Final Week—Husky Investment Tournament

Thank you for participating in the Husky Investment Tournament! Together we watched one of the longest bull runs in history come to an end, markets move at peak volatility, and developments in COVID-19 disrupt financial markets and everyday life. We hope the Michigan Tech College of Business has helped you to understand the connections between these developments and the financial markets, as well as understanding other important financial concepts. 

This week is your final week for trading, which will close at 11:59 p.m. on Friday, April 3. 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, April 6. 

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

Throughout the competition, we have introduced you to the idea of total portfolio return (formula shown below). In this simple calculation, the ending portfolio value is divided by the beginning value and converted into a percentage to yield the total portfolio return. However, this 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 (see week two blog post). 

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. 

Week Six—Husky Investment Tournament

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 Android phone. Not only does the user need to pay for a new phone to make the switch, they may also have other technology, such as a Mac or iPad, that would 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.

What companies do you know have economic moats and brand recognition?

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. 

Week Five—Husky Investment Tournament

Attempts to limit the spread of COVID-19 have closed schools, suspended face-to-face classes at many universities (including Michigan Tech), closed restaurant dining areas, and are causing countless events and functions to be canceled.

The markets have been extremely volatile (rapidly changing) in the past few weeks and will likely continue to be until the effects of the virus level out and normalcy is restored to the financial system (the President indicated yesterday that this could be sometime in summer). 

The bull market (remember, a bull market is when the market continually goes up, whereas a bear market is when stocks are dropping), one of the longest in history, was still going strong a month ago. However, in just a few weeks, things have taken a major turn. Last Monday, the S&P fell 7.6 percent in one day; that’s the biggest drop since 2008. Stocks then rebounded on Wednesday and fell again (by 9.51 percent) on Thursday. On Friday, they soared by over 9 percent again. 

For a bull market to turn into a bear market, the market needs to drop 20 percent over a period of time. The Dow, S&P, and Nasdaq all ended their historic 11-year bull run last Wednesday and Thursday, with stock prices less than 20 percent than they were just a month before. 

Typically, a bull market turning into a bear market is an indicator of a looming recession, but this is not always the case. Prior to market disruptions from the Coronavirus, the US economy was booming with 50-year low unemployment, a 20-year high in household income, and record-low interest rates. It is yet to be seen if the Coronavirus will propel us into a recession, or if the markets will rebound following these unprecedented times.

Of course, this is not the first time the markets have seen huge fluctuations. You may remember learning about the Great Depression, the financial crisis of 2008, and the dot-com bubble in your classes. All of these events triggered detrimental effects on the stock market, but the market recovered from each event. There is yet to be an event in history where the market could not recover—with time. 

We know many students are out of school right now. Keep following the markets and making trades! This is an excellent time to learn how the markets react in times of distress and is a great time to practice virtual collaboration, a useful skill for anyone. We recommend using a video conferencing software, such as Zoom, to meet with your team and discuss your trading strategies. 

For this week’s video, Laura Connolly, an assistant professor of economics at Michigan Tech, discusses economic indicators and how investors can use them to gauge their investment decisions. Please note, the rates and indicators in this video are as of October 2019; however, the information surrounding how to read and interpret these ratios is correct. 

Week Four—Husky Investment Tournament

Accounting is the language of business; it allows companies to accurately convey important financial information to stakeholders. Accountants have many jobs, but among them are preparing the company’s financial statements, which show the financial position of a company.

There are three main financial statements: the balance sheet, income statement, and statement of cash flows. 

The balance sheet is a snapshot of a company’s financial position at one point in time. It details the amount of a company’s assets, their liabilities, and how much owner’s equity is in the company. Assets are things the company owns, liabilities are how much a company owes to others, and owner’s equity is the residual assets that would be leftover if a company paid all of its liabilities at that point in time. 

The income statement shows how much a company made during a period of time. The income statement and statement of cash flows are different from the balance sheet in that they both show financial information for a period of time, versus one point in time. To show how much a company made, the income statement shows a company’s revenues (earnings), minus their expenses

Finally, the statement of cash flows details all of the cash a company received and used during a period of time. These cash flows are broken into operating, investing, and financing cash flows. Operating cash flows are from running normal business activities, investing cash flows section shows how much money was made or spent on investing activities, and the financing section shows how a company funded its operations. 

Stakeholders are anyone who have an interest in a company’s performance and include, but are not limited to: investors, creditors (people and other businesses who the company owes money to), banks, and even employees. Enabling companies to accurately convey their financial information to both exterior parties and people within an organization is critical for both publicly and privately held companies. 

For example, when a company wants to borrow money from the bank, the bank wants to ensure the company has the ability to repay the loan. By looking at the company who is borrowing money’s financial statements and other factors, the bank is able to see how much money they should lend the company and what interest rate (to accommodate for risk) they should charge on the loan. 

Another example is when investors look at a company’s financial statements to see if a company is a worthy investment opportunity. Investors can look at various financial statements and use various techniques and accounting ratios to gauge their investment decisions. In the week two video, Jacob showed you an example of how the students in Michigan Tech’s Applied Portfolio Management Program use various financial statements to decide whether they should buy or sell shares of a company. 

In this week’s video, Sheila Milligan, a senior accounting lecturer at Michigan Tech, explains what the income statement is and how investors can use it to gauge their investment decisions.

Please note: Teams are encouraged to continue making trades and checking tournament updates during upcoming spring breaks. 

Week Three—Husky Investment Tournament

Have you been watching the markets lately? We have been on a historic, almost 10-year-long, bull run. A bull run is when prices in the stock market rise over an extended period of time, whereas in a bear run, the opposite is true. You can remember the difference by picturing a bull, which bucks upwards, and a bear, who swipes his claw downwards.

You may also have noticed that the DOW and S&P 500 dropped more than 3 percent last Monday and the NASDAQ had a two-day drop of 6.38 percent–the worst since June 2016.

What should investors do with this information? If prices are dropping, should you be selling your assets before prices can get any worse? Is now the time to buy and ride out the market dip? Making hasty sell decisions is rarely a good choice in times like these.

Here are two major factors driving changes in the market, and what investment professionals are saying about them:

You’ve surely heard about the coronavirus (COVID-19). While the loss of life and emotional toll of the disease are potentially monumental, we will focus on the financial side of things.

At this time, experts predict that although the results will be substantial, and already are, they will be temporary. Historically, when there is an outbreak such as this, markets are influenced in the short-run, but recover following the outbreak. One aspect of the coronavirus that is likely to have a lasting global impact, is the issue that is created in supply chains with shut downs in China.

Since we source many of our products from the country, there is fear that companies will not be able to meet consumer demands. This may cause ripple effects that last into the rest of 2020. Some companies, such as Apple, predict lower sales in the fiscal year. Apple’s sales may be down this year if they are not able to produce enough iPhones for the company’s annual new product release, which is generally in September. 

Politics are also a major factor in financial markets. With the upcoming election and primaries beginning, news in politics is constantly impacting the market. 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 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.

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 wild card. 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.

With everything going on in the markets, it is difficult to predict how the multitude of influences will blend together to move the market going forward. Watch this week’s video to learn more about supply chain management, and how investors can use this information when making decisions.