He’s Dead, He’s Alive, And Now He’s Gone
The saga of Peloton and Mr. Big took yet another turn between the time I posted last week’s update and now. Apparently, following Mr. Big’s untimely demise at the hands of his Peloton, the actor that portrays him has been the target of some unseemly accusations. As a result of this, Peloton pulled their ad campaign about him being alive and now the Twitter link that I posted last week looks like this1
I guess Ferris Bueller was right after all.
Follow-up on Core Identity
Last week, I talked about the concept “Don’t make the things you like part of your core identity.” A quick follow-up on that came from a Morning Brew Q&A with John Urschel, a former offensive lineman for the Baltimore Ravens. Dr. Urschel is a bit of human freak (in a most excellent way) in that he retired from the NFL to focus on earning his PhD in mathematics — completing the PhD this year. Further evidence that the stereotype of “dumb jock” may need some re-evaluating.2 In response to a question about a mid-career pivot, Dr. Urschel responded:
One of the things that makes it really hard for people to make a switch in sports or in anything is that, when you have a job, you start to think that your job is who you are. Your job is something that defines you in some way to family, friends, and other people. I think that actually limits a lot of people because they have a hard time imagining themselves outside of a certain thing. I think it's really important to disassociate yourself with what it is that you do. In my mind that empowers you to do different things.
It’s pretty clear that he values the ability to switch gears and doesn’t see his career as part of his core identity. Kudos to him, both for his accomplishments so far and for his mindset.
CFA Institute Research Challenge
“By Doing, Learn” — This was one of the core missions at Pittsburg State University (GoGorillas!). Alternatively stated by Benjamin Franklin (or maybe not)
Both address the same central theme. While lectures may have a role in education, if we want students to actually learn something that will have some permanence they need to roll up their sleeves and just do it (apologies to Nike — although an interesting origin story to that slogan). Preferably with some guidance. While this philosophy was something I tried to incorporate into my teaching (with varied success), one opportunity came each year for a small group of students to jump into the proverbial deep end of the pool and take on the role of developing a sell-side research report.
My first experience with the competition started in the fall of 2011, when we were assigned Garmin as the company to research. I was fortunate enough to start off with a strong group of students — Alena, Barbara, Brandon, Esther, and Yana. Not only was it an incredible learning opportunity for them but, as my first foray into the CFA Institute Research Challenge competition, also for me.
It sounds silly to say this, but my first job as a financial analyst was largely a result of my boss having attended the competition. I showed him the work and we talked about it in our interview. This led to me getting into this line of work. While it wasn’t a good fit overall, the exposure really helped me develop experience working with a finance professional on standard practices regarding the FP&A process. I would not have been able to drive value and advance in my role at my current job without that experience. — Brandon
What Is the CFA Institute Research Challenge?
This seems like a good time to explain what the CFA Institute Research Challenge (I’ll simply abbreviate it as CFA RC for the rest of the post) actually is. From the CFA Institutes web site, we can find this overview:
Local CFA® Societies work with universities to assemble teams of three to five undergraduate and/or graduate students. Teams research and analyze a designated publicly traded company; prepare a written report on that company that supports a buy, sell, or hold recommendation; receive advice and support from a faculty advisor and an industry mentor; and present and defend their findings to a panel of industry experts. Winners from the local competitions advance to subregional competitions, then on to regional competitions in the Americas, Asia, and Europe, culminating in a global final.
Essentially, in the fall participating schools submits their teams. Each school can submit a team of 3-5 students.3 At the Kickoff event, the team would get introduced to what the challenge was about, the rules (including the ethics requirements), what the timeline was (company presentation to teams, Q&A session with company, written report deadline, presentation date, regional competition, etc.), suggestions for how to approach competition, and the identification of the company to be analyzed. Before the Kickoff meeting, I would engage in recruiting for the team. While you might think this would be pretty straight forward given the huge opportunity this is for students, many years the challenge was finding enough students to fill a team.4 What makes this tough is that while it is the best learning experience offered for students interested in investments (IMHO), we were at a school in Southeast Kansas which is not really a hotbed for investment analysts. Also, it is a LOT of work. In order to be competitive, students probably need to put in about 5-10 hours each week (with a couple of longer weeks before the written report and presentation deadlines). Given that many students are either engaged in career search or relaxing after having secured a position, combined with a few cases of senioritis, the motivation to take on that extra workload tends to be low.
Post Kickoff Meeting
This is usually the time frame when the excitement is at its highest. The students have a goal in sight and know the company they will be targeting. In addition to a faculty advisor, each team has an industry mentor — typically someone working as an investment analyst. I should take a moment here to commend the CFA Institute and each of the local societies who put on this competition each year. It’s a tremendous amount of work. In addition to coordinating with schools in their local region, they need to find a company that is
willing to work with students through a multi-month project,
give a presentation,
and take shorter (approximately 30-minute) Q&A sessions with each team.
They also find volunteers to serve as the industry mentor for each team, judges for written submission, a place to host the Kickoff meeting and presentations, and judges for the presentation round. This work eats into their weekends and is all volunteer. Special thanks to Laurian Lytle who served as the person in charge for the KC local competition. And also to Jeff Hoernemann, who volunteered each year as Pittsburg State’s professional advisor. Also, a shoutout to all the other volunteers throughout the KC local and overall competition! You’re efforts were and are greatly appreciated.
Some schools are probably better prepared for this competition in that they have mainly graduate students on their teams or have programs where students have had investments classes prior to starting the competition. However, there are plenty of schools that were also in the same situation as we were, where students are learning about the concepts of equity markets, valuation, and risk analysis in classes at the same time they are trying to apply them to an actual company. I’m guessing that for the majority of our teams, their first exposure to a 10-K, 10-Q, or conference call transcript came about as part of the CFA RC. Their first time building a financial model also was likely a result of participating in the CFA RC.
One of the challenges of education is that students learn to follow instructions. Textbooks provide examples of forecasting revenues by giving students the current year revenue and telling them the growth rate. While companies may provide some guidance for the next year, it is rare for them to provide it for the next several years.5 Now, the team’s first assignment is to learn about the company by reading through the 10-K, recent 10-Qs, conference call transcripts, and any presentations on the firm’s investor relations page. This typically resulted in facial expressions that might remind you of this.
I would give them a couple weeks to start making their way through the material and also set up a phone interview with our industry mentor for an overview of the company and some tips on how they should proceed.
While virtually all teams would hit a stretch where the vision of what they were hoping to accomplish would run into the reality of how much work it was going to take to get there (there was one team that was an exception — which is probably why they won the local challenge during their year). Invariably, one or two students would decide they no longer wanted to participate. Sometimes we had enough team members to keep going and sometimes we scrambled to find replacements. Many teams in the local challenge often had a slightly different cast of competitors at the presentation than they did at the Kickoff meeting, so this was not just an issue with our school.
Building a Financial Model
One of the recommendations from our industry mentor every year was to start by building the financial model (income statement, balance sheet, and cash flow projections) that would serve as the basis for valuation. This was always a stumbling block for students as they would often ask “how do we project sales growth or costs?” Moving from the textbook world to the world of an actual company in real-time with news coming out on a regular basis is a major challenge. Yet this is exactly what made the CFA RC such a great opportunity. It is like a chef moving from following a recipe to creating a recipe. Following the recipe merely requires one to do as their told. Creating the recipe requires one to understand WHY the ingredients and preparation are being done as they are. Being successful beyond the classroom requires that one is able to understand what they are doing, why they are doing it, and how to adjust.
Skill Sets
While many people think of something like the CFA RC as a way to understand valuation (and they’re not wrong), it is actually much more than that. In order to be successful, teams have to develop several sets of skills.
Time Management — in addition to the CFA RC, they also have classes, interviews, jobs, and every other aspect of their lives going on. The CFA RC adds an extra 5-10 hours per week on top of that. Without sound time management skills, things would fall through the gaps. This happened with some teams, but the more successful teams developed the time management skills to keep up.
Communication — Team members need to communicate with each other, with their faculty advisor, their industry mentor, the spokesperson for the company, the organizers, and the judges (both in the written report and in the oral presentation). In addition to being able to clearly present their arguments, they need to develop the terminology associated with the company/industry, be able to answer questions on the fly (the competition has a 10-minute question and answer session), ask appropriate questions, etc. Without strong written and oral communication skills, their chances of success plummet.
Organization/Leadership — One of the things that really identified whether a team was going to be competitive was whether they had one or two people that would be willing to take charge. There are a lot of moving parts and someone needs to organize so each team member knows what they are responsible for and when it needs completed.
Teamwork — This connects with the two topics above. For the team to work well in a chaotic environment (and, if you haven’t followed financial markets and individual companies, trust me — there is plenty of chaos in both news flow and market reactions to the news flow) requires everyone to understand their role and how they are contributing. Often, it is essential to have at least two team members with a good grasp of each issue (even if one is the lead). One of the overlooked parts is that if you have four or five members of the team, you are likely (hopefully) going to get some disagreement. The ability to rationally work through that disagreement to reach a consensus requires some real effort and the ability to focus on ideas rather than who is presenting the idea. Each team member also needs to realize that if he or she isn’t pulling their weight, they are hurting the team as a whole.
Connections. I speak with you almost daily and the rest of the guys were all groomsmen in my wedding. You really get to know everyone through the process and build lifelong friends. In addition to this, there is potential to meet other investment/business connections through the process. — Trevor on the benefits of having a strong team instead of just a group of individuals.
Critical Thinking — The company that was assigned for the KC local competition in 2011 was Garmin. This was when the smartphone (especially Apple’s iPhone) was starting to put the hurt on the in-car GPS systems offered by Garmin.
Remember that we started the competition in the October 2011, so we knew the 2009 and 2010 data, but not 2011 yet. The biggest source of revenues (by far) was the automotive/mobile, but that was losing out to smartphone apps and it was clear that this trend would continue. So, how do students just getting started with investment analysis forecast the company’s cash flows over the next few years? They need to factor in the declining revenue from one source and decide whether it would get offset by cash flow growth from other sources. What will happen to margins? What risk factors are out there? What other news flow will occur during the analysis period? Plus 101 other strategic issues need analyzed. These are all things that challenge seasoned professionals. For students, it is being thrown into the fire. However, they need to develop their story (what they think will happen) and be able to logically explain why to professional analysts and portfolio managers.
While the list of skills could go on, these are some of the major ones. Note that they are not truly “finance” skills. Instead, most fall under the category of “soft” skills that are essential to the success of most employees. Sure, an employee needs to have some understanding of their field. However, it is often easier to teach someone the technical skills they need than to develop the above skillset. The stronger the team was in these areas, the better their performance was in the competition.
Preparation
One last important step is preparation. The team that won the KC local challenge (Alex, Jordan, Rece, and Trevor with EPR Properties) had a level of focus that made sure they were going to be on the top of their game. One of the things that stood out was very early into the process, they asked about how other Pitt State teams had fared. My response was that it was a mixed bag. Some had done very well and some had really struggled. Their follow-up question asked what was the biggest struggle. My answer was the presentation (a 10-minute prepared presentation from the team followed by a 10-minute question/answer session). This team was determined to nail the presentation. The rules are such that they can’t have anyone coach them on their presentation outside of the faculty advisor, industry mentor or a presentation coach. The coach could only focus on style, not the content. Fortunately, there was a professor (Dr. Mark Johnson) who is an outstanding public speaker and was willing to volunteer his time to work with them, transforming their presentation from informative to dynamic. In addition, the team literally spent the night before the written report was due in the business building (a student workroom) until about 5:00 AM putting the finishing touches on wording, formatting, and all the details required to make their report as strong as possible.
The competition teaches you that there are a lot of moving parts with a business. As you start to dig into a company, there are many rocks to unturn and it can begin to drive you nuts. At a certain point in time, your research reaches the diminishing marginal return period. What's that Einstein quote: "Make everything as simple as possible, but not simpler."? At the end of it all, I had a chance to reflect and look back at what was beneficial and what was maybe a waste of time during the research process. Today, I'm able to tie that into my research process. — Trevor
Benefits to the Faculty Advisor
I’ve talked a lot about the benefits to students for participating in the CFA Institute Research Challenge. However, I’d be remiss to not add that I received tons of benefits as well in my role as a faculty advisor.
Teaching — Very quickly into my teaching career (while I was still a graduate student), I learned that I really enjoyed teaching. Making the connection with students who were interested in learning is an incredibly rewarding experience. Helping them see connections between things discussed in class and application to analyzing a company “in the wild” is the essence of teaching. Seeing the growth between the time they signed up for the competition and when they gave their presentation was amazing.
Connections — The competition also provided an opportunity to get to know students beyond the classroom. In the collage above, you can see the EPR Properties team and I eating at the Boston pizzeria where Mark Zuckerberg hung out while at Harvard. Often the students would drive to/from Kansas City with me for the events up there. There were lunches at Chipotle, Cheesecake Factory, etc. and the opportunity to talk about their career interests and goals in life.
Learning — I included the subheading “By Doing, Learn” to this week’s post — and it applies to me as well as the students. Often the projects from previous years provided great examples for helping illustrate concepts to students in classes. By spending months working on a single company (while they were doing the work, I needed to do it as well so I could answer questions and give them appropriate feedback), I’d have the depth necessary to talk about Compass Minerals or Kansas City Southern instead of Company X.
While most of you will not have the opportunity to participate directly in the CFA RC, I thought it would provide some insight into one of the highlights of my career — moving away from the overly clean world of textbooks and into the naturally messy world of actual companies. If you were one of my students who had the benefit of participating in the competition (Adilet, Viet, anyone else?), I hope it was as rewarding for you as it was for me. Also, KUDOS to you for all the hard work you put in during the process! For the rest of my readers, it is a great example that giving (there was no direct compensation for an activity that consumed quite a bit of time) is often tied very closely to receiving (the benefits that I received made this one of the highlights of my career).
HAPPY HOLIDAYS AND MERRY CHRISTMAS!
You can still find the video of the ad on YouTube.
nd for the record, my experience of nearly 30 years of teaching at the university level also refutes this stereotype. Are some athletes bad students? Sure, but so are many non-athletes. Factor in the amount of time they need to spend practicing/participating in their sport and I would argue athletes are no different than any other student.
The schedule would vary from one “local” competition to the next, but most followed similar schedules. We competed in the Kansas City local competition each year. Initially, schools were limited to one team. However, in recent years, each local CFA society could decide whether to allow multiple teams per school. KC stayed at one while I participated.
There were two years where we did not compete because there weren’t three students willing to participate.
In addition, the company may be overly optimistic. This is not saying that they are lying. Instead, it is acknowledging that their natural bias is going to be positive towards the company that they are a part of leading. It is the self-serving bias in action.