis exchange-traded fund, ETFMG, over the period depicted in the figure below:
Note that within a period of approximately one year, cannabis stocks lost more than 50% of their aggregate value. The damage cut across the board. Tilray and Canopy Growth, the two largest market capitalization companies in the October 2019 saw their market capitalizations decline by 80.7% and 38.6% respectively. Given that there was no significant shift in fundamentals, the apparent explanation is that investors came to realize that the “big market” was not going to deliver the previously expected growth rates or the profitability for the expanding group of individual companies.

Common Elements
The three examples that we listed are in very different businesses and have different market settings. That said, there are some common elements that you see in all three, and will in any big market setting:
  1. Big Market stories: In every big market delusion, there is one shared feature. When asked to justify the pricing of a company in the market, especially young companies with little to show in terms of fundamentals, entrepreneurs, managers and investors almost always point to macro potential, i.e., that the retail or advertising or cannabis markets were huge. The interesting aspect is that they rarely express the need to go beyond that justification, by explaining why the specific company they were recommending was positioned to take advantage of that growth. In recent years, the big markets have gone from just words to numbers, as young companies point to big total accessible markets (TAM), when seeking higher pricing, often adopting nonsensical notions of what accessible means to get to large numbers. 
  2. Blindness to competition: When the big market delusion is in force, entrepreneurs, managers and investors generally downplay existing competition, thus failing to factor in the reality that growth will have to be shared with both existing and potential new entrants. With cannabis stocks in late 2018, much of the pricing optimism was driven by the size of the potential market in the United States, assuming legalization, but very few entrepreneurs, managers and investors seemed to consider the likelihood that legalization would attract new players into the market and that illegal sources of supply would maintain their hold on the market.
  3. All about growth: When enthusiasm about growth is at its peak, companies focus on growth, often putting business models to the side or even ignoring them completely. That was true in all three of our case studies. With internet stocks, companies typically based their entire pricing pitch on how quickly they were growing. With social media companies, it took an even rawer form, with growth in users and subscribers being the calling cards for higher pricing. Investors, both private and public, not only went along with the pitch but often actively encouraged companies to emphasize growth at the expense of profits.
  4. Disconnect from fundamentals: If you combine a focus on growth as the basis for pricing with an absence of concern at these companies about business models, you get pricing that is disconnected from the fundamentals. In all three case studies presented in this paper, at the peak of the pricing run up, most of the stocks in each group had negative earnings (making earnings multiples not meaningful), little to show in assets (making book value multiples difficult to work with) and traded at huge multiples of revenues. Put simply, the pricing losing its moorings in value, but investors who look at only multiples miss the disconnect.
The one area where the three case studies diverge is in how the pricing delusion corrects itself. For instance, the dot com bubble hit a wall in March 2000 and burst in a few months, as public markets corrected first, followed by private markets, but the question of why it happened at the time that it did remains a mystery. The online advertising run-up has moderated much more gradually over a few years, and if that trend continues, the correction in this market may be smooth enough that investors will not call it a correction. With cannabis stocks, the rise and fall were both precipitous, with the stocks tripling over a few months and losing that rise in the next few months.

If the big market delusion is a feature of big markets, destined to repeat over time, it behooves us as entrepreneurs, managers, investors and regulators to recognize that reality and modify our behavior.
1. Entrepreneurs and Venture Capitalists
The obvious advice that can be offered to entrepreneurs and venture capitalists, to counter the big market delusion, is to be less over confident, but given that it is not only part of their make up but the driver for exploiting the big market, it will have little effect. Our suggestions are more modest. First, testing out the plausibility of your market size assumptions and the viability of the business model you plan to use to exploit the market on people, whose opinion you value but don't operate in your bubble, is a sensible first step. Second, when you get results from your initial business forays that run counter to what you expected to see, don't be quick to rationalize them away as aberrations. By keeping the feedback loop open, you may be able to improve your business model and adjust your expectations sooner, to reflect reality. Third, build in safety buffers into your model, allowing you to keep operating even if capital dries up (as it inevitably will when the correction arrives), by accumulating cash and avoiding cost commitments that lock you in, like debt and long term cost contracts. Finally, while you may be intent on delivering the metrics that are priced highly, such as users or subscribers, pay attention to building a business model that will work at delivering profits, and if forced to pick between the two objectives, pick the latter.

2.Public Market Investors
The big market delusion almost never stays confined to private markets and sooner or later, the companies in the space list on public markets and are often priced in these markets, at least initially, like they were in private markets. While a risk averse investor may feel it prudent to entirely avoid these stocks, there are opportunities that can be exploited:
  • Momentum investors/traders: The big market delusion is one explanation for the momentum of young, growth stocks. When fascination with a big market like “transportation” takes hold, it can produce momentum in the prices of innovative companies in that space such as Uber and Lyft, and significant profits along the way. The risk, of course, is that the big market delusion fades and the market corrects as has happened in the case of both Uber and Lyft. As we have emphasized, however, there appears to be no way to time such corrections. 
  • Value investors:  The  obvious advice is to avoid young, growth stocks whose value is based on big market stories. But that carries its own risk. In the twelve year stretch beginning in 2007, growth stocks have dramatically outperformed value stocks. As one example, during this period the Russell 1000 growth index outperformed the Russell 1000 value index by an astonishing 4.3% per year. That outperformance was driven in part by stories regarding how technology companies were going to disrupt or invent big markets from housing to entertainment to automobiles. There is a riskier, higher payoff, strategy. Since the big market delusion leads to a collective over pricing, value investors can bet against a basket of stocks (sell short on an ETF like the ETFMG) and hope that the correction occurs soon enough to reap rewards.
In sum, though, young companies make markets interesting and by making them interesting, they increase liquidity and trading.
3. Governments and Market Regulators 
In the aftermath of every correction, there are many who look back at the bubble as an example of irrational exuberance. A few have gone further and argued that such episodes are bad for markets, and suggested fixes, some disclosure-related and some putting restrictions on investors and companies. In fact, in the aftermath of every bursting bubble, you hear talk of how more disclosure and regulations will prevent the next bubble. After three centuries of futility, where the regulations passed in response to one bubble often are at the heart of the next one, you would think that we would learn, but we don't. In fact, over confidence will overwhelm almost every regulatory and disclosure barrier that you can throw up. We also believe that these critics are missing the point. Not only are bubbles part and parcel of markets, they are not necessarily a negative. The dot com bubble changed the way we live, altering not only how we shop but how we travel, plan and communicate with each other. What is more, some of the best performing companies of the last two decades emerged from the debris., a poster child for dot com excess, survived the collapse and has become a company with a trillion-dollar market capitalization.  Our policy advice to politicians, regulators and investors then is to stop trying to make bubbles go away. In our view, requiring more disclosure, regulating trading and legislating moderation are never going to stop human beings from overreaching. The enthusiasm for big markets may lead to added price volatility, but it is also a spur for innovation, and the benefits of that innovation, in our view, outweigh the costs of the volatility. We would choose the chaos of bubbles, and the change that they create, over a world run by actuaries, where we would still be living in caves, weighing the probabilities of whether fire is a good invention or not.

Overconfident in their own abilities, entrepreneurs and venture capitalists are naturally drawn to big markets which offer companies the possibility of huge valuations if they can effectively exploit them. And there are always examples of a few immense successes, like Amazon, to fuel the fire. This leads to a big market delusion, resulting in too many new companies being founded to take advantage of big markets, each company being overpriced by its cluster of founders and venture capitalists. This overconfidence then feeds into public markets, where investors get their cues on price and relevant metrics from private market investors, leading to inflated values in those markets. This results in eventual corrections as the evidence accumulates that growth has to be shared and profitability may be difficult to achieve in a competitive environment. This post is a long one, but if you find it interesting, Brad Cornell and I have a paper expounding a more complete picture here. As always, your feedback is appreciated!

Paper on the big market delusion
Previous posts relating to the big market delusion

Thursday, December 19, 2019

A Teaching Manifesto: An Invitation to my Spring 2020 classes

If you have been reading my blog for long enough, you should have seen this post coming. Every semester that I teach, and it has only been in the spring in the last few years, I issue an invitation to anyone interested to attend my classes online. While I cannot offer you credit for taking the class or much direct personal help, you can watch my sessions online (albeit not live), review the slides that I use and access the post class material, and it is free. If you are interested in a certificate version of the class, NYU offers that option, but it does so for a fee. You can decide what works for you, and whatever your decision is, I hope that you enjoy the material and learn from it, in that order.

The Structure

I will be teaching three classes in Spring 2020 at the Stern School of Business (NYU), a corporate finance class to the MBAs and two identical valuation classes, one to the MBAs and one for undergraduates. If you decide to take one of the MBA classes, the first session will be on February 3, 2020, and there will be classes every Monday and Wednesday until May 11, 2020, with the week of March 15-22 being spring break. In total, there will be 26 sessions, each session lasting 80 minutes. The undergraduate classes start a week earlier, on January 27, and go through May 11, comprising 28 sessions of 75 minutes apiece. 
  1. The Spring 2020 Classses: With all three classes, the sessions will be recorded and converted into streams, accessible on my website and downloadable, as well as YouTube videos, with each class having its own playlist. In addition, the classes will also be carried on iTunes U, with material and slides, accessible from the site. The session videos will usually be accessible about 3-4 hours after class is done and you can either take the class in real time, watching the sessions in the week that they are taught, or in bunches, when you have the time to spend to watch the sessions; the recordings will stay online for at least a couple of years after the class ends. There will be no need for passwords, since the session videos will be unprotected on all of the platforms. 
  2. The (Free) Online Version: During the two decades that I have been offering this online option, I have noticed that many people who start the class with the intent of finishing it give up for one of two reasons. The first is that watching an 80-minute video on a TV or tablet is a lot more difficult than watching it live in class, straining both your patience and your attention. The second is that watching these full-length videos is a huge time commitment and life gets in the way. It is to counter these problems that I created 12-15 minute versions of the each session for online versions of the classes. These online classes, recorded in 2014 and 2015, is also available on my website and through YouTube, and should perhaps be more doable than the full class version.
  3. The NYU Certificate Version: For most of the last 20 years, I have been asked why I don’t offer certificates of completion for my own classes and I have had three answers. The first is that, as a solo act, I don’t have the bandwidth to grade and certify the 20,000 people who take the classes each semester. The second is that certification requires regulatory permission, a bureaucratic process in New York State that I have neither the stomach nor the inclination to go through. The third is, and it is perhaps the most critical, is that I am lazy and I really don't want to add this to my to-do list. One solution would be to offer the classes through platforms like Coursera, but those platforms work with universities, not individual faculty, and NYU has no agreements with any of these platforms. About three years ago, when NYU approached me with a request to create online certificate classes, I agreed, with one condition: that the free online versions of these classes would continue to be offered. With those terms agreed to, there are now NYU Certificate versions of each of the online classes, with much of the same content, but with four add ons. First, each participant will have to take quizzes and a final exam, multiple choice and auto-graded, that will be scored and recorded. Second, each participant will have to complete and turn in a real-world project, showing that they can apply the principles of the class on a company of their choice, to be graded by me. Third, I will have live Zoom sessions every other week for class participants, where you can join and ask questions about the material. Finally, at the end of the class, assuming that the scores on the exams and project meet thresholds, you will get a certificate, if you pass the class, or a certificate with honors, if you pass it with flying colors.
The Classes
I have absolutely no desire to waste your time and your energy by trying to get you to take classes that you either have no interest in, or feel will serve no good purpose for you. In this section, I will  provide a short description of each class, and provide links to the different options for taking each class.

I. Corporate Finance

Class description: I don’t like to play favorites, but corporate finance is my favorite class, a big picture class about the first principles of finance that govern how to run a business. I will not be egotistical enough to claim that you cannot run a business without taking this class, since there are many incredibly successful business-people who do, but I do believe that you cannot run a business without paying heed to the first principles. I teach this class as a narrative, staring with the question of what the objective of a business should be and then using that objective to determine how best to allocate and invest scarce resources (the investment decision), how to fund the business (the financing decision) and how much cash to take out and how much to leave in the business (the dividend decision). I end the class, by looking at how all of these decisions are connected to value.

Chapters: Applied Corporate Finance Book, Sessions: Class session
I am not a believer in theory, for the sake of theory, and everything that we do in this class will be applied to real companies, and I will use six companies (Disney, Vale, Tata Motors, Deutsche Bank, Baidu and a small private bookstore called Bookscape) as lab experiements that run through the entire class.

I say, only half-jokingly, that everything in business is corporate finance, from the question of whether shareholder or stakeholder interests should have top billing at companies, to why companies borrow money and whether the shift to stock buybacks that we are seeing at US companies is good or bad for the economy. Since each of these questions has a political component, and have now entered the political domain, I am sure that the upcoming presidential election in the US will create some heat, if not light, around how they are answered.

For whom?

As I admitted up front, I believe that having a solid corporate finance perspective can be helpful to everyone. I have taught this class to diverse groups, from CEOs to banking analysts, from VCs to startup founders, from high schoolers to senior citizens, and while the content does not change, what people take away from the class is different. For bankers and analysts, it may be the tools and techniques that have the most staying power, whereas for strategists and founders, it is the big picture that sticks. So, in the words of the old English calling, "Come ye, come all", take what you find useful, abandon what you don't and have fun while you do this.

Links to Offerings

1. Spring 2020 Corporate Finance MBA class (Free)
2. Online Corporate Finance Class (Free)

3. NYU Certificate Class on Corporate Finance (It will cost you...)

II. Valuation

Class description: Some time in the last decade, I was tagged as the Dean of Valuation, and I still cringe when I hear those words for two reasons. First, it suggests that valuation is a deep and complex subject that requires intense study to get good at. Second, it also suggests that I somehow have mastered the topic. If nothing else, this class that I first taught in 1987 at NYU, and have taught pretty much every year since, dispenses with both delusions. I emphasize that valuation, at its core, is simple and that practitioner, academics and analysts often choose to make it complex, sometimes to make their services seem indispensable, and sometimes because they lose the forest for the trees. Second, I describe valuation as a craft that you learn by doing, not by reading or watching other people talk about it, and that I am still working on the craft. In fact, the more I learn, the more I realize that I have more work to do.  This is a class about valuing just about anything, from an infrastructure project to a small private business to a multinational conglomerate, and it also looks at value from different perspectives, from that of a passive investor seeking to buy a stake or shares in a company to a PE or VC investor taking a larger stake to an acquirer interested in buying the whole company. 

Finally, I lay out my rationale for differentiating between value and price, and why pricing an asset can give you a very different number than valuing that asset, and why much of what passes for valuation in the real world is really pricing. 

Along the way, I emphasize how little has changed in valuation over the centuries, even as we get access to more data and more complex models, while also bringing in new tools that have enriched us, from option pricing models to value real options (young biotech companies, natural resource firms) to statistical add-ons (decision trees, Monte Carlo simulations, regressions). 

For whom?

Do you need to be able to do valuation to live a happy and fulfilling life? Of course not, but it is a skill worth having as a business owner, consultant, investor or just bystander. With that broad audience in mind, I don't teach this class to prepare people for equity research or financial analysis jobs, but to get a handle on what it is that drives value, in general, and how to detect BS, often spouted in its context. Don't get me wrong! I want you to be able to value or price just about anything by the end of this class, from Bitcoin to WeWork, but don't take yourself too seriously, as you do so.

Links to Offerings
1a. Spring 2020 Valuation MBA class (Free)
1b. Spring 2020 Valuation Undergraduate class (Free)
2. Online Valuation Class (Free)
3. NYU Certificate Class on Valuation (Paid)
III. Investment Philosophies

Class description: This is my orphan class, a class that I have had the material to teach but never taught in a regular classroom. It had its origins in an couple of observations that puzzled me. The first was that, if you look at the pantheon of successful investors over time, it is not only a short one, but a diverse grouping, including those from the old time value school (Ben Graham, Warren Buffett), growth success stories (Peter Lynch and VC), macro and market timers (George Soros), quant players (Jim Simon) and even chartists. The second was that the millions who claim to follow these legends, by reading everything ever written by or about them and listening to their advice, don’t seem to replicate their success. That led me to conclude that there could be no one ‘best’ Investment philosophy across all investors but there could be one that is best for you, given your personal makeup and characteristics, and that if you are seeking investment nirvana, the person that you most need to understand is not Buffett or Lynch, but you.  In this class, having laid the foundations for understanding risk, transactions cost and market efficiency (and inefficiency), I look at the entire spectrum of investment philosophies, from charting/technical analysis to value investing in all its forms (passive, activist, contrarian) to growth investing (from small cap to venture capital) to market timing. With each one, I look at the core drivers (beliefs and assumptions) of the philosophy, the historical evidence on what works and does not work and end by looking at what an investor needs to bring to the table, to succeed with each one.

I will try (and not always succeed) to keep my biases out of the discussion, but I will also be open about where my search for an investment philosophy has brought me. By the end of the class, it is not my intent to make you follow my path but to help you find your own.

For whom?
This is a class for investors, not portfolio managers or analysts, and since we are all investors in one way or the other, I try to make it general. That said, if your intent is to take a class that will provide easy pathways to making money, or an affirmation of the "best" investment philosophy, this is not the class for you. My objective in this class is not to provide prescriptive advice, but to instead provide a menu of choices, with enough information to help you can make the choice that is best for you. Along the way, you will see how difficult it is to beat the market, why almost every investment strategy that sounds too good to be true is built on sand, and why imitating great investors is not a great way to make money.

Links to Offerings

1. Online Investment Philosophies Class (Free)
2. NYU Certificate Class on Valuation (Paid)
  • NYU Entry Page (Coming soon)
I have to confess that I don't subscribe to the ancient Guru/Sishya relationship in teaching, where the Guru (teacher) is an all-knowing individual who imparts his or her fountain of wisdom to a receptive and usually subservient follower. I have always believed that every person who takes my class, no matter how much of a novice in finance, already knows everything that needs to be known about valuation, corporate finance and investments, and it is my job, as a teacher, to make him or her aware of this knowledge. Put simply, I can provide some structure for you to organize what you already know, and tools that may help you put that knowledge into practice, but I am incapable of profundity. I hope that you do give one (or more) of my classes a shot and I hope that you both enjoy the experience and get a chance to try it out on real companies in real time.

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