How to Make Millions How to Make Millions in the Stock Marketin the Stock Market

Ted ShiehTed Shiehted.shieh@anderson.ucla.eduted.shieh@anderson.ucla.edu

Jan 22, 2008Jan 22, 2008

Step 1: Start with billions of Step 1: Start with billions of dollarsdollars

OutlineOutline

Brief bioBrief bio Fundamental analysis: investing the Warren Buffett wayFundamental analysis: investing the Warren Buffett way Technical analysis and trend-followingTechnical analysis and trend-following Regime shiftsRegime shifts Allocating capital towards productive uses and away Allocating capital towards productive uses and away

from nonproductive usesfrom nonproductive uses Risk arbitrage (merger arbitrage)Risk arbitrage (merger arbitrage) Reading listReading list Conclusion Conclusion

Brief bioBrief bio

B.A. in Molecular Biophysics & Biochemistry from B.A. in Molecular Biophysics & Biochemistry from Yale UniversityYale University

Worked at JP Morgan and LiveCapital before joining Worked at JP Morgan and LiveCapital before joining UCLA Anderson’s Finance Ph.D. program in 2003.UCLA Anderson’s Finance Ph.D. program in 2003.

Summer Intern at Countrywide Financial in Fixed Summer Intern at Countrywide Financial in Fixed Income TradingIncome Trading

Currently part of an 11 person team (including the Currently part of an 11 person team (including the former head of U.S. Treasury and Agency trading at former head of U.S. Treasury and Agency trading at Morgan Stanley) that is raising capital for a hedge fund Morgan Stanley) that is raising capital for a hedge fund (role: quantitative analyst)(role: quantitative analyst)

Fundamental analysisFundamental analysis

Warren BuffettWarren Buffett Intrinsic ValueIntrinsic Value Goldman Sachs’ model for Dillard’sGoldman Sachs’ model for Dillard’s Estimating future cash flowsEstimating future cash flows Estimating a discount rateEstimating a discount rate

Buffett’s definition for intrinsic valueBuffett’s definition for intrinsic value

We define intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life. Anyone calculating intrinsic value necessarily comes up with a highly subjective figure that will change both as estimates of future cash flows are revised and as interest rates move. Despite its fuzziness, however, intrinsic value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.

Free cash flowFree cash flow

FCF = NOPAT – net investmentFCF = NOPAT – net investment NOPAT = net income plus depreciationNOPAT = net income plus depreciation Net investment = capex plus change in net Net investment = capex plus change in net

working capitalworking capital

Technical Analysis: Martin SchwartzTechnical Analysis: Martin Schwartz

After nine years as a securities analyst, I decided After nine years as a securities analyst, I decided to make a complete transition from fundamental to make a complete transition from fundamental analysis, the use of economic data to forecast analysis, the use of economic data to forecast individual stock prices, to technical analysis, the individual stock prices, to technical analysis, the study of price and volume independent of the study of price and volume independent of the underlying economic data.underlying economic data.

- - Pit Bull: Lessons from Wall Street’s Champion Pit Bull: Lessons from Wall Street’s Champion TraderTrader, p. 265., p. 265.

MomentumMomentum

Jegadeesh, Narasimhan and Sheridan Titman Jegadeesh, Narasimhan and Sheridan Titman (1993). Returns to Buying Winners and Selling (1993). Returns to Buying Winners and Selling Losers: Implications for Stock Market Losers: Implications for Stock Market Efficiency, Efficiency, Journal of FinanceJournal of Finance, pp. 65-91., pp. 65-91.

Advice for speculators from Jesse Advice for speculators from Jesse LivermoreLivermore

Only speculate if you can make it a full-time job. Don’t Only speculate if you can make it a full-time job. Don’t take tips of any kind, no matter where they come from. take tips of any kind, no matter where they come from. Don’t worry about catching the tops or bottoms, that’s Don’t worry about catching the tops or bottoms, that’s fool’s play. Keep the number of stocks you own to a fool’s play. Keep the number of stocks you own to a controllable number. It’s hard to herd cats, and it’s controllable number. It’s hard to herd cats, and it’s hard to track a lot of securities. Take your losses hard to track a lot of securities. Take your losses quickly and don’t brood about them. Try to learn from quickly and don’t brood about them. Try to learn from them, but mistakes are as inevitable as death. And only them, but mistakes are as inevitable as death. And only make a big move, a real big plunge, when the majority make a big move, a real big plunge, when the majority of factors are in your favor.of factors are in your favor.

- - Jesse Livermore, World’s Greatest Stock TraderJesse Livermore, World’s Greatest Stock Trader, pp. 130-131, pp. 130-131

Sources: Federal Reserve and Yahoo! FinanceSources: Federal Reserve and Yahoo! Finance

Regime shiftsRegime shifts

15

20

25

30

35

401/

3/20

01

7/3/

2001

1/3/

2002

7/3/

2002

1/3/

2003

7/3/

2003

1/3/

2004

7/3/

2004

1/3/

2005

7/3/

2005

1/3/

2006

7/3/

2006

1/3/

2007

7/3/

2007

1/3/

2008

XL

F P

rice

500

600

700

800

900

1000

1100

1200

1300

AB

CP

Ou

tsta

nd

ing

(b

illio

ns)

XLF

ABCP Outstanding

Sources: St. Louis Federal Reserve and Yahoo! FinanceSources: St. Louis Federal Reserve and Yahoo! Finance

1.0

1.5

2.0

2.5

3.0

Fe

b-5

0

Fe

b-5

3

Fe

b-5

6

Fe

b-5

9

Fe

b-6

2

Fe

b-6

5

Fe

b-6

8

Fe

b-7

1

Fe

b-7

4

Fe

b-7

7

Fe

b-8

0

Fe

b-8

3

Fe

b-8

6

Fe

b-8

9

Fe

b-9

2

Fe

b-9

5

Fe

b-9

8

Fe

b-0

1

Fe

b-0

4

Fe

b-0

7

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

log S&P 500 (left axis)

Unemployment Rate (right axis)

Regime shiftsRegime shifts

Allocating capital towards productive Allocating capital towards productive uses and away from nonproductive uses and away from nonproductive

usesuses

GoogleGoogle Dot-com boom and bustDot-com boom and bust Subprime mortgage crisisSubprime mortgage crisis GlobalizationGlobalization

Dot-comsDot-coms

These ten dot-com companies spent more than These ten dot-com companies spent more than $40 million in aggregate on SuperBowl ads in $40 million in aggregate on SuperBowl ads in January 2000:January 2000:

Pets.comPets.com• • E*TradeE*Trade• • Computer.comComputer.com• • LifeMinders.comLifeMinders.com• • HotJobs.comHotJobs.com• • LastMinuteTravel.comLastMinuteTravel.com• • Epidemic.comEpidemic.com• • KForce.comKForce.com• • WebMD.comWebMD.com• • OurBeginning.comOurBeginning.com

Subprime mortgagesSubprime mortgages

NINJA loans: no income, no job, no assetsNINJA loans: no income, no job, no assets

(you might be able to document income but not a (you might be able to document income but not a job if you are self-employed)job if you are self-employed)

Reading listReading list

Market Wizards by Jack D. SchwagerMarket Wizards by Jack D. Schwager Pit Bull: Lessons from Wall Street’s Champion Trader Pit Bull: Lessons from Wall Street’s Champion Trader

by Martin Schwartzby Martin Schwartz Jesse Livermore: World’s Greatest Stock Trader by Jesse Livermore: World’s Greatest Stock Trader by

Richard SmittenRichard Smitten Devil Take the Hindmost: A History of Financial Devil Take the Hindmost: A History of Financial

Speculation by Edward ChancellorSpeculation by Edward Chancellor Iceberg Risk by Kent OsbandIceberg Risk by Kent Osband Trump: The Art of the Deal by Donald J. Trump and Trump: The Art of the Deal by Donald J. Trump and

Tony SchwartzTony Schwartz Be My Guest by Conrad N. HiltonBe My Guest by Conrad N. Hilton

Risk arbitrageRisk arbitrage Also known as merger arbitrageAlso known as merger arbitrage BAC announced that it plans to acquire CFC with BAC announced that it plans to acquire CFC with

stock; it plans to exchange 0.1822 shares of BAC for stock; it plans to exchange 0.1822 shares of BAC for each share of CFC.each share of CFC.

BAC (2008-01-18): 35.97BAC (2008-01-18): 35.97 CFC (2008-01-18): 4.96CFC (2008-01-18): 4.96 Buy 100 CFC (pay $496). Short 18 BAC (receive Buy 100 CFC (pay $496). Short 18 BAC (receive

$647.46).$647.46). If the acquisition proceeds as planned, your 100 CFC If the acquisition proceeds as planned, your 100 CFC

will become 18 BAC (covering your short position) and will become 18 BAC (covering your short position) and you will make $151.46. But it is possible for the deal to you will make $151.46. But it is possible for the deal to fall through.fall through.

ConclusionConclusion

For the contest:For the contest: Take as much risk as you canTake as much risk as you can It’s artificial, but it’s still a good way to learnIt’s artificial, but it’s still a good way to learn

For real life:For real life: The path to riches is through building a career, building a The path to riches is through building a career, building a

reputation, and attracting Other People’s Money (OPM)reputation, and attracting Other People’s Money (OPM) Take risk, but make sure you are compensated for taking riskTake risk, but make sure you are compensated for taking risk If you don’t have time to read the news, either don’t take risk If you don’t have time to read the news, either don’t take risk

or find someone you trust to monitor your investmentsor find someone you trust to monitor your investments

Source: Bankrate.com (2008-01-18)