introduction Flashcards
what asset classes are there?
real assets
-reflect ownership of underlying assets
-stocks, real estate, commodities (gold oil gas), art, human capital
monetary assets
-promise of payment granted to investor by issuer without ownership title
-fixed income, fiat money, bank deposits
about real assets
1.direct or indirect ownership and total or partial
2.generate rents rom specific service offered
3.rents variable and depend on interest of society on that asset
4.rents can be explicit (dividends) or implicit (difference of price of sale and cogs
5.keep purchasing power in any context as long as somebody is interest in it –> good against inflation
6.downside limited to what you have paid for the asset, upside unlimited
about monetary assets
1.promise of payment usually fixed rentrs in specific currency
2.no ownership titel over asset
3.right to receive nomnal rent and principal
4.no protection of purchasing power so bad to hedge against inflation
5.downside limited as well as upside, reutrn less appealing
equities
- pieces of businesses
- title of ownership over capital goods and assets of firm
- unlimited upside and limited downside, can only loose what invested but can win multiples
4.if publicly traded subject to short term risk for prices but more investment opportunities
5.long term value driven by free cashflow of firm in the future discounted to today
approaches to investing (different choices)
1- active vs passive
2. fundamental vs technical analysis
3.longterm investing vs short term trading
4. bottom up vs top down analysis
–> value: active, fundamental, longterm, bottom up
what is active investing
- achieve higher average returns than benchmark of a given market or reference
2.manager has complete freedom to take any investment decision based on philospy, process and convictions - there is a price discovery process
what is passive investing
1.replicate the reutrn of the benchmark
2.match benchmarks sector exposure, weights, constituents
3.lower fees
4. no price discovery process
fundamental vs technical analysis
fundamental:
study all relevant factors (financial, business, economic) determine intrinsic value and compare with the market price to see if margin of safety big enough
technical:
1.study past prices and how they evolved, detect patterns and trends to determine future prices
2.generally short term nature and applied by traders
3.speculative
bottom up vs top down
bottom up:
-focuses on the individual factors and characteristics of a specific company
-fundamentals of business and studies financial accounts, competitive position, management, culture and capital allocation process
top down:
-focuses on macroeconomic factors and trends to determine which are most attractive sectors
active investing styles
-growth
-quality
-momentum
-event driven
-value investing
growth investing
-companies that will potentially gneerate high earnings growth rates in the future
-businesses n expansion phase like tech
-rapidly changing sectors with fierce competition
-reinvest CF in own business
-tend to be valued at high multiples of current earnings anf FCF
-focuses on value derived from future assets (value derives from vurrent assets)
-higher grade of uncertainty and is more compelx
modern finance theory
1.individuals cannot affect market prices and have homogeneous expectations for expected returns, expected volatility and correlations
2.all individuals have same investment horizion
3.asset returns have normal distribution
4. there is a risk free asset. asset market is perfect and any combination of assets can be done
5. all exisiting info is available for all investors and free
ALL WRONG
efficient market hypothesis
-all agents form their expectations for the future with full knowledge of all economic relations and use of all available information
-deviations of future events from the expected outcomes are purely random
-market prices in present contain and reflect all available info and future prices deviate from present prices only by chance
-forecast of future prices is imposible
-no point in searching for info and the process of price discovery is erroneous
-acitve managers cannot beat the market so invest passive
criticism of modern finance theory
hypothesis not real fail to describe reality of financial markets
-just simplification to model human behaviour but leave out real human conditions
-agents are subjectively rational
value investing definition
-buying something for a discount compared to what we think it is worth
-margin of safety = discount (from above)
-margin of saftey protects against losing money
-two main elements are price and value
—>price fluctuates in short term due to volatility and brings opportunities
—>value complex, how much is business worth?
