Investment Strategies

Investment Strategies

Course Number 1490

Professor Malcolm P. Baker
Associate Professor Samuel G. Hanson
Spring; Q3Q4; 3 credits
28 Sessions
Exam

Career Focus

Global capital markets are vast and dynamic, with over $60 trillion in listed public equities and more than $80 trillion in sovereign and corporate bonds outstanding. Every day, public markets set prices for CEOs and CFOs, financial institutions, and investors, all seeking to raise and invest money in a way that drives the economy forward. A public exit - "whether through an initial public offering of common stock or a stock-financed merger with an already public acquirer" - remains a critical step in corporate transformation by private equity investors and innovation by venture capitalists. Because public capital markets play such a key role in the global economy, government regulators and policy makers continually monitor their health and pay heed to the signals they are sending.

Investment Strategies is most directly applicable to students interested in pursuing careers in finance including mutual funds, hedge funds, pension funds, endowments, wealth management, financial consulting, marketing and client service, sales and trading, investment banking, private equity, venture capital, and corporate finance. However, many students have found that a thorough understanding of public capital markets and the business of investment management is valuable in a wider set of careers outside of finance and in managing their personal wealth.

The focus of Investment Strategies is financial markets, principally equity markets, taking the perspective of an institutional portfolio manager and considering the efficacy of value investing, growth investing, arbitrage, macroeconomic investing, and other active investment strategies.

Educational Objectives

The goal of this course is for you to develop an investment philosophy, a set of guiding principles that shape your approach to understanding and investing in public capital markets. While this philosophy is directly applicable to professional investment management, it is also relevant for corporate finance, investment banking, and personal finance. A cornerstone of any investment philosophy is a view on the efficiency of markets.

An efficient market is one where prices reflect true fundamental values. In an efficient market, there is little value in the selection of individual securities. Higher returns come only from bearing greater risk. Investing in efficient markets means minimizing transaction costs and choosing maximally diversified portfolios that deliver an optimal tradeoff between risk and return.

An inefficient market, by contrast, is one where prices differ - sometimes substantially - from fundamental values. Behavioral finance is a useful framework for understanding market inefficiencies. According to behavioral finance, the combination of investor biases and institutional constraints can lead prices to diverge from fundamental value. These deviations from fundamental value create opportunities and risks for sophisticated investors, in both security selection and asset allocation.

Content and Organization

The course is organized into two parts. The first part develops a conceptual framework for the functioning of markets, spread over four topics:

  1. Introduction
  2. Market Efficiency
  3. Execution and Risk Management
  4. Applications: Relative Value Investing and Systematic Investing

The second part puts these ideas into practice, examining the selection of individual securities and the execution of broader investment strategies, divided into five topics:

  1. Value Investing
  2. Forensic Accounting
  3. Asset Value
  4. Earnings Value and Activism
  5. Growth Investing

The materials consist of cases, class polls, and two course textbooks. A number of classes are built around visits from successful and well-known money managers.