A Viral Market Update XIII: The Strong (FANGAM) get stronger!

When I started these updates on February 26, 2020, about two weeks after the markets went into free fall, my first six posts were titled "Viral Market Meltdowns", reflecting the sell off across the globe. About half way through this series, I changed the title, replacing the word "meltdown" with "update", as markets turned around. In fact, by August 14, the date of this update, US equities had recouped all of their crisis losses, and were trading higher than they were on February 14, the start of the crisis. In that six-month period, though, there has been a reallocation of value, from old to young, value to growth and manufacturing to technology companies, and I have tried to both chronicle and explain these shifts in earlier posts. In this one, I plan to focus on a subset of these companies, the FANG (Facebook, Amazon, Netflix and Google) stocks, younger companies  that have soared in value over the last decade, and two other tech companies of longer standing, Apple and Microsoft. These FANGAM stocks, which have dominated the market for the last decade, have become even more dominant during the crisis, and explaining (or trying to explain) that phenomenon is key to understanding both the market comeback and to assessing whether it is sustainable.

Market Outlook

My crisis clock started on February 14, 2020, and it is now six months since its start, and as with my previous updates, I will begin with a quick overview of financial market action over this period. I start by looking at selected equity indices, spread geographically, and how they have performed over the period:

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On August 14, the S&P 500 was almost back to where it was on February 14, which was an all-time high, and the NASDAQ was 13.46% higher than its February-levels, hitting new highs. In local currency terms, the Latin American indices were still showing double-digit declines, as of August 14, but the Asian indices have recouped much of their early losses. As equities have gone on a roller-coaster ride, US treasuries have settled into a holding pattern, with rates across maturities at much lower levels than prior to it:

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Almost all of the drop in rates occurred in the first few weeks of the crisis, but rates are now close to zero at the short end of the maturity spectrum, less than 1% for the 10-year treasuries and approaching 1.5% for the 30-year treasuries. The Fed's two big action announcements, the one of March 15 on expanding quantitative easing and the other on March 23, on operating as a backstop in lending markets, have had only a muted effect on treasury rates, but they do seem to have caused a shift in corporate bond markets, as can be seen in the graph below, showing corporate default spreads for bonds in different ratings classes:

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Corporate bond spreads, which surged in the first five weeks of the crisis, have dropped back almost to pre-crisis levels for the highest rated bonds. For the lowest rated bonds, spreads have followed the same pattern, but they remain at elevated levels, relative to pre-crisis values. The ebbs and flows in equity and bond markets have also played out in commodities, where I track oil and copper on a daily basis in the graph below:

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Copper, after dropping 15.36% between February 14 and March 20, has more than recovered its losses and was trading 10.57% higher on August 14, than on February 14. Oil had a much steeper fall in the early weeks, down more than 50% in the first five weeks of the crisis, and while it too has recovered, it was trading about 20% below where it was on February 14. Finally, I look at gold and bitcoin during the crisis period:

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Comparing Bitcoin to gold, the cumulative return over the six-month period is not dissimilar, with gold up about 23% from its February 14 level, while Bitcoin is up 14%, but the performance over the six month period is telling. Gold has held its value through the crisis, reinforcing its crisis investment status, but bitcoin has been on a wild ride, falling about 40% in the first five weeks, when stocks were down, and rallying almost 89% in the weeks since, as stocks have risen, behaving more like very risky equity than a crisis investment.

Equities Breakdown

While looking at equity indices can provide a big-picture perspective on how stocks are doing, looking at individual companies can yield much richer insights. As in prior weeks, I updated my company-level data on market capitalizations to include the four weeks since my last update, and I report the changes in market capitalization, by region, in the table below:

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All of these returns are computed in US dollar terms, for comparability, and they are based upon the aggregate market capitalization of all companies traded in each of these markets. As you can see,  a subset of emerging markets (Africa, Eastern Europe, Latin America), are showing the most damage, with weakening local currencies exacerbating market damage. Collectively, global equities on August 14 are back to where they were on February 14, reflecting the comeback story that the indices were telling. Breaking down global stocks by sector, here is what I see:

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Of the eleven sectors that S&P uses to classify stocks, six now have positive returns over the crisis period, and technology has now overtaken health care as the best performing sector. The worst performing sectors are energy, real estate and utilities, all businesses that are capital intensive and debt laden, and default worries about that debt burden may explain why financials remain the worst performing sector. Breaking sectors down into finer detail in industry groups, I list the ten worst performing and best performing industries, over the six-month period:

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The message in this table reinforces what you saw in the sector returns, with infrastructure, commodity and financial service industries making up the bulk of the loser list, and technology, health care and retail dominating the winner list.

The FANGAM Phenomenon

In my earlier posts, I argued that the market effects of this crisis have been disparate, with capital-intensive, debt-laden and rigid firms being worse affected than firms that are capital-light and flexible. You see this play out in the returns you see across sectors, industries and regions. In fact, with returns updated through August 14, 2020, technology companies are now showing healthy gains from where they were at the start of this crisis, up 11.82% since February 14, 2020. There is an inside story to this success, and it revolves around six companies - the original FANG stocks and Apple and Microsoft. They have been responsible not just for the bulk of the returns among technology companies, but  have also provided the thrust for the overall market's recovery.

FANGAM - Tale of the Tape

To understand the FANGAM story, let's retrace our steps to when there were only four young companies in this group, Facebook, Amazon, Netflix and Google (FANG) and look at how two of their senior counterparts, Apple and Microsoft, entered this group. In the table below, I list out the founding date for each of these companies, together with the date of their public offerings, the market capitalization at the time of the offering and the years in which each company hit market cap milestones ($100 billion, $500 billion and $1 trillion):

Looking at the six companies, they vary in age, with Microsoft being the oldest and Facebook the youngest, but they have also had extraordinary revenue growth in the last two decades, albeit from different bases. Coming into 2020, Apple, Amazon and Microsoft had already hit trillion-dollar market caps, and they were joined by Alphabet in 2020, and Apple crossed the $2 trillion threshold just two days prior to this post. I find the construct of a corporate life cycle useful in explaining the evolution of companies over time, in both corporate finance and valuations. 

For most companies, aging is accompanied by three phenomena. The first is that revenue growth decreases as companies scale up, with the speed of deceleration in growth a function of competition in the business. The second is that profit margins, which are negative or very low when companies are young, improve as companies grow, with the magnitude of improvement depending upon the economies of scale in the business, but plateau as new competitors emerge. The third is that even the very best companies reach mature growth, where they remain profitable, but struggle to grow and create value at the same time. The FANGAM stocks stand out from the rest of the market, since they have, at least so far, found the antidote to aging, continuing to grow even as they get larger, while sustaining or even improving profit margins. Breaking down how each of these companies deviate from the norm, here is what I conclude:

• Amazon, the Original: In an era, where every company claims to be the "next Amazon", it is worth remembering that the original company's rise to global dominance came with hiccups and interruptions. After its stint as the poster child for the dot com boom, Amazon's online retail business flirted with failure in 2001, but survived and prospered in the next decade. By the end of the decade, though, it seemed like Amazon's story had run its course, but just as investors were readying for the company becoming a mature retailer, the company reinvented itself as a disruption platform, ready to go after any business it chose to, with an army (Amazon Prime) backing it up.
• Apple and Microsoft, the Reincarnation Duo: By tech company standards, Apple and Microsoft are old companies that should be struggling to hold on to their customers and fighting off competition. Both companies though seem to have found a way to move the clock back, and retain their status as growth companies. Apple, given up for dead in the late 1990s, found its answer in streamed music, smartphones and tablets in the following decade. Office and Windows were the cash cows that kept Microsoft going for much of its corporate life, but after seeing growth flatline in the software business, the company found new growth in a subscription model (Office 365) and the cloud business.
• Alphabet and Facebook, the Advertising Juggernauts: Google and Facebook have had almost uninterrupted growth, since their founding, as they have not only taken advantage of the shift to online advertising, but also dominated that shift, while also delivering profit margins in the stratosphere. Along the way, they have accumulated huge user bases, giving them the power to influence not only where people shop, but also what they think, and perhaps even how they vote.
• Netflix, the Shape Shifter: Of the six stocks, the one that has had to make the most mid-course corrections, changing its business model to reflect a changing world, is Netflix. It started life as a video rental service, mailing DVDs to its customers, and undercutting Blockbuster, the dominant player in the business then. It pivoted quickly to become the leading streaming player, renting its content from movie and TV producers, and offering them to subscribers. As content producers squeezed the company, it shifted its business model again to make its own shows and movies, becoming the largest spender on content in the business. Along the way, it has gone global, and its business machine not only has a huge base of subscribers, but finds ways to keep adding to that base.

Every investing generation has its share of legendary companies, but I do not believe that there has been another grouping of companies that has dominated the market as completely as these six have done over the recent past.

A Decade of Domination

To understand how the FANGAM stocks made the last decade their own, you need to go back to the start of 2010, and see how the market viewed each one then:

• The Lagging Giant: At the start of 2010, Microsoft had a market capitalization in excess of $270 billion, and was second only to Exxon Mobil, with a market cap of $320 billion, among US companies, but that represented a come down from its status as the largest market cap company at the start of 2000, with a market cap exceeding $500 billion.
• The Rising Star: At the start of 2010, Apple's market cap was approaching $200 billion, making it the fifth largest US company in terms of market cap, but that was a quantum leap from its market cap of $16 billion, ten years earlier.
• The Field of Dreams Company: By early 2010, Amazon had cemented its status as online retailer, capable of growing its revenues at the expense of its brick and mortar competitors, but without a clear pathway to profitability. The market seemed to be willing to overlook this limitation, giving the company a market cap of more than $50 billion, a significant comeback from the dot-com bust days of 2001, when it was valued at less than $4 billion. 
• The New Tech Prototype: In January 2010, Google was already the prototype for the new tech company model, having reached a hundred-billion dollar market cap threshold faster (a little more than a year after going public) than any other company in history, and with its market capitalization of more than $160 billion in early 2010, the company was already on the top ten list among US companies.
• On the cusp: In early 2010, it is unlikely that anyone would have put Netflix on the list of big-time winners, since its market capitalization was less than $4 billion and its business model of renting content and signing up subscribers was seen as successful, but not scalable.
• The glimmer in the market's eye: At the start of 2010, Facebook was still a private business, though venture capitalists were clearly excited about its prospects, pricing it at roughly $14 billion in January 2010, based primarily on its user numbers. 

Looking at the FANG or FANGAM grouping, there is an element of revisionist history at play, since the stocks that are part of this group are there primarily because they have done so well in the last decade. In short, no one was talking about FANG stocks in early 2010, and Microsoft would never have made this list even as late as 2012, when it was viewed as a stodgy and fading company.  Notwithstanding this hindsight bias, the FANGAM stocks collectively saw their market capitalizations increase from $719 billion (albeit without Facebook) to a staggering $5 trillion between January 1, 2010 and January 1, 2020. In the graph below, I show that collective market cap figure as well as the market capitalizations of all other US equities, each year from the start of 2010 to the start of 2020.

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It is true that US equities did well over the decade, but the FANGAM stocks rose much more, rising from 6.5% of the overall market capitalization of all US equities, in January 2010, to close to 15% in January 2020. To provide perspective on how much the FANGAM stocks contributed to the overall equity market's rise, I compute the change in market capitalization each year at the FANGAM stocks and all other US equities, each year from 2010 to 2019:

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The $4.35 trillion in market cap added by the FANGAM stocks accounted for 19% of the overall increase in equity value across all US equities (>7000 stocks). 

The COVID Rally

At the start of 2020, there was no denying the dominance of the FANGAM stocks in US equity markets, but there was a debate about whether they were over priced, at least collectively. For many old-time value investors, the FANGAM stocks had became a symbol of growth and momentum run amok,  though a legendary member of this group (Warren Buffet) had invested in one of the companies (Apple). Between January 1, 2020 and February 14, 2020, the FANGAM stocks continued to rise more than the rest of the market and they collectively accounted for 16.08% of the market cap of all US equities on February 14, up from the 14.94% at the start of the year. When the crisis hit, there were some value investors who felt that the market correction would be felt disproportionately by this group, given their run-up in the years before. In the graph below, I look at the market capitalization of the FANGAM stocks and the rest of US equities, on a week-to-week basis from February 14, 2020 to August 14, 2020:

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During the first five weeks of the crisis (2/14- 3/20), the FANGAM stocks lost about $1.44 trillion in value, providing partial vindication to value investors, but in spite of that loss, saw their share of the market rise to 17.94% of US equities. Between March 20 and August 14, the FANGAM stocks more than recouped the early losses, and were up $1.39 trillion from their February 14 levels, on August 14, while the rest of US equities have collectively lost $1.29 trillion in market capitalization. On August 14, 2020, the FANGAM stocks accounted for 19.94% of the market capitalization of all US equities. While much has been made about how technology has led the comeback on stocks, it is worth noting that US technology companies collectively are up only $973 billion in the last six months, implying that without the FANGAM stocks, there would be no tech comeback. 

From Strength to Strength

We may lump the FANGAM stocks as a group, but these are different companies in different businesses. In fact, lumping them together as technology companies misses the fact that Netflix is closer to Disney in its business than it is to Microsoft's software offerings, and Google and Facebook are advertising companies built on very different technology platforms. There are three elements that they do share in common:

1. Cash Machines: Each of these companies has a business or segment that is a cash machine, generating large profits and huge amounts of cash for the company. With Apple, it is the iPhone business that allows it to generate tens of billions in cash flows each year, and with Microsoft, it is a combination of its legacy products (Office & Windows) and cloud services that plays this role. With Facebook and Google, their core online advertising businesses not only generate sky high margins, but require very little capital investment to grow. Amazon, until a few years ago, had no segment of equivalent profitability, but AWS (Amazon’s cloud business) is now delivering those cash flows. Netflix remains the weakest of the six companies on this dimension, but even it can count on the subscription revenues from its "sticky" subscriber base for its cash needs. 
2. Platform of users/subscribers: The FANGAM stocks also share user bases that are immense, with Facebook leading that numbers game with close to 2.7 billion users, many of whom spend large portions of each day in its ecosystem. Microsoft, Google and Apple all also have more than a billion users apiece, with multiple ways to entangle them. Amazon and Netflix may not be able to match the other four companies on sheer numbers, but each has hundreds of millions of users.
3. Proprietary and Actionable Data: I know that big data is the buzzword of business today, and in the hands of most companies, that big data is of little use, since it is neither exclusive to them, nor the basis for action. What sets the FANMAG companies apart is that they use big data to create value, partly because the data that they collect is proprietary (Facebook from your posts, Amazon/Alexa from your shopping/interactions, Netflix from your watching habits, Google from your search history and Apple from your device usage). Even Microsoft, a late entrant into big data, has stepped up its game. On top of the data is actionable, since these companies clearly use the data to advance their business models, 

Each of these strengths has contributed to helping these companies not just ride out the COVID storm, but to also emerge stronger from it. The cash machines embedded in each company, combined with light debt loads (relative to their earnings and valuations), have left them unscathed, while their debt-laden competitors are hamstrung by default and distress concerns. The economic shut down has left people home-bound and more dependent than ever before on the FANGAM companies to get through the day, increasing the power of the user platforms and the data collected on them by these companies.

In fact, it is the fact that these companies are doing so well that is giving rise to the biggest threat to their continued success, which is regulatory and legal pushback. With Facebook and Google, this is already a reality, especially in the aftermath of the privacy debates and worries about their platforms being used for political influence, with the EU being the forefront of writing restrictions on their data collection and usage. Amazon's disruption of retail, and the devastation it has wrought on its brick and mortar competitors has long been a source of concern for critics, but voices pushing for the use of legal restraints and anti-trust laws on the company are growing louder. Apple has been able to operate under the radar of political and legal scrutiny for a long time, but  recent attempts to force app sellers to sell only through its App Store, leaving it with a hefty slice of revenues, has drawn calls for government action. While Microsoft is now viewed as the most virtuous of the six, and is in fact the most widely held stock in ESG portfolios, I am old enough to remember when Microsoft was viewed as the Darth Vader of technology and targeted by the Justice department for breakup, because of its monopoly power.

Value and Pricing

I know that this has been a long lead in, but interesting though it might be to explain why the FANMAG stocks are where they are, the question of the moment in investing is whether you should buy, sell or just watch these stocks. Having valued all these stocks in the past, and acted on those valuations, with mixed results, I will draw on my past history with each company, to craft my stories and valuations of the companies. 

Download valuations: Facebook, Amazon, Netflix, Google, Apple and Microsoft
Simulation results: Facebook, Amazon, Netflix, Google, Apple and Microsoft

With each company, I report an estimated median (or most likely) value, as well as the range (1st decile, 1st Quartile, 3rd Quartile and ninth decile) of values that I estimated from running simulations. Given how much these stocks have gone up over the last six months, it should come as no surprise that I find only one (Facebook) to be under valued. Among the remaining, Apple looks the most overvalued (>30%), to me, followed by Amazon and Microsoft (10%-20%) and Netflix and Alphabet (<10%). I have also computed the internal rates of return for these stock, based upon the current market capitalization, and my estimates of expected cash flows. I would expect to earn an IRR of 7.16% on Facebook, for instance, if I bought at its current market capitalization, and it generates the cash flows I expect it to. That may not sound like much to you, but in a world of low interest rates and equity risk premiums, it is high enough for the stock to be undervalued. Even Apple, the most overvalued stock in this group can be expected to generate a 5.30% IRR, at its current market capitalization, lower than what I would need it to make, given its risk, but not bad given the alternatives.  That said, I expect you to disagree with me, perhaps even strongly, on my stories and assumptions, which is one reason the spreadsheets are yours to download and change to reflect your views.

In Closing

In the interests of full disclosure, at the time that I started on this post, I owned three of these six stocks, Apple, Facebook and Microsoft, with each having spent significant time in my portfolio; my posts detailing their acquisitions are here, here and here. As you look back at the valuations that I used to justify those investments, they seem laughably low, and I will not claim any semblance of clairvoyance. In fact, I bought Microsoft in 2013, even though I perceived it to be an aging company with little left in the tank in 2013, Apple in 2016, notwithstanding my expectations of low growth in the future, and Facebook in 2018, in the aftermath of the Cambridge Analytica scandal, because I found the companies cheap, even with my stilted narratives. 

I did sell my Apple holdings today (August 19, 2020) as the company crested the $2 trillion mark, will continue to hold Microsoft, even though I believe that it is moderately overvalued, and Facebook, hoping for more upside.  In case you are tempted to follow my lead, let me hasten to add that I also sold my Tesla holdings in January 2020 at $640, and the stock is now trading at close to $2000. Google and Netflix will remain on my watch list, and I plan to add either stock, on weakness. I will not tempt fate, and sell short on Amazon, partly because I have seen what the market does to Amazon short sellers and partly because I struggle to think of a catalyst that will cause the price to adjust. If history is any guide, these companies, unstoppable though they seem now, will hand the baton, for carrying the market forward in this decade, to other companies. 

YouTube Video

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Data

1. Market data (August 14, 2020)
2. Regional breakdown - Market Changes and Pricing (August 14, 2020)
3. Sector breakdown - Market Changes and Pricing (August 14 2020)
4. Industry breakdown - Market Changes and Pricing (August 14, 2020)

FANMAG: Valuations and Simulation Results

1. Facebook: Valuation and Simulation Results
2. Amazon: Valuation and Simulation Results
3. Netflix: Valuation and Simulation Results
4. Google/Alphabet: Valuation and Simulation Results
5. Apple: Valuation and Simulation Results
6. Microsoft: Valuation and Simulation Results

Viral Market Update Posts

1. A Viral Market Meltdown: Fear or Fundamentals?
2. A Viral Market Meltdown II: Pricing or Valuing? Investing or Trading?
3. A Viral Market Meltdown III: Clues in the Market Debris
4. A Viral Market Meltdown IV: Investing for a post-virus Economy
5. A Viral Market Meltdown V: Back to Basics
6. A Viral Market Meltdown VI: The Price of Risk
7. A Viral Market Update VII: Market Multiples
8. A Viral Market Update VIII: Value vs Growth, Active vs Passive, Small Cap vs Large!
9. A Viral Market Update IX: A Do-it-Yourself S&P 500 Valuation
10. A Viral Market Update X: A Corporate Life Cycle Perspective
11. A Viral Market Update XI: The Flexibility Premium
12. A Viral Market Update XII: The Resilience of Private Risk Capital
13. A Viral Market Update XIII: The Strong (FANGAM) get Stronger!

From Class Rooms to Class Zooms: Teaching during COVID times!

As some of you who have visited my website and read my bio know, I describe myself first and foremost as a teacher,  and every semester, for the last decade, I have invited anyone who is interested to join in my classes. In December 2019, when I posted my last invite, I fully expected to be teaching corporate finance and valuation, in person, at the Stern School of Business at NYU, in the spring of 2020, and I invited people to join in virtually, albeit for no credit. Needless to say, COVID upended my plans, as it has everyone else’s, and we had to move classes online in early March, and spent the last half of the semester, meeting on Zoom, and taking exams online. As the fall semester approaches, I have the luxury of sitting back and waiting, since I am not scheduled to teach until the spring again. I am thankful that I will not have to deal with the chaos that September will bring to classrooms around the world, in both schools and colleges, but that will not stop me from extending an invite to my classes in the fall.

A Teacher's Lament

I have been a long time advocate of using technology to deliver classes online, and my first attempts to do so date back to the 1990s, well before the appearance of Coursera, EdX and a host of other online platforms. When classes had to be moved online mid-semester in the spring of 2020, I was more prepared than most to deliver my classes online, having had some experience in the game. As this crisis has stretched from days to weeks, and from weeks to months, my office at home has become a home recording studio, but my updated camera still captures me in shades of dishevelment, and my new microphone cannot completely shut out the sounds of home, from my dog barking at the front door, to Alexa notifying me that a new package has arrived, to the microwave pinging.  

That said, this semester was a reminder, in case I needed one, of how much of what I love about teaching comes from physically being a classroom. Don't get me wrong! I love what Zoom, Cisco WebEx, Microsoft Team and Google Classes have created as platforms,  to allow me to teach my classes online, but as I explain in this long-ago session I did on teaching as a craft, there is an element of magic that can show up only in a classroom, and even there only rarely. If you ask me where the magic comes from or how it is created, my answer would be that I do not know, and that if I did, I would bottle it and drink it myself. I am aware, though, when it happens, and it does so suddenly, and in settings and moments where you least expect it, and when it does, there is no experience quite like it.  It is the reason that I would not trade in what I do for a living for any other profession in the world, no matter how lucrative the payoffs. 

I am sure many of you find yourself working in unfamiliar settings, as you struggle to get your job done from home, and juggle multiple roles (parents, teachers, handymen). I also know that some of you were expecting to be back in school soon and have been disappointed to find out that you will be taking your classes online again. The last thing that many of you may want to do is to add another online task to your to-do list, but just in case you do have the time and the inclination, I thought I would give you a look at the courses that I teach (or have taught) and the platforms that I offer them on, to find a course/platform combination that is to your liking. 

Picking your Poison

I have been lucky in my academic life that I have never been good enough at any one area of finance to become a specialist/expert, and have had to develop diverse interests in both teaching and research and different ways of delivering (timing, platform) what I know, to create something resembling a niche.

Courses

In 1985, in my very first year of teaching at the University of California at Berkeley, I taught five different classes from corporate finance to investments to central banking, knowing just enough of each to stay one step ahead of my students. In the years since, my primary teaching at the Stern School of Business has been focused on two courses, corporate finance to the first year MBAs, and valuation to the second year MBAs, with occasional forays into undergraduate teaching. Along the way, I also developed the material to teach a third course on investment philosophies that I have never delivered in a classroom at NYU but have taught in shorter programs elsewhere. In fact, over the last three decades, I have unpacked and repacked these three classes and delivered them on every continent, and in different durations, ranging from an hour (yes, really!) to a day to three days. I don’t require much in terms of pre-prep for any of these classes, but there are a few very basic financial building blocks and economic concepts that I draw on repeatedly that I have now packaged into a course that I unimaginatively call my foundations of finance class. 

1. Foundations of Finance

Coverage: I have always thought of finance as a hybrid discipline, with roots in economics, and substantial contributions from statistics, accounting and psychology. In this short class, more a collection of tools and topics than a real course, I look at how the time value of money, an incredibly simple construct built around cash flows and risk, underlies much of what we do in finance, and the mechanics of putting it into practice. I also do a brief introduction to three macroeconomic variables that show up repeatedly in finance, inflation, interest rates and exchange rates, more from the perspective of a practitioner who has to deal with them on a daily basis and less from that of an economist.

Objective: To provide a basic understanding of the building blocks that I will use in my corporate finance and valuation classes. 

Intended audience: If you have no background in finance or economics, the topics that I cover in this class will be useful. If you do, you may find the sessions going over familiar ground, and may find yourself skipping forward. 

Structure: The class is built around 12 sessions, starting with an introduction to how finance views businesses, moving on to the time value of money and a basic introduction to how we value contractual, residual and contingent cash flows and closing with sessions on three macroeconomic variables (inflation, interest rates, exchange rates) that show up repeatedly in financial analysis.

2. Corporate Finance

Coverage: Corporate finance is the ultimate big-picture class laying out the first financial principles that govern how to run a business. Consequently, it covers every aspect of business, from whether and how much to invest back into the business to how to finance (borrowed money or your own) these investments to how much cash to take out of the business (dividends and cash return).

Objectives: 

(1) To provide perspective on the core principles that govern investing, financing and dividend decisions, and how choices on one of these dimensions can and often do affect choices on the other.

(2) To get comfortable with the tools, models and theories that lead to the "right" corporate finance decisions.

(3) To understand why managers and owners often choose to deviate from the script and make sub-optimal decisions.

Intended audience: Everyone, from business owners to managers to consultants to investors, but I am biased... 

Structure: This class starts with an assessment of corporate governance (and where power resides in a  company), moves on to how best assess investments, then to financing mix and type and ends with dividend policy. Since it is an applied class, I use corporate finance tools on a diverse group of companies to see how they work.

3. Valuation

Coverage: This class is about attaching a number to an asset, item or investment, and given that broad mission, it draws a contrast between valuing and pricing an investment and develops the tools of each  approach, with intrinsic and discounted cash flows determining value, and multiples/comparable assets driving pricing. 

Objective: 

(1) To value and price publicly traded companies, small and large, young and old, developed and emerging markets, as an investor.

(2) To value and price privately owned and non-traded businesses

(3) To value and price stand-alone assets

(4) To price collectibles

Intended audience: Investors of every stripe, from individuals to venture capitalists to fund managers, equity research analysts, value consultants and financial managers at public companies.

Structure: The class begins with an examination of broad themes that animate valuation and pricing, and then spends a significant portion of time in the weeks of intrinsic value, talking about cash flows, growth and risk, before moving on to pricing and real option valuation. Along the way, we will look at valuation through different perspectives (investors, acquirers, managers).

4. Investment Philosophies

Coverage: This class is designed to provide you with a menu of investment philosophies, from old-time value investing to day trading, with descriptions of the market beliefs that underlie each one, the historical evidence on how well each philosophy as performed, as well as the skills and strengths you will need to make that philosophy work.

Objective: To find the investment philosophy that is right for you, given your risk preferences, strengths and personal make up.

Intended audience: Investors of all types, from individuals to professionals, novice to experienced and young to old.

Structure: In keeping with the idea that there is no one best investment philosophy, the class will begin with the much maligned philosophy of technical analysis and charting, before moving on to value investing and growth investing in its different forms. We then look at trading strategies built around information and arbitrage-based strategy, before ending with a sobering assessment of how difficult it has proved for active investors to beat the market.

Sequencing and Overlap

If you an uninterested in any of these classes, there is clearly nothing more to say. If you are, I can offer my subjective road map through the classes. 

• The course to start with is the Foundations class, since it is only twelve sessions and covers the basics. Feel free to jump ahead if you find the material too basic or just do the sessions that you are interested in.
• Of the remaining three classes, the one that I think has the widest reach is corporate finance, since understanding how to run a business is something that I believe everyone can benefit from. Put simply, whether you are corporate lawyer, a marketing executive, a consultant or a strategist, understanding corporate finance can make you better at your job. In terms of sequencing, it also lays the foundations for getting more out of the valuations class and should precede it.
• Valuation builds on corporate finance, but is most useful to those in the business of valuing companies (appraisers, equity research analysts, M&A analysts), but understanding what drives value can also help entrepreneurs and private equity investors. I think that understanding value can be useful even if you consider yourself more of a trader, but that may be my biases speaking.
• The investment philosophies class is aimed at people interested in investing, whether they be individual investors or professional money managers. Thus, if you have little interest in actually valuing companies from scratch, and more interest in getting a broad perspective on how to invest money, you can skip both corporate finance and valuation and just take this class.

Will there be some topics that get covered in more than one of these classes? Of course, but in my view (and remember again that I am biased), these are topics that are worth repeating and looking at through a different lens. Thus, I will cover the basics of estimating cost of capital in corporate finance, but with the perspective of estimating hurdle rates for companies that are evaluating projects, and again in valuation, but from the perspective of investors trying to value a company. 

Delivery Platforms

With each class that I teach, I have multiple versions that you can access, and you are welcome to pick the one that best fits the time you have available to spend on the class, and what you hope to get out of it. I have tried to make the content equally accessible in all of the platforms.

1. Regular classes (Free): For the corporate finance and valuation classes, the classes that I teach at Stern are available in unvarnished, but complete, form (classroom recordings of lectures, slides, exams and even class emails). That detail, though, can be overwhelming, since no one was meant to watch a session that last 80 minutes (my regular class time) online, and you can drown in the weekly assignments, quizzes and other components that make for a regular class. That said, this is the closest you will get to a full time class experience in terms of content and if have patience and tolerance, you can make your way through these classes. You can find the entry pages to the classes below:

1. Entry page for MBA Corporate Finance
2. Entry page for MBA Valuation

With each class, you can stream the class from the NYU server, at least for the latest semesters. The spring 2020 class was distorted by the crisis, and if you prefer a more conventional class, I have the 2019 versions listed as well:

1. Webcast page for MBA Corporate Finance, Spring 2020
2. Webcast page for MBA Corporate Finance, Spring 2019
3. Webcast page for MBA Valuation, Spring 2020
4. Webcast page for MBA Valuation, Spring 2019

As you will see on these pages, each recorded lecture comes with the slides that I used for that lecture and a post-class test and solution. Since the NYU server gets wiped clean every two or three years, I have YouTube playlists of the same classes at the links below:

1. YouTube page for MBA Corporate Finance, Spring 2020
2. YouTube page for MBA Corporate Finance, Spring 2019
3. YouTube page for MBA Valuation, Spring 2020
4. YouTube page for MBA Valuation, Spring 2019

The YouTube videos have the links to the slides and the post class tests/solutions.

2. Online Classes (Free): If you don't have the time or the patience to sit through 26 sessions of 80 minutes apiece (and who can blame you?), I have created online versions of all four classes, where I have tried to compress what I would say in an 80-minute session into a 12-15 minute session, and honesty requires me to confess that it was not that difficult, a testimonial to how much padding we put into two-year MBA programs. The webcast pages for all four classes are available below:

1. Webcast page for Foundations of Finance Online
2. Webcast page for Corporate Finance Online
3. Webcast page for Valuation Online
4. Webcast page for Investment Philosophies Online

The videos are also available as YouTube playlists for each class:

1. YouTube playlist for Foundations of Finance Online
2. YouTube playlist for Corporate Finance Online
3. YouTube playlist for Valuation Online
4. YouTube playlist for Investment Philosophies Online

3. NYU Certificate Classes (definitely not free): The regular and online classes that I list above are free, but there are two catches. The first is that they come with no certification, since I have neither the inclination nor the resources to keep track of who is taking the class, how well they are doing and providing the certification. The second is that online classes require self-discipline, since there is no mechanism for me to prod or nag you to keep up with the class. For many of you, these are not deal breakers, and I know of many who have persevered to finish these classes. If you believe that you need both the structure of a real class (with deadlines and time schedules) and certification, there is a third option and that is to take these classes through New York University's Executive Education program. The links to the certificate versions of the classes are below:

1. Foundations of Finance Online (Included in Corporate Finance and Valuation certificate classes)
2. NYU Certificate in Corporate Finance
3. NYU Certificate in Advanced Valuation 
4. NYU Certificate in Investment Philosophies

These classes have more polished versions of the videos that I recorded for my online class, come with exams and projects, and I do live Zoom sessions every two weeks, with each class, for the clearing up of doubts and questions. They also include quizzes, an exam and a final project, the last of which I will grade and return to you with feedback. Since these are offered through NYU, they come with a price tag, that some of you may find too high. Since the content on these courses is identical to the free online versions (even though NYU has chosen to add advanced to the valuation class and applied to the corporate finance class names), you will have to decide whether these add ons are worth the price that NYU charges for them. And for those of you find that price to be too high, there is always the free version!

The University Model: Disruption Coming?

You can accuse me of biting the hand that feeds me, but I have always though that the university model of education, especially as practiced by research universities, is dysfunctional and ripe for disruption.  If a university were treated as a business, and we were asked to objectively assess its performance, we would give it failing grades on multiple counts. The university governance system stinks, investments are driven by ego and me-tooism, the funding process is unsustainable, and universities seem to revel in mistreating their primary customers, the students, who deliver the tuition revenues that represent the bulk of their revenues. That said, this mistreatment is not a new phenomenon and the university model has endured for centuries, foiling and co-opting potential challengers over this period. As recently as a decade ago, there were some who proclaimed that MOOCs (massive open online courses) would upend universities, but that assault, like others before, failed and EdX and Coursera now operate as extensions of universities, rather than competitors. I argued a few years ago that technology-driven disruptors of education were failing because of a fundamental misunderstanding of what a university degree package offers students, viewing a university education as a collection of courses. At the same time, I offered a cautionary note to my university colleagues that change was already here, undermining the moats that universities have erected against competitors. If you are interested in that presentation, you can click here.

In 2020, COVID may have accomplished what hundreds of years of competitors and critics have not, and exposed the underbelly of the university model. 

• First, as classes moved online, there were many where students hardly noticed the difference, as classes taught without energy, enthusiasm and engagement in a physical classroom sound the same online, and are easier to mute. 
• Second, of the many things that students misses after classes moved online, the classes themselves were low down the list, well below friends, college sports and parties. 
• Third, the fact that most universities were unable or unwilling to cut tuition, even as classes move online, drew attention to the magnitude of the tuition and how little of it is directly connected to student education. 
• Finally, it forced students and parents, who had been have been conditioned to believe that the only way to get an education is to spend four years at a university, out of their pre-conceptions and to experiment with alternative routes.

My good friend, Scott Galloway, has been vocal in arguing that COVID is the tipping point that is going to upend the university model. He sees a world, where the strongest and most prestigious schools will survive and perhaps even thrive, while many small colleges and tuition-dependent universities will be decimated. While Scott and I agree on the trends and many of the problems with the university model,  I have more hope than Scott does for the model. I  think that COVID provides an opportunity for universities to remake themselves into institutions where real learning is delivered in classrooms, good teaching is valued, and the focus returns to educating students. This change will come with pain, felt disproportionately by the tenured faculty and administrators, who have benefited the most from the existing model, with the question of tenure itself being debated. As someone with tenure, I believe that no one is entitled to a job for life, and arguing that tenure is needed to allow researchers to express themselves freely sounds good, but is disingenuous. Much of academic research is so abstract and separated from reality that it is unlikely to be read, let alone be the basis for a firing. 

The Bottom Line

It has always been true that learning is not restricted to classrooms, and that your education may begin in a classroom, but it finds its grounding when you practice it in the real world, warts and all. There is almost nothing I teach in my classes that is timeless or profound, and I have learned that there is so much more that I do not know about the topics that I teach, than I do. I don't believe that I have either the knowledge or the intellect to answer every question that I am asked, but my job in teaching is to expose the process by which I try to get an answer, misguided and incorrect though it may be. As I have said repeatedly, and in many contexts, I would rather be transparently wrong than opaquely right, and I hope that if you take one or more of my classes, you will not only learn from my mistakes but also develop your own processes for answering the big questions in finance. Good luck and Godspeed!

YouTube Video