About a year ago, I agreed to do a series of seminars for the IFC, an arm of the World Bank that invests in privately owned businesses, primarily in emerging markets. The focus of the seminars was risk governance and the audience was directors in companies. While I was leery of getting entangled in the layers of bureaucracy that characterize the World Bank, I agreed to do it for two reasons. First, I had done the bulk of the work already in my book on Strategic Risk Taking (published by Wharton Press), published a couple of years ago. Second, I thought it would be interesting to talk about risk...
Past performance is no guarantee of future performance... but is anyone listening?
Most mutual funds end their advertisements with this statement: "past performance is no guarantee of future results". I don't know why they bother because investors don't seem to act like they care. In fact, one phenomenon that we know characterizes investors is that many of them try to invest in whatever asset class, fund or stock has done well in the past.I was reminded of this return chasing phenomenon by an article I read on Permanent Portfolio, a fund that has been around a while but has generally struggled to survive for most of its life, with about $ 50 million in money under management...
Checks and Balances: Eisner and Disney
I just read about a forthcoming book, written by Michael Eisner, ex-Disney CEO, titled "Working Together: Why great partnerships succeed". My first reaction was incredulity.. What next? Madonna on "The Importance of Celibacy" and Bernie Madoff on "Investing Wisely"...As some of you may know, I have used Disney as my laboratory case study in my applied corporate finance book through three editions and fifteen years. I love the company and its products but have not always cared for its management. In fact, I have been particularly harsh about Eisner, who I think did serious damage to the company,...
Capital Structure: Optimal or Opportunisitic?
Contrary to the prediction of doomsayers during the banking crisis of 2008, firms seem to be returning with a vengeance to the debt markets. Today's story in the Wall Street Journal provides some details:http://online.wsj.com/article/SB10001424052748703453804575479712501514050.html?mod=WSJ_hps_LEFTWhatsNewsFinding the right mix of debt and equity to fund a business remains one of the key components of corporate finance. The contours of the choices are clearly established.On the plus side: Using debt instead of equity to fund investments generates tax benefits in most countries, since interest...
Time for class!!
I am getting ready for the first day of my Fall 2010 Valuation class and am just as excited as I was the day that I taught my first class. I taught my first valuation class in 1986 and have taught it every year since (twice a year, in most years). I am often asked whether I get bored, teaching the same class over and over. Not for a second, and here is why:1. The issues that we face in valuation change constantly. When I first started teaching the class, the big issue was recapitalization, as many large US companies were shifting to using more debt in their capital structure. In the 1990s, interest...
Unstable risk premiums: A new paper
I am back from a long hiatus from posting, but I had nothing profound (even mildly so) to post and I was on vacation for a couple of weeks and Latin America last week.As many of you have read in my postings, I am working on a book where I look at shaking up some of the fundamental assumptions that underlie modern finance. My first chapter on "what if nothing is risk free?" was posted about four weeks ago and you can still get to it by going to:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1648164My second chapter builds on a theme that has been a bit of an obsession for me on risk premiums...
