Welcome to Mentorship. Will Showers Director of Mentorship

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1 Welcome to Mentorship Will Showers Director of Mentorship

2 What s in Store 4-week lecture series Tuesdays and Thursdays from 6-7 Bring a laptop or tablet to every meeting What will be covered How the IC operates Accounting fundamentals Valuation basics Fixed Income & Macroeconomics Introduction to Modern Portfolio Theory What I ask of you Come ready to learn Ask questions!

3 Full Schedule Tuesday, 1/26 Welcome to Mentorship, Introduction to Markets Thursday, 1/28 Modern Portfolio Theory, Accounting Fundamentals Tuesday, 2/2 Valuation, Multiples Analysis Thursday, 2/4 Intrinsic Valuation Tuesday, 2/9 Building a Pitch/Screen Thursday, 2/11 Team Problems / Review Tuesday, 2/16 Mock Pitches Thursday 2/18 Mentorship Exam

4 Georgia Tech Student Foundation Brandon Danzig Priya Srinivasin

5 What we do Moving Forward by Giving Back Four Primary Objectives 1. Educate students on the value and tradition of giving back to the Institute 2. Enhance the growth and development of student leaders 3. Invest the endowment 4. Allocate to programs and initiatives that improve the student experience at Georgia Tech 1/27/2016 5

6 Fundraising The Development Committee educates students on the importance of philanthropy. Secure gifts from 26% of Georgia Tech Student population Increased likelihood of young alumni giving Increase participation each year Fiscal Year 2015 Goals: 5,740 student donors (27% of GT student population) 50+ organizations pledging 100% Host Donor Appreciation events Fiscal Year Student Donors Fiscal Year 2004 Student Donors 1, , , , , ,791 1, ,347 1, ,397 2, ,808 2, ,327 2, ,918 4, ,204 4, ,605 5, ,740 (Goal) 5,605 1/27/2016 6

7 Developing Future Leaders The Freshman Leadership Initiative (FLI) teaches Tech s youngest students the mission of GTSF and gives them the tools to lead Made up of 16 selected freshman leaders Led by four (4) sophomore advisors Focuses on: Professional and leadership development Planning the FLI Challenge Cultivating freshman for larger leadership roles within GTSF 1/27/2016 7

8 Investing The Investments Committee invests and manages the $1.2M foundation endowment. Has grown endowment from original $100k donation in 1986 to over $1.2M Consistently out-performs S&P 500 Member development & finance alumni Publicity of finance capabilities of GT students Atlanta Journal & Constitution Fox Business News 1/27/2016 8

9 Allocating The Allocations Committee facilitates allocation of over $17,000 per semester to student initiatives. Provides funding to student groups with novel, philanthropic, and impactful initiatives Has provided over $600k in funding to over 350 student organizations since 1986 Fall 2014 Spring 2015 $34,082 allocated Received 100 applications Provided funding to 30 initiatives 1/27/2016 9

10 Marketing & Communications The Marketing & Communications Committee promotes GTSF s presence on campus Maintains consistent branding across organization Seeks to improve visibility of GTSF across campus Track quantitative metrics and improvements across different social media outlets Support other committees marketing pushes Allocation recipients activities Recent student and organization donors Portfolio/endowment update 1/27/

11 GTSF Investments Committee

12 What is the Investments Committee? Largest student-managed philanthropic endowment in the country Portfolio valued at ~ $1.2 million Dedicated to developing the next generation of financial professionals through real life application of investment and portfolio management techniques Numerous successful alumni (more on this later) Funds are withdrawn from the portfolio each semester to award grants for GT community initiatives and organizations 2% of avg. portfolio value over the last 5 years ($17k)

13 IC Organizational Structure IDG Sector Heads Senior Analysts Analysts & General Members 13

14 Investments Decision Group (IDG) Makes all executive decisions related to the portfolio Votes on all investment decisions Organizes continual education of committee Attends to external relations Mentors each sector Director Roles Senior Financial Director Analytics External Relations Macroeconomics Operations Senior Managing Director Development Financial Programming Mentorship Portfolio 14

15 Sector Heads Manage analysts and senior analysts in their specific sector Host a weekly sector meeting Educate analysts about their sector and stimulate further learning Expected to be experts and the most knowledgeable on their sector of anyone in the committee Oversee research and investment idea generation in their sector Sectors Special Situations Consumer Staples Financials Health Care Materials Utilities Consumer Discretionary Energy Macroeconomics Industrials Technology Analytics 15

16 Senior Analysts Additional layer leadership between Analysts and Sector Heads Responsible for developing theses for potential investments Construct thought-intensive portions of screens and presentations (e.g. valuation) Teach analysts how to build out public comps, pull trading levels, read through 10-k s Focus heavily on developing presentation skills 16

17 Analysts The primary body of the IC Organized into sectors Research potential new investment ideas and current holdings Work alongside Senior Analysts and Sector Heads to generate new ideas Construct screens and present to the committee 17

18 General Members Introductory level of the IC Primary goal is to observe and work with analysts and sector heads to develop skills and prepare for promotion to the analyst level Encouraged to attend sector meetings Frequent opportunities for promotion Cannot pitch or present to the committee 18

19 Investment Process Step 1: Independent Research Work with available resources to find potential investments for the committee Step 2: Development of Screen PowerPoint deck created to provide committee snapshot of investment idea 6-8 slides Reviewed on voted on by IDG to advance to presentation Step 3: Presentation In-depth presentation on major aspects of the security Should answer all of the questions raised by IDG about yours screen Step 4: Further Review by the Directors Directors will review presentations and hold a vote on whether to purchase Step 5: Purchase and addition to the portfolio Asset is purchased at recommended allocation and added to the portfolio

20 Investment Strategy Strategy aimed at generating returns in excess of the S&P 500, while taking on similar to smaller risk levels through a diversified portfolio Holding period medium-to-long term 6 months-5 years Asset Classes Domestic equities, ETF s, and bonds Value and Growth investments Don t know what some parts of that mean? No problem! That s why we re here

21 Why Join?

22 Why Join? All of us will not be Jordan Belfort s or Warren Buffett s and may not even pursue careers in Finance But what do nearly all professionals in the free world do throughout their careers? Save money, manage assets, and generate wealth The IC will put you ahead of the game for years to come Additional & universal skills Public speaking, presentation building, research, leadership Starting Salaries IC alumni average starting salary: $68, GT alumni average starting salary: $54,250

23 Those who are interested in Finance Networking A large portion of Tech s presence on Wall Street is composed of IC alumni Concentration of experience and know-how One conversation with an upperclassmen in your field can save you hours of prep work and possibly make the difference in getting that first internship Imagine what talking to 10 could do Every hour you spend on the Investments Committee will be an hour spent towards reaching your career goals Exposure to markets, public speaking, networking, due diligence, etc

24 Recent Placement

25 Markets & Investing Why we invest, how we invest, and what we invest in

26 Why do we invest? Two ways to make money Work Have your assets work for you Investment Generating future income by foregoing consumption today Instead of spending $1000, invest it, and have $1250 at the end of the semester Why are we compensated for our investment? The Risk in the underlying asset/company that may cause us to lose our investment The Time Value of Money

27 Time Value of Money A Dollar today is worth more than a Dollar tomorrow Today > Tomorrow This is essential to investing

28 Time Value of Money Example Let s say in a world before the financial crisis, you could earn 3% by keeping your money in your savings account Now, let s say your grandparents give you the option of receiving a trust fund of $10,000 now or one of $11,000 in 4 years Which do you pick? See how much you would earn in four years if you took $10,000 now If you accept $10,000 now, you can invest it at 3% for four years FV = (10,000)(1.03)^4 = $11,255 OR, If you accept $11,000 in four years, you need to discount it to the present time to make an apples to apples comparison PV = (11,000)/(1.03)^4 PV = $9,773

29 Time Value of Money Use a timeline to visualize cash flows Future Value - Value at a time in the future Present Value - Value in today s dollars Which one should be greater? Formula: FV = PV (1 + i)^n FV = future value PV = present value i = interest rate per period N = number of periods

30 Aspects of Time Value Earning power of a dollar Dollar can be invested risk-free to receive some base rate Inflation Risk Historically, currency has lost value over time due to inflation Most variable aspect of time value across investments Riskier investments have a lower probability of producing positive returns What if we invest in a risky company that may go bankrupt? We should expect higher returns compared to a safer investment like IBM If not, why would we ever invest in risky assets? We discount future cash flows more if they carry more risk

31 Aspects of Time Value Example We invest in Company A and Company B. Company A is a technology start-up in a competitive market. Company B is an established monopoly in the utilities sector. Both investments will pay us $10,000 in 6 months Which one has the greater present value? Think about the discount rate

32 Types of investments - Equity vs Debt Equity ( stock ) Ownership interest in a corporation Returns Stock price goes up Dividends

33 What is Equity vs Debt? Debt i.e. Fixed Income or Bonds Company borrows money by issuing Bonds Company then pays back that money plus interest to those bondholders Called Fixed Income because you receive a fixed payment of interest periodically Example Company A issues a bond to you in which you give them $1000. They say that they will pay you 10% interest annually and repay you the $1000 in 5 years

34 Debt Example Company A issues a bond to you in which you give them $1000. They say that they will pay you 10% interest annually and repay you the $1000 in 5 years Draw out the Cash Flows $100 in year 1, $100 in year 2, $100 in year 3, $100 in year 4, $100 + $1000 in year 5 Why do they pay you this 10%? Time Value of Money Default risk Maturity or Duration Risk Reinvestment Risk (Interest Rate risk)

35 Equity Example Company A has 1000 shares outstanding. These shares are currently priced at $10 each. You decide to buy 100 of these shares for a total of $1000. You hold these for 5 years, the same amount of time you held the bond in the previous example, and then sell them the same day your bond expired. Which investment should generate the higher return? i.e. should your investment in stock give you more than 10% per year? Think about risks

36 Equity cont The Equity investment should generate the higher returns You are bearing much more risk No guarantee of income like there is with the bond The price of the stock could drop at anytime (Capital risk) What if the company defaults? (default risk) Both the bondholder and the equityholder would lose money Bondholders have a more senior claim on assets in the event of a default so default risk is higher for equity investments Remember, returns should increase as risk increases If not, why would you ever invest in something risky?!

37 Equity vs. Debt Illustration Raise Capital Equity Debt Bankruptcy = $0 Stock Upside Limited Downside Fixed Return

38 Long vs Short So far we have discussed buying and holding a company s shares This is what is known as having a long position Long means that you expect the asset to increase in value Stock price goes up What if we expect the stock price to go down? Borrow the asset, sell it at a higher price, and then buy it back at a lower price This is called having a short position You earn a return if the asset s value decreases Anyone seen the movie The Big Short?

39 Long vs Short Reasons that we would be long a company Growth We expect the company to grow in the future, increasing the value of the company Outperformance We think the company will outperform its competitors and capture market share Undervalued We think the company is trading for cheap on the market, and we think that the price may rise to its true value Reasons that we would be short a company Default We think that the company is in risk of defaulting on its debt payments Underperformance We think that the company will do worse than its competitors and lose market share Overvalued We think the company is expensive on the market, and we think that the price may come down to its true value

40 Investment Styles Growth, Momentum, and Value

41 Investment Styles How do investors try to beat the market? The main styles Growth Investing Momentum Investing Value Investing

42 Growth Investing A strategy in which investors seek to pick stocks with the best growth potential Remember that growth is one of the greatest catalysts in the appreciation of stock prices Pros Cons Very popular strategy and not overly technical Growth investments usually exhibit a high degree of volatility (exposure to systematic risk) Due to popularity, a lot of these trades are crowded into by investors (making them more expensive) Important note: Growth expectations will be factored into the price of assets. As such, good growth investments are in companies in which you expect growth to exceed expectations

43 Growth Investing Popular growth stocks: Typical Characteristics: Highly volatile, smaller, younger, new market niches Typical sectors: Technology, Healthcare, Consumer Discretionary, Energy

44 Momentum Investing A strategy in which investors exploit trends in the market and in specific asset prices Known as chartists or trend-followers Buy hot stocks, Sell cold stocks Belief that stocks that are increasing in value will continue to increase in value and stocks that are decreasing in value will continue to decrease in value Once a stock gains momentum, price is often driven by demand and not by fundamentals Leads to overreaction and drives prices away from their true value

45 Momentum Investing

46 Value Investing Also known as fundamental investing Investment strategy in which investors look for assets whose true value differs from its value on the market Undervalued or Overvalued Based off of fundamental analysis Looking at the underlying fundamentals of the company Three financial statements, forward projections, effectiveness of management This is the most conservative of the major investment philosophies and is utilized by some of the greatest investors in history

47 Value Investing The father of value investing: Benjamin Graham Security Analysis and The Intelligent Investor Speculation vs Investing Las Vegas makes all of its money from speculators Rolling the dice Many investors are simply speculators The value philosophy is arguably the least speculative as it is based off of fundamental analysis as opposed to growth expectations or chart analysis (momentum)

48 What we have learned so far Why do we invest? Time value of money Interest, discounting, and risk What is equity? What is debt? What does it mean if we are long a company What does it mean if we are short a company Investment Strategies Session 1 Quiz A link will be sent out shortly after the meeting Please complete it by Thursday!

49 Next Time Modern Portfolio Theory Diversification, optimal portfolio construction, measuring risk Accounting Fundamentals The Three Financial Statements Questions? Hang around after