Wednesday, 27 February 2013

The Once Invincible

Coach Arsene Wenger (above) should have a happier summer
     This past Monday, Premier League team Arsenal F.C published its financial statements for the first half of the season, posting a profit of about 17.8 million pounds.
     While profits from this period are just half of those from the previous period, Arsenal fans can rejoice in the fact that the reduced income is due to an increase in player investments. Over the past six months, the team brought on the likes of Lukas Podolski, Santi Cazorla, and Olivier Giroud, and the club also announced extending contracts with the talented Jack Wilshire and Theo Walcott.
   Although the increase in spending is and should be considered a good thing for Arsenal as a football team, major problems still exist. The team has failed to win a trophy for seven years, and sit at fifth place in the current Premier League table, one spot away from Champions League qualification. Should Arsenal fail to qualify for the Champions League, the team would suffer a huge hit to television broadcast revenue and home ticket sales, most likely prompting the sale of valuable players. The club's estimated wage bill of 155 million pounds per year would not be sustainable with any less fixtures for the team. Having a losing team with such a high wage bill would also put management under even more scrutiny for signing lackluster players to expensive deals.
    While Arsenal does have its fair share of problems going forward, there still exists hope for the Gunners faithful, The team reported a cash reserve of 123 million pounds with plans of having a strong summer transfer period. A sponsorship deal with Emirates in excess of 100 million pounds will also strengthen the club's finances for several more years.
    Still, fans are growing impatient over a perceived lack of investment in the team. As a Liverpool fan, I had to sit and watch as Xabi Alonso, Mascherano, and Fernando Torres all left Liverpool for greener pastures (maybe not so green for Torres). For Arsenal, the loss of Cesc Febregas, Samir Nasri, and Robin Van Persie has not been balanced out, with management sitting on the cash they made in those deals (each being a historic sum in its own right). After this most recent financial report, the promise has been made to the fans for improvement. Now we will have to wait and see if Arsenal will do what it financially takes to reclaim its place as the Invincibles of England.

-Aureen Sarker (Photo Credit: Arsenal F.C)

Italy’s Political Fallout

After the election that took place on Monday, Italy finds itself in political gridlock. The center-left, led by Pier Luigi Bersani, hold a majority in the lower house while the center-right coalition, led by Silvio Berlusconi, won enough seats in the Senate (117) to deprive the center-left of the majority it needed to govern. Beppe Grillo, a former satirist turned populist-politician, received 25.5% of the popular vote and won 54 seats in the Senate in what is perhaps the clearest demonstration of the dissatisfaction by the Italian people with the electoral system. Mario Monti, the outgoing technocrat that led the government after Berlusconi resigned in the midst of a crisis in 2011, received a lowly 10.5% of the votes for the lower house and 9.1% for the Senate, corroborating the displeasure that the public has for the austerity measures and tax hikes enacted under his government that managed to quell some of the fear ever-present in the marketplace.

SX5E - Euro Stoxx 50 Index (5-day performance)
The effects of such a result were clearly observable in the markets. In the immediate aftermath, the Euro Stoxx 50 Index, a Blue-chip Index containing 50 “Supersector leaders” from 12 European markets, fell sharply after initial projections had the center-left with a majority in both chambers were proven wrong. The FTSE 100 in London closed 1.3% lower and the MIB stock Index in Milan closed 4.9% lower. Even more worryingly, Italian 10-year bond yields rose by about half a percentage point to 4.86%, 62 basis points below the premium commanded by Spanish debt – their narrowest margin in 4 months. Unsurprisingly, the spread on 5-year Italian credit default swaps, or the cost of insuring Italian government debt, rose to 290 basis points from 245 basis points a day earlier. According to Market Watch, this means that it now costs $290,000 annually to insure $10 million of Italian debt against default for five years, versus $245,000 on Monday[1]. The euro fell to $1.3018, its lowest level since January 7.

So what does this mean for the Eurozone? After all, more than 50% of voters cast their ballots unambiguously against the Euro, against further austerity measures, and in favor of increased spending and lower taxes. In the now likely scenario that Bersani finds himself unable to form a coalition that communicates the clear message that Italy is committed to the austerity measures and the euro, then the uncertainty and anxiety that plagued Europe for the most part of 2011 might return. If Italy’s borrowing costs start to rise, a weak government could prevent it from reaping the benefits of a European Central Bank government bond-buying program, which could prove disastrous for the region. With this scenario in mind, European leaders have already started to pile pressure on Italy’s rival parties to form a stable government.

Let’s hope that they do.

-- Andrés Muñoz

[1] William L. Watts, "Investors Now Fear a Default by Italy more than Spain", Market Watch,

Monday, 25 February 2013


I received the following email from Dennis Beresford about my previous blog posting.   In that earlier essay, I had indicated that I expected my students to study before each class as if a quiz were scheduled even though no quiz was going to be given.   I want them to motivate themselves to do the work rather than leaving the motivation up to me as the teacher.   It is their education.   They should care enough to have the discipline needed to do the work.

I have long argued that students will always do much better in any class if they feel a sense of urgency.   The only question is whether that urgency needs to be externally driven or whether the students can be expected to create it for themselves.  

As many of you will know, Professor Beresford served as the chairman of FASB (Financial Accounting Standards Board) from 1987 until 1997.   Since that time, he has been the Ernst & Young Executive Professor of Accounting in the J. M. Tull School of Accounting at the Terry College of Business at the University of Georgia.   Over the years, he has held an unbelievable number of other prominent positions in the business and accounting world.  

Professor Beresford writes here about his own undergraduate education and the method by which his accounting professor at the University of Southern California created that essential sense of urgency in his students.   I only have a few quick comments.

(1) – I would bet that the students walked into Professor James’ class each day extremely well prepared and, as a result, learned a ton about accounting.   He certainly understood motivation.   I just hope that none of the students had a nervous breakdown.  

(2) – Although this method of teaching seems a bit harsh, do note that it successfully created one of the most influential accountants of the past 50 years:   Dennis Beresford.   You cannot argue against that outcome.   I do not know what happened to all of the other students after graduation but this method worked extremely well in one case.

(3) – Faculty members often complain that students have changed over the years (they have gotten soft and lazy).   From this account, maybe it is not the students who have changed but rather the faculty members who have changed.   Perhaps faculty members were once more willing than today to put these kinds of demands on their students.

From Professor Dennis Beresford:

“I enjoyed your latest teaching blog, ‘There Will Be No Quiz.’  It reminded me of my own experience at USC where the professor who taught my two Intermediate classes and one Advance class had a policy of never announcing any of his exams (except for the final, of course). Yes, I meant to say exams and not just quizzes. So we came to class each period not knowing whether we would have a lecture and discussion of homework problems on the assigned topic or the entire period would be devoted to an exam. He announced this policy at the beginning of the semester and the students would start to anticipate an exam if we hadn’t had one for some time. But we never knew whether it might be in the fifth week, the seventh week, or so on. I can’t recall if we know how many interim exams we would have during the semester but I believe it was at least a couple before the final.

“Most students were aghast at this policy but I actually thought it was great. That’s because I was never a ‘study all night before the exam’ type of guy. I worked my way through school and almost always spent at least 20 hours at my outside job. But besides that it’s always been my approach to keep up to date with my classes or other obligations. I figured that if I didn’t read the materials and work the problems while they were fresh in mind I was losing the opportunity to take advantage of what I had heard in class and wouldn’t be able to ask timely questions to reinforce the material right away. I’m sure there were times when I went back to try to review things for an exam but not too many. I just tried hard to learn things well the first time around so I wouldn’t have to re-learn them again later. That served me particularly well in Professor James’ classes and it’s worked pretty well throughout my career too!”


Greenhill -- M&A Negotiation This Upcoming Thursday!

Thursday, 21 February 2013


If you have followed my blog postings over the years, you know that I have several obsessions about teaching.  

(1) – I believe in having a lot of communications with my students.  Whether it is love, marriage, or a college class, things go better with communication.   To the teacher, everything makes sense.   Too often, to the students, everything is a mystery.   I want to cut out as much of that mystery as possible.  I think students respond well when they understand what is expected of them.

(2) – I believe in honest and frank communication.   College students are adults.  I never see any reason to feed them a bunch of nonsense.   If you aren’t going to tell them the truth, you would be better off not to have the communication.   I think you should stress the good as well as the bad.   No one wants to get praise all the time and no one wants to hear how bad they are all the time.

(3) – I believe a lot in motivation but I think the core of motivation has to come from inside the student.   I am not going to go through life with each student and serve as their personal cheerleader.   At some point, they have to be willing to work hard because they want to achieve their own success.   For better or worse, I think our society uses too much external motivation on students as they are growing up.   Schools, teachers, and parents do so much pushing that students never have to consider (a) what they want to achieve and (b) how to do the work to get there.   Many students have the unspoken motto:   “Why push myself when someone else will do it for me?”

(4) – I want my students to become good at being students.   I am always amazed by how little so many students know about becoming good students.   When they leave my class, I obviously want them to know accounting but I also want them to walk away knowing how to be better students.

I gave a very hard test last week in my Intermediate Accounting II class.   I knew it was hard and I meant for it to be hard because the material was hard.   The class had been doing well but not as well as I might have liked.   I wanted more from them than I was getting.   You can always tell students that they need to work harder but every teacher says that (and often does not really mean it).   Those warnings just bounce off most students.

Between the time that I gave that test and the time I gave back the graded exams, I had several points that I wanted my students to consider.   In that limbo period, they are very open to suggestion.   They often realize that they did not know the material as well as they should have and want to know how to do better.   The test has caught their attention.   As a teacher, you need to make use of that opening.   So, I wrote them the following email.   I wanted to communicate with them before the grade came back and got them distracted.  

In many ways, the note is about having the discipline and the ambition needed to do the necessary work.

My students are 20-21 year olds.   I don’t want them to do any work just because I have threatened to give them a bad grade.  I want all of the students to do the work because they want to do well.   I want them to do the work because they have that fire in their belly to succeed.

I didn’t get through to all of them but I believe that I did get through to some of them.   As the teacher, open and frank communication of your goals and reasoning can be awfully helpful.

“I have not graded any of the tests yet and am not sure when I will grade them. They might be great or they might be horrible. I have seen plenty of both over the years. But, as I have said before, this test is only 20 percent of the grade. You’ve got time to move the grade up if need be.

“However, I want to assess how the class has done so far. And, to be honest, it is sometimes difficult for me to tell. I listen to answers and try to speculate as to what those answers tell me. Sometimes I am pretty sure I know what’s in your head but often I don’t.

“But, given that disclaimer, here’s my assessment. To date, I really haven’t seen anyone who seems truly obsessed with making an A. I usually have one or two students for whom the desire to make an A in this class is a burning passion. And, they usually make it. I haven’t seen anyone with that type of desire (or have not seen them yet). On the other hand, no one seems completely lost. Usually by now, I have a few people who seem to be desperately trying to fail. I clearly have not seen that.

“My guess is that most of you prepare each day for class like making a B or a C is fine. In truth, that is a decision you have to make. You are an adult.

“My one irritation is the number of times I find myself saying ‘we did this 48 hours ago – what did we do then?’ and then I get a look from you like we actually did it 48 years ago. There is always a connection between the classes. No matter what you made on the test today, the better you make that connection, the more likely it is that your grade will go up. In fact, the test was just one big interconnected problem.

“Want advice? Here it is. And, I have already given it to you before. Prepare for each class like I’m going to give you a very serious quiz in class that day. Of course, I am never going to give you that quiz but you have to prepare like I am. That is not easy.

“But, if you must have some outside person motivate you by giving you a quiz, then you probably won’t do much better than a C.

“People who prove to be successful (in school and after) find some way deep down in their dirty little hearts to motivate themselves to do the necessary work without having to have someone threaten them with a quiz.

“I do not want to motivate you. Heck, no. I want you to motivate yourself.

“I might change my mind once I’ve graded this test but I’m not at all unhappy with the effort to date in general. Yes, I would always be glad to see more students shoot for an A.  I’m an ambitious person and I like ambitious students.  But that is not the real point. What I want is not important. The point is whether you are satisfied with your effort and how you will adjust it going forward.

“We will not have a quiz on Monday. I guarantee it. The secret is:   Can you walk into class having prepared like there was going to be one?

“See you Monday. Have a wonderful weekend.

“No quiz.”


Monday, 18 February 2013

Resume & Cover Letter Workshop

Come join Finance Society this upcoming Tuesday for a resume and cover letter workshop. Members of our executive board will be teaching you the steps of building the two professional documents. At the end of the workshop you will also have a chance for an one-on-one critique session. Bring a copy of your resume.

Sunday, 17 February 2013

Conserving Capital: It All Made Sense Until He Said That EVERYONE Profits

Conserving Capital with Kyle Cameron

It All Made Sense Until He Said That EVERYONE Profits

I have decided to give a central theme to my blog posts for the Finance Society from here on out.  This first post will explore the theme chosen, its centrality to finance, and the chat that inspired the idea. 
Capital conservation has to be the most important topic in finance, and as such deserves a little defining.  Finance poses the question: How do I best allocate assets?  As a subcategory, capital conservation concerns itself with the logical follow-up: How do I avoid poor allocations of assets?  Indeed, capital allocation is what Warren Buffett was referring to in his quote, “The first rule of investing is don't lose money; the second rule is don't forget Rule No. 1”.  However, despite the world famous investor’s reference to capital allocation as the first rule, I would argue that most people – financiers, economists, and other businessmen included – believe finance and investing to be the pursuit of asset allocations producing the largest gains; a cheery view that ignores the often frightening concepts of loss and risk.  This unfortunate view is akin to the gambler who always bets the max and assumes such action will produce the largest gains.     
Upon hearing that I was studying finance, my acquaintance decided that I must be made aware of this business he was involved in that would help save me money.  He began to tell me about, a website that he claimed would allow me to save money on the items I normally purchase.  Responding positively to my prodding, he went on to explain that in exchange for the opportunity to purchase this vast array of discounted items, I would need to contribute a small initiation fee in addition to monthly dues.  At this point, his claims have seemed reasonable – in fact, seemingly comparable to my family’s Costco membership.  Like the flip of a switch, however, the conversation turned as he explained how he had made money from selling product himself and networking to find other individuals who would sell products.  I then made the very pointed question, “What percentage of distributors profit from the sale of goods?”  His answer: “100%”.  I will not recount the conversation any further from there, but I did give the acquaintance my contact information and a promise to buy product if he would share his books and prove that he had, in fact, made a profit from his participation in 
I am supremely confident that my acquaintance is exponentially more knowledgeable about his business than myself.  However, I am just as confident that he does not understand capital conservation.  It is highly likely that a significant portion of the  “profits” he has made from product sales, cost savings, and networking to bring in other sellers are illusory.  Such “profits” are surely being destroyed by being tied up in inventory, future purchase commitments, marketing efforts and time, monthly fees, and increased unnecessary purchases.  I hope my acquaintance truly is profiting from, but I also know that his mention of everyone profiting from the business is proof of his own complete ignorance of the risks involved.  Even if my acquaintance has profited, his dearth of knowledge around the risk of loss means that he is not conserving his own capital.   
Now ask yourself, are you conserving your capital?  

Saturday, 16 February 2013

U.S sues S&P

Last week, the U.S. Justice Department’s legal suit against Standard and Poor’s Rating Services captured much public attention and gave rise to a heated debate. It is by far the first legal case against a rating agency over the cause of the crisis. The government believed that the rating giant should be accounted for its overly optimistic ratings toward mortgage-backed securities and collateralized debt obligations that misled the market and cost investors billions of dollars. Moreover, over the past few years, the government has been investigating whether the firm’s management was involved in intentionally pushing the standards lower for certain kinds of bonds, a misconduct that would potentially bring about a serious disaster for this New York based company.

Indeed, before the housing bubble burst and the crisis began, most MBS’s and CDO’s were given AAA ratings because rating analysts all agreed that the investment was so diverse that it could provide investors a safe net against losses. The government believed that it is this kind of misleadingly high ratings that attracted a huge number of investors into the trap of MBS and CDO investments.

Yet, suing a rating agency for granting certain bonds higher ratings, in some sense, is like accusing a wizard for failing to predict the future, a metaphor that S&P spokespeople have been using repetitively to show their innocence. Furthermore, the rating firm has been emphasizing that this latest crisis is by no means caused by a single financial facility. Instead, it is the result of a combination of complex macro- and micro-economic factors that range from government policies to investor behavior, which as a matter of fact partially affected all rating firms’ credit ratings towards different kinds of equity and bonds.

Whatever the result of this attention-grabbing lawsuit would be, it shows the government’s determination to start seeking the culprits for this passed (or not) financial crisis and to hold them accountable. S&P might just be a beginning.

Ruijia Tan


Housing analysts have been giddy for the past year about the comeback of their industry, whose collapse led to the Great Recession. 2012 ended up being the third worst year for housing ever, but still beat 2011 and 2010. New and existing home sales, housing starts, and prices jumped in 2012; Countless experts expect an even stronger recovery for 2013.

I imagine people are excited because a major housing rebound typically leads to a broader economic recovery. The logic is as more people put equity into their homes, they experience a psychological effect causing them to feel more free to spend disposable income, increasing economic activity - a phenomenon known as the “wealth effect.”
Can bullish expectations for housing actually simulate a long-awaited recovery to Main Street? The more I think about it, the clearer it becomes that it’s not being driven by the typical American families who lost their homes in the economic crash. In fact, it’s being fueled by the banks, private equity firms, and hedge funds whose powerful speculation caused that crash in the first place.

Currently, one of the hottest trends in the financial sector is known as “REO-to-rental.” Over the past couple years, hedge funds, private equity firms, and the biggest banks have raised massive amounts of capital to buy distressed or foreclosed single-family homes, in bulk, and at bargain prices.

According to a recent JPMorgan Chase report, the top ten most active REO-to-rental investment firms have already collectively raised enough capital to purchase 15% of all bank-owned homes.  Blackstone is spending over $100 million a week on buying homes.

The strategy involves fixing up, or "rehabbing," distressed houses to rental standard, then renting them out usually for a duration of 3-8 years. By converting distressed properties into strong, steady cash flows for a few years before reselling them, part of this investment strategy essentially entails a macroeconomic bet that prices will significantly appreciate in the nearby future.

Most firms are scooping up properties in the hardest-hit areas, promising high returns from rental revenue streams, usually at least 10% percent annually. It’s the next Wall Street gold rush, with warning signs of a renewed speculative bubble.


Tuesday, 12 February 2013


I began giving teaching presentations about 10-12 years ago.   As I have said many times, I enjoyed that experience immensely because it forced me to spend serious time thinking more deeply about my own teaching.   I cannot begin to guess the number of times in the last few years that I have asked myself:
--What really happened in class today?  
--Why didn’t this work?
--How should I have changed what I did?
--What was wrong with that particular question?
--Why did the class seem unorganized?
--How did I manage to confuse so many students in that discussion?

All those questions eventually led me to begin writing about teaching and now I am up to over 250 pages.   And, I am still asking questions and still learning.

One of the very first teaching concepts that I ever developed for myself was “the learning triangle.”   I remember standing in front of 100 or so brilliant professors one day a number of years ago in one of my very first presentations trying to explain how the learning triangle could help their students to become more efficient.

I was reminded of this today as I contemplated giving my first test on Friday.   My guess is that a lot of the teachers who read this blog will also be handing out their first test around now.   I always believe the first test presents a good time, every semester, to stop and contemplate whether the students are progressing as you would like.   Are changes needed?    After the semester is over, there is nothing you can do to fix problems.   Why not consider making adjustments after looking over the results of the first test?

In sports, I am always impressed by basketball and football coaches who make halftime adjustments and get their team to suddenly play better.   Teachers should consider doing the same thing.   If the coaches can do it, so can you.

That brings me to the learning triangle.   Simply put, I believe that student learning is most affected at three specific points.  
--The first is how well students prepare before they walk into class.  
--The second is how efficiently the class operates.  
--The third is what the students do following the class to help organize and solidify their understanding. 

If a class is not going well, if a teacher needs to make some adjustments, then improvement in one of those three points of the triangle should help.  

Too often, we focus solely on the classroom experience.   For example, you might ask a veteran professor to observe your class and make suggestions.   And, in truth, a class can be a disorganized mess if the teacher has not spent sufficient time thinking through the step by step structure of the 50-90 minutes that make up most classes.   For example, if class coverage is not sequenced logically, the whole experience really can seem like an effort to herd cats.

However, I have long been a believer that the most benefit can be gained by focusing on the other two points of the learning triangle:   class preparation and the organizing and solidifying of understanding immediately after class.  

Class Preparation:   From my experience, a vast majority of students walk into class each day under-prepared to learn.  They have not been told what to do to ready themselves for class.   Or, they have not seen sufficient reason to exert much effort prior to entering the room.   I often raise this question and I think it is worth considering:   If students are not well prepared, what are they capable of doing during your class other than sitting like lumps taking notes?   You cannot ask a student to have a thoughtful discussion of Hamlet if the student merely skimmed the play.   You cannot ask students to provide insight into recent politics if they have not checked on the news in two weeks.   The kinds of discussions and debates that make college education so very wonderful are absolutely impossible if students walk into class under-prepared.   At that point, Socrates himself would throw up his hands.

What is the solution?   (1) Give the students very clear cut instructions on what you want them to do in advance.   Do not be vague.   Tell them the exact pages to read.   Point out the questions that you want them to answer.   Make the assignment a challenge but make it one that they can complete in a reasonable period of time.   (2) Make sure the assignments are reasonably interesting.   Ask good questions that make the students think and want to know the answer.   Don’t make learning a drudgery.   All topics can be enjoyable if they are approached in the right manner.  (3) Tie the subsequent class to that assignment in some very clear way.   If you tell a student to read the first 10 pages of Chapter 6 for class and then you never mention those pages, don’t expect the student to pay any attention the next time you give an assignment.   A student will label an assignment as “busy work” if you do not convince them otherwise.   The assignment has to tie into class in some important way.   (4) If a student does not do the preparation that has been required, you have to call them on it.   I send emails to students saying things like “I expect you to do better at our next class” or I call them to my office to find out why I am working so hard and they are not.  

Trust me – if you can increase the level of student preparation, you will be startled by how much more interesting class will become.   A lot of the burden of teaching is trying to figure out how to help unprepared students to learn.   And, that is never fun.

After Class.   No matter how smart your students are, they will leave every class with a brain full of disorganized material.   They simply cannot absorb college-level information quickly enough in class.   I always tell them that the knowledge will seep out of their brains in record time if they do not do some work very quickly after class.  

One of the best exercises is to simply ask them to write out what they learned in a couple of paragraphs.   Because words, sentences, and paragraphs are all sequential, this writing helps them to figure out how the pieces should go together.    A one page synopsis titled “What We Covered Today In Class” can be a great help to any student.   Or, perhaps you can provide some review questions or a practice problem.   
Since I teach accounting, I often send out an email almost immediately after class with this admonition:  “If you learned what I wanted you to learn today, then you should be able to work the following problem in 30 minutes without looking at your notes.   The answer is $385.   If you get that answer, you probably have a good handle on today’s work.   If you cannot get $385 in a reasonable period of time, come by and you and I can talk about what you missed.”  

To use an old cliché, teaching is not brain surgery.   I can promise you that if you figure out how to get your students to prepare better before they come to class and if you can figure out how to help them sort and organize the material after class, the learning will improve rather dramatically.   

And, you and the students both will enjoy the class more.

To make a halftime adjustment, focus on the points of the learning triangle.