Group Presentations Flashcards
Describe discretionary equity investing as a trading strategy?
Active investors rely on discretionary judgment. Analyze firms thoroughly considering business, profit potential, management integrity, and valuation.
What do long-short equity funds do?
Long-short funds seek undervalued stocks to buy and overvalued ones to short. They are often more long than short, aiming to earn equity premiums. specializations include industry-specific, value, or growth investing.
What is value investing?
It is a trading strategy that uses fundamental analysis (finding intrinsic value through financial statement assessments and qualitative factors - talking to management, competitors, and suppliers) to buy undervalued securities and possibly short-selling overvalued ones. It involves contrarian judgment against market sentiment.
Describe the concept of Quality Investing and Quality at a Reasonable Price (QARP).
It focuses on buying high-quality companies.
Quality attributes include profitability, earnings quality, safety, and management quality.
The strategy combines quality with value, seeking discounted prices for high-quality assets.
What is activist investing?
It involves acquiring shares to influence company decisions. Strategies include board engagement, proxy fights, or takeovers. Aims to unlock shareholder value by advocating changes in management or strategy.
What is the Margin of Safety?
It refers to the difference between the intrinsic value of a security and its market price. In other words, it’s a cushion that protects investors against errors in their analysis or unforeseen adverse events. The margin of safety serves as a risk management tool for investors. A larger margin of safety provides investors with a greater degree of protection.
What is a value trap?
A “value trap” is a situation in which a stock appears to be undervalued based on traditional valuation metrics such as price-to-earnings ratio, price-to-book ratio, or dividend yield, but instead of increasing in value, it continues to decline or remains stagnant for an extended period. In other words, investors are lured into buying the stock because it seems cheap, only to find out later that the company’s fundamental problems are deeper or more severe than initially perceived.
What is a catalyst?
A catalyst is an event or development that significantly impacts the value or price of a security. It can trigger a change in investor sentiment or fundamentals, leading to a revaluation of the asset.
They include earnings announcements, product launches, regulatory changes, mergers and acquisitions, or changes in industry conditions.
What does trading on flows mean?
Trading on flows involves analyzing the movement of capital in financial markets and using that information to make trading decisions. Traders monitor buy and sell orders to anticipate short-term price movements.
A strategy includes Front-Running: Unethical practice where traders execute trades based on privileged information about client orders, exploiting the subsequent price impact.
What is sentiment trading?
Sentiment trading involves assessing market sentiment or investor psychology to forecast future price movements. It can contribute to asset bubbles.
Contrarian Approach: traders go against prevailing market sentiment, buying when sentiment is excessively negative and selling when it’s overly positive.
Greater Fool Theory: Some investors buy overvalued assets, anticipating selling them to a “greater fool” at an even higher price.
What is a dedicated short bias strategy?
Dedicated Short Bias is an investment strategy where hedge fund managers predominantly take short positions on stocks, aiming to profit from declining stock prices. The underlying analysis is fundamental.
Dedicated short-bias managers target stocks exhibiting signs of potential problems, such as overstated earnings, aggressive accounting practices, or fundamentally flawed business models. They also investigate firms suspected of engaging in outright fraud or relying on obsolete technologies.
Describe the mechanics of short-selling.
Short sellers borrow shares from a broker, sell them in the market, and aim to buy them back at a lower price to return to the lender. Short-selling requires posting margin collateral and is associated with a loan fee.
What are the challenges of short-selling?
(1) Locating lendable shares.
(2) Posting margin collateral.
(3) Navigating potential recall risks.
(4) Margin calls if stock prices rise, leading to potential short squeezes.
What is the impact of short-selling on market efficiency?
Short-selling can contribute to market efficiency by allowing both positive and negative opinions to be expressed. Short sellers play a crucial role in price discovery and help prevent overvaluation in the market.
What is the view of short-selling in society? Provide benefits and drawbacks of shorting.
Benefits
(1) short sellers play a crucial role in making markets efficient by providing liquidity, uncovering mispricing, and holding management accountable for their actions.
(2) Short-selling allows investors to hedge their positions.
(3) Short sellers contribute to capital allocation by directing investment towards the most productive firms.
Drawbacks:
(1) Companies often view short-selling as a vote of no confidence and may take actions to discourage short sellers, such as implementing stock splits or distributing shares to disrupt short-selling activities.
(2) Short-selling has been criticized by policymakers and the general public, who may view it as morally wrong or detrimental to market stability.
