Michigan Tech College of Business Newsblog

Thank you for participating in the Husky Investment Tournament! This week is your final week for trading, which will close at 11:59 p.m. on Friday, November 13. The winning team will be determined by their final portfolio value at the time of the completion of the tournament. We will announce the winning team on Monday, November 16. 

We hope you have enjoyed learning and interacting with us as much as we have with you.

Once the competition is over it would make sense to calculate your portfolio return. The portfolio return is calculated by taking the ending portfolio value divided by the beginning value and converted into a percentage to yield the total portfolio return. Annually, the market has returned between 6-8 percent. How do you compare? Was your stock picking better than what the market would have returned? Our competition was only seven weeks long (35 days) compared to the 250 trading days there are in a year. Doing some math we can convert the 7 percent return to our time period of 35 days. 

7% return over 250 days = 0.028% per day
0.028% * 35 days in competition = 0.98% return

If we take the $1 million we started with and use the simple interest formula for the 0.98% return we find that it calculates out to $1,009,800.

FV = $1,000,000 * (1.0098) ^1 = $1,009,800

So all of the teams that finish above that amount “beat the market.” 

However, the portfolio return formula fails to take a very important factor into account—risk. 

We have encouraged teams to pursue risk in order to win the competition—here is the reason why. As you can see, the total portfolio return does not take the amount of risk that you pursued into account while calculating your percentage return. Because of this, teams may have found it lucrative to pursue a higher level of risk in order to achieve a higher potential return.

While this strategy works well in a trading competition, where there is nothing to lose and everything to gain from pursuing risk, we would not want you to leave the Husky Investment Tournament thinking this is the best strategy for investing for retirement, or that this is how portfolio returns are measured in industry. In the real world, portfolio returns are risk-adjusted or adjusted to show how much extra return you generated per unit of risk. This comparison shifts the question from “how much money did you make me?” to “how much did you risk to make me this money?”

In this week’s video, Dean Johnson, dean of the MTU College of Business, introduces risk-adjusted return metrics and how investors use them to measure their investment results. 

Politics are a major factor in financial markets. With the upcoming election, news in politics is constantly impacting the market. The market has been all over the place in the past week. Although the influence of politics on the market is difficult to predict, there are several trends that have been noticeable.

Presidential candidates are often gauged as “pro” or “anti” business, and the stock market reacts accordingly. When candidates generally are seen as pro-business are leading in the polls, the market tends to go up. When candidates that aren’t seen as pro-business are in the lead, the market tends to head in the opposite direction.

Historically, it has been found that following an election year the bond market will outperform while the stock market will slightly underperform. It has also been discovered that although the party affiliation matters slightly, it does not have a huge impact on trends. The bigger question of how the market reacts is whether the incumbent party wins the presidency or not.

If the incumbent party retains the presidency, the stock market averages around six-and-a-half percent a year, while if there is a change in the party it has returned slightly lower at five percent. 

Going one step further, certain sectors and companies can be impacted to a greater extent depending on the platform of the politicians. For example, a “hawkish” politician would be good for the defensive industry versus a “dovish” politician. That being said, the effect on the stock market is a wildcard. At this point in the election process, investors will see politics playing a heavy role in the market, which will likely increase the volatility of stocks.

It is important to note that this is only historical data, and the outcome of the election could hold vastly different results for the market. “Time in the market defeats timing the market.” It is better to just be in the market longterm, rather than try to predict how the market will react to an event like an election.

Watch this week’s video to learn more about supply chain management, and how investors can use this information when making decisions. 

Let’s talk marketing—If you need to blow your nose you use a Kleenex. You use a Q-Tip to clean your ears. If you have a headache you might take Tylenol. What do these examples have in common? Brand recognition. Brand recognition is how familiar a company’s brand is to consumers. This, along with other factors, helps some companies to form an economic moat. Economic moats serve as barriers to competition by creating a competitive advantage that is difficult for other companies to copy or replicate. 

You can think about an economic moat by thinking about a castle with a moat around it. The bigger the moat is, the more difficult it is for intruders to attack the castle. Now, imagine that the castle is a company and their profits, the moat is the economic moat, and the intruders are other companies trying to gain a share of the company’s profits. The larger the economic moat, the more difficult it is for other companies to cut into their profits. 

Economic moats take on many different forms and can be difficult to quantify (measure).

There are five types of economic moats: cost-advantage moats, intangible-assets moats, high-switching costs moats, size-advantage moats, and soft moats. Cost-advantage moats are when companies have a cost advantage and can squeeze out other competitors who try to enter their market. Intangible-asset moats are created when companies have some type of non-physical barriers that prevent other companies from competing; examples include patents, trademarks, and brand recognition. High-switching costs are just as they sound—it is expensive to switch from one company to another. Consider the swap from an Apple to an Android phone. Not only does the user need to pay for a new phone to make the switch, but they may also have other technology, such as a Mac or iPad, but that would also need to be adapted (either by purchasing new software or a different device) to achieve the same level of integration that iOS products offer. Size-advantage moats come from economies of scale, the idea that larger companies are able to do things better, faster, and cheaper (think $1 McChickens). Finally, soft moats are economic moats that are difficult to identify and describe. They could be caused by the unique culture of an organization or some other advantage a company has over competitors.

Investors should think about economic moats and consider them in their investment decisions. Companies with larger economic moats are more likely to protect their profits and therefore, your investment. Economic moats also allow companies to charge higher prices for their goods and services. For example, Kleenex brand tissues are more expensive than a dollar-store brand.

Can you name some companies you are familiar with that have economic moats?

In this week’s video, Jun Min, professor of marketing in the Michigan Tech College of Business, illustrates what economic moats are and why they are important in business and in influencing the stock market. 

Welcome to week four of the Husky Investment Tournament! Continuing on with our analysis of the financial statements, we have moved on to the statement of cash flows, which shows us the cash inflows and outflows that go on within a company over the course of the year. You may have heard the statement that “cash is king” before. A company with strong cash flows will be in a better position than one that does not.

When is the statement of cash flows useful? 

Looking at selected amounts of Company XYZ financials:

INCOME STATEMENT

Year 2019-20

Sales 10 mil 20 mil

NI 1 mil 3 mil

We can see that the company has doubled its sales in the year 2020. Sounds good, right? 

CASH FLOW STATEMENT

Operating CF 4 mil 1 mil

However, when looking at the statement of cash flows we see that their operating cash flow has decreased in 2020. That should raise red flags. Somehow the company was able to double their sales, but the cash they collected from operations went down. In this example, the company was probably really aggressive in their sales. They must have sold a lot more products on account rather than for cash.

To further check this assumption, you could look at the accounts receivable balance on their balance sheet. If the accounts receivable went up as well you have found out what this company is doing. 

This further illustrates the fact of how all financial statements tie together and that it is important to understand each one when it comes to investing.

In this week’s video, Trevor Salata, current MTU business student and Applied Portfolio Management Program alumnus, explains the cash flow statement and how investors can use it to gauge investment decisions.