Note – stay tuned for our upcoming podcast with ”upcoming podcast with Paul Sonkin and Paul Johnson on the topic of preparing analysts for interviews and careers
I always get asked the question – I want to manage money or work at a hedge fund, what should I do? While I have a condensed answer, it takes hours just to get to explain basics. Now I can simply tell people you MUST read “Pitch The Perfect Investment“. The book does a great job at its mission – preparing analysts (or potential ones) for the job.
Sonkin and Johnson have a unique vantage point in being educators, analysts and portfolio managers. Given their combined experience of teaching more than 2,500 students over a 25 year period, they know what knowledge young enterprising analysts need in order to survive and thrive on Wall Street. The examples and graphics in their book puts difficult concepts into a form which is a surprisingly easy read while being informative.
At the end of last week, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. The chat spanned many different topics, Read More
On their website, they outline what you can expect to learn:
Pitch the Perfect Investment is divided into two primary sections. We selected this structure because an analyst has two distinctively different responsibilities. The analyst’s first assignment is to find a good investment, one where there is a large spread between the market price and intrinsic value. This part of the process requires the analyst to calculate the stock’s intrinsic value, determine whether a genuine mispricing exists, and identify a catalyst that will close the gap between the stock’s price and its intrinsic value, thus correcting the stock’s mispricing. The second part of the process is communicating (pitching) the idea to the portfolio manager. This step requires a completely different set of skills. We have structured the book accordingly, as shown below.
The first four chapters of the book layout the process of determining a company’s intrinsic value. This explanation begins with valuing an asset using a discounted cash flow model in Chapter 1, then uses this approach to value a business in Chapter 2. Because assessing competitive advantage is critical to determining the value of growth, we discuss these topics in depth in Chapter 3. Chapter 4 uses those tools to value a security.
We then explain how investors set stock prices, which entails a detailed discussion of market efficiency. We begin in Chapter 5 with an examination of Eugene Fama’s efficient market hypothesis, where we establish the rules the market follows to set prices. We discuss the wisdom of crowds in Chapter 6 and show how these rules are implemented in the market. We then discuss behavioral finance in Chapter 7 to show how these rules can become strained or broken.
In Chapter 8 we discuss how to add value through the research process. We show that the investor must develop an informational advantage, an analytical advantage, or a trading advantage to be able to claim that a stock is genuinely mispriced. If the investor cannot identify why other investors are wrong, show why he is right, and articulate what advantage he has, then it is unlikely that he has identified a true mispricing. We end the chapter by defining a catalyst as any event that begins to close the gap between the stock price and your estimate of intrinsic value.
In Chapter 9 we demonstrate that risk and uncertainty are not synonymous and show that their difference is misunderstood by most investors. We then highlight the components of an investment’s return and emphasize that while most investors focus on their estimate of intrinsic value, time is a critical, although often overlooked, factor. We demonstrate how an investor can significantly reduce risk by increasing the accuracy and precision of both their estimate of intrinsic value and the investment’s time horizon. At this point in the book we will have shown how to vet the perfect investment. The next part discusses the key elements of pitching that investment to a portfolio manager.
We explain in Chapter 10 that for the analyst to select the proper security to pitch, he must know the portfolio manager’s selection criteria. We demonstrate that the manager will not even listen, much less adopt, an investment idea unless it matches his investment criteria. We show in Chapter 11 how to organize the content of the pitch to maximize its impact. Finally, we discuss in Chapter 12 the different elements necessary to ensure the effectiveness of the delivery, while minimizing extraneous factors.
Pitch the Perfect Investment is a great resource that distills a significant percent of what an analyst need to know into one volume. The book does a great job at its mission - preparing analysts (or potential ones) for the job.