Pitch the Perfect Investment

The Essential Guide to Winning on Wall Street

Paul D. Sonkin, Paul Johnson

• Publisher: Wiley
• Year: 2017
• ISBN:
  9781119280972
• Edition: 1
• Topic: Business
• Subtopic: Investimenti e titoli
• Index: Business

Learn the overlooked skill that is essential to Wall Street success

Pitch the Perfect Investment combines investment analysis with persuasion and sales to teach you the "soft skill" so crucial to success in the financial markets. Written by the leading authorities in investment pitching, this book shows you how to develop and exploit the essential, career-advancing skill of pitching value-creating ideas to win over clients and investors. You'll gain world-class insight into search strategy, data collection and research, securities analysis, and risk assessment and management to help you uncover the perfect opportunity; you'll then strengthen your critical thinking skills and draw on psychology, argumentation, and informal logic to craft the perfect pitch to showcase your perfect idea. The ability to effectively pitch an investment is essential to securing a job on Wall Street, where it immediately becomes a fundamental part of day-to-day business. This book gives you in-depth training along with access to complete online ancillaries and case studies so you can master the little skill that makes a big difference.

It doesn't matter how great your investment ideas are if you can't convince anyone to actually invest. Ideas must come to fruition to be truly great, and this book gives you the tools and understanding you need to get it done.

• Persuade potential investors, clients, executives, and employers
• Source, analyze, value, and pitch your ideas for stocks and acquisitions
• Get hired, make money, expand your company, and win business
• Craft the perfect investment into the perfect pitch

Money managers, analysts, bankers, executives, salespeople, students, and individual investors alike stand to gain massively by employing the techniques discussed here. If you're serious about success and ready to start moving up, Pitch the Perfect Investment shows you how to make it happen.

PART 1
THE PERFECT INVESTMENT

The goal in Part I of the book is to show how to identify the perfect investment, which we explain is one where a stock has been mispriced. We also show that the investor must identify a path for the mispricing to correct and be able to exploit the opportunity. To determine if a stock is mispriced, the analyst needs to calculate the stock’s intrinsic value, which we cover in detail in the first four chapters of the book.

We define the value of an asset in Chapter 1 and show how it is valued using a discounted cash flow model. We use 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. Finally, we use these tools in Chapter 4 to show how to think about a security’s intrinsic value.

To determine if a genuine mispricing exists, we need to define the conditions under which a stock will be efficiently priced, which requires a detailed discussion of market efficiency. We begin in Chapter 5 with an explanation of Eugene Fama’s efficient market hypothesis, which we show are the rules the market follows to set prices. We then discuss the wisdom of crowds in Chapter 6 and show it as the mechanism that implements the rules in the market. We then explore behavioral finance in Chapter 7 and show how the rules can become strained or broken when a systematic error skews the crowd’s view.

To establish if a mispricing is genuine, the investor must demonstrate that he has either an informational advantage, an analytical advantage, or a trading advantage. If the investor cannot identify specifically why other investors are wrong, show why he is right, and articulate what advantage he has, then it is unlikely he has identified a stock that is truly mispriced. We discuss these topics in Chapter 8 and then define 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 show that risk and uncertainty are not the same thing and that the difference is often misunderstood. We then discuss the three components of investment return—the price you pay, your estimate of intrinsic value, and the estimated time horizon. It is the authors’ experience that most investors spend the bulk of their time focusing on calculating their estimate of intrinsic value, while failing to estimate accurately an investment’s time horizon. We feel this focus is a mistake as time is a critical factor in determining the investment’s ultimate return. We then move the discussion to how through research an investor can significantly reduce risk by increasing the accuracy and precision of both the estimates of intrinsic value and the investment’s time horizon.

By the end of Part I we will have shown how to vet the perfect investment.

CHAPTER 1
How to Value an Asset

Three Primary Components of Value

In this chapter, we discuss the three main components necessary to calculate the value of an asset: the cash flows, the uncertainty of receiving the cash flows, and the time value of money. We show these components in Figure 1.1

Figure 1.1 Primary Components to the Value of an Asset

Four Subcomponents of Cash Flow

The first part of the definition, “Cash flows produced by that asset, over its useful life,” includes four subcomponents: timing, duration, magnitude, and growth, as shown in Figure 1.2.

Figure 1.2 Four Cash Flow Subcomponents

The first subcomponent, timing, addresses the question, “When will we get the cash?” Will we get the cash flow next year or in five years? While the amount of the cash flow is the same in Figures 1.3A and B, the cash flow is received sooner in A than in B. All else being equal, getting cash sooner is better than getting it later.

Figure 1.3 Getting Cash Sooner Is Preferable

The second subcomponent, duration, addresses the question, “How lo...