Insight from interviews

So I had a couple of interviews today with the investment division of a large financial services firm. The interviews could have gone better, but I was able to pick the brains of some very experienced investment management folk on their investment philosophies. In particular, I asked one of my interviewers what he thought of the markets, seeing as they are in a flipped relationship with economic activity. That is, weak jobs reports cause the market to rise, strong jobs reports cause the market to fall, for fear of the dreaded tapering.

His response was very interesting. He basically said that markets don’t matter, what you should focus your attention on is the business and how well its run. I can see where he is coming from. I may have been focusing too much on market movements when determining whether to invest or not, and which stock to choose.

So this is something to keep in mind for next time, although I still feel that market movements are important and should be factored into any investment analysis.

As Keynes said “The markets can stay irrational longer than you can stay solvent”.

Overall, it was an interesting day today and I learnt quite a bit from some very experienced investors.

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Good reads from around the Web

Economics

  • This is a break-down of some of the key stats from the recently released Global Wealth Report. It goes to highlight the staggering levels of wealth inequality in the US compared to the other top countries in the list, arranged by median wealth per-capita. In the US, the mean wealth is 6.7 times the media wealth whereas in Australia, this ratio is only 1.5. More juicy stats to be found at the source.
  • Business Insider does one of these posts every now and then. This one is very audaciously titled ‘The Most Important Charts In The World’ in all caps, so it demands at least a quick look-through. There are a few charts in there which I found insightful. One was the chart (charts #7,#15, #91) showing the effects of shale gas on US petroleum imports (here is an interesting article on it). Decreasing reliance on Middle-Eastern oil has very big geopolitical ramifications.  Other interesting charts were #41, #45, #54, #56, #60, #69, #74, #77, #82, #83, #87, #89, #101.
  • This article lists the flows out of money-market funds and a flight-of-safety into equities. A flight-of-safety into equities, you say? In this market? What has the world come to?
  • This is BIG news. A trade deal giving Canada preferential trade access to the EU, increasing bilateral trade by 20% to $35 Billion, add an estimated $12 Billion extra to the Canadian economy and create 80,000 jobs. Sounds so rosy. These two articles (CBC and Reuters) provide more details. Canada is now the only country with preferential trade access to both the US and the EU, a good position to be in.
  • Ahh Scott Sumner talking about NGDP targeting again. He makes some very good arguments, if you go through his previous posts, but he hasn’t manged to convince the right central-bankers and policy-makers yet.

Commodities

  • What has gold been up to these days? It’s been trading in the $1,300s for the last quarter, going up to low $1,400s for a bit in August and intermittently dropping down to the upper $1,200s. At the Commodities Week conference in London last week, head of  commodities research at Goldman labelled gold as a ‘slam-dunk sell’. This article provides some good background reading material and this one some good analysis on why gold has been going down.
  • Brent is up above $101, fueled by demand from China. This article provides some helpful stats.

Markets

  • GOOG just breached $1,000! My Applied Investments team have been at our 5% ceiling on Google so we have made a decent profit off it over the last few months. Where is GOOG headed now, after having hit the $1,000 mark?  I’m personally bullish on it over a 3-5 year horizon, but this article advises caution.
  • Over here is a decent summary of bull and bear cases for the equities market. Not a lot to read, so you can quickly glance over the points.

Miscellaneous

Other stuff

I still need to continue with my AUS story, post details on the few portfolios that I’ve created AND post the code for the ARMA-GARCH strategy. All three of these things coming up soon!

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The AUS job- Part 5

The summer of ‘12
After all the negotiation work had been done, it was time to be an accountant! I was tasked with rebuilding AUS financial history for the last 4 years using the boxes of documents and receipts left over. It is safe to say that I spent most of my summer in the AUS office, with over 12-14 hours per day easily going into organizing the documents left over from the previous years. After I had organized the receipts, cheque requisition forms, deposit slips and all other transaction records in chronological order, I had to go through them again, one-by-one, to enter them into Quickbooks, our accounting software.

After that had been done, I had to go through the bank statements for four years, month-by-month, and reconcile our Quickbooks accounting records item-by-item with the bank statements. One of my motivating factors while working through this was the incredible insight I got into AUS operations by going so thoroughly through the financial records. You cannot get to know an organization better after you have been through each dollar of cash coming in and going out for the last four years three times over.

One of my other motivating factors was to have everything perfectly organized in the way I wanted. There is something beautiful in organizing things, giving structure to what was before an ungodly mess. Organizing these documents and databases was like running a marathon, or solving a very large puzzle. Completing it is its own reward, in addition to any other positive ramifications that may be obtained.

Externalized Departments
The records I had available were for all the non-externalized departments, i.e. departments which did not have their own bank accounts. Records for externalized departments were incredibly irksome to obtain. None of the departmental executives were in Montreal over the summer and the banks wouldn’t release their information to me as I did not have signing authority on their accounts. Many of their records were locked up in their offices for the summer, their bank statements were impossible to obtain, and I could not get the NTRs processed without these documents.

Getting these documents delayed the process. I had to send frantic emails to account managers at the bank, departmental executives (both old and new) and our accountants to coordinate the whole thing, so that we didn’t miss any of our debt repayment deadlines.

In the end, I managed to gain access to these locked up documents by talking to the building manager where the departmental offices were located, and by talking to the account managers at the bank to obtain the bank statements for these accounts. As they can only allow access to these documents/ offices to the specific departmental executives, what they did wasn’t technically legal, but it helped save the AUS.

Delivery!
Once I had all the information compiled, organized and reconciled on both our accounting software and on paper, I delivered it to our accountants. We subsequently had the NTRs made and delivered to McGill on time and got our student fees released.

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The AUS job- Part 4

Where did the money go?
Back in 2003, the AUS was given $130,000 in exchange for providing McGill with some space in the Arts Building basement which McGill subsequently leased to a Subway franchisee. The $130,000 was deposited by the AUS into a GIC, which gave an interest of approximately 3% annually. This $130,000 was reduced to $110,000 by 2009, further reduced to $90,000 by 2010, and when my term started, was non-existent.

This GIC had constituted the only long term savings/investments the AUS had. In 2011-2012, when the AUS had run out of funds to pay for its operations (because of no student fees transfers from McGill), the executive of that year decided to liquidate the GIC to pay for operations. However, as soon as they liquidated and deposited the $90,000 into the checking account, it was immediately frozen by Revenu Quebec due to the several years of non-payment of taxes.

Seeking aid from McGill
The AUS executive of 2011-2012 then had no other option left except to seek assistance from McGill, which they were granted after strenuous negotiations.  

Similarly, the AUS in 2009-2010 had promised McGill a Notice To Readers (NTR) for the previous year and a full audit for the 2009-10 year, if McGill released their student fees. They got the fees released but failed to provide what they promised. The AUS for 2010-11 promised McGill NTRs for 08-09, 09-10  and a full audit for 2010-11. Again, they got the student fees but failed to provide any of that. And as mentioned before, the executive in 2011-2012 promised NTRs for all the previous years and a full audit for their year. This promise was also not upheld during that year, though the process for obtaining the NTRs was initiated.

So, by the time I started my term in 2012-2013, McGill gave no value to the promises made by AUS executives. This was the context under which I (along with the AUS President) had to negotiate with the McGill administration.

Promises made and kept
We promised McGill to clear all outstanding NTRs and to provide a full audit for the 2012-2013 year. After several rounds of meeting, we managed to convince the administration that we knew what we were doing, and would deliver on our promises. We provided them with our debt repayment schedule, to inform them of when we would be needing cash inflows. They mapped specific milestones to each release of student fees as a pre-condition.

These milestones were in the form of letters from our accountants detailing the progress made in compiling and producing the financial statements. Accountants are notoriously difficult to get any official letters laying out the timelines for completing work from, which is what McGill wanted. So I had to balance the demands placed by McGill with what I knew I could extract from our accountants and negotiate with both of them to strike that balance.

I’ll go over what exactly I had to do to get the NTRs done in the next post

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The AUS job- Part 3

The two obligations
The AUS has always had a troubled financial history. These stem from the AUS not being able to fulfill two of its most important legal obligations, as an incorporated student association. The first obligation is filing taxes every quarter to Revenu Quebec. The second obligation is providing audited financial statements to McGill annually.

Consequences
If the AUS does not fulfill its first obligation, it leads to Revenu Quebec arbitrarily assessing the tax owed by the AUS and then freezing that amount in the AUS’s checking account. If the AUS does not fulfill its second obligation, the AUS does not receive its student fees, collected by McGill to be disbursed to the AUS.

2008: A pivotal year
When I started my term, the AUS had been in violation of both of these obligations since 2008. Why 2008 in particular you ask? Well, 2008 was the year in which a few of the larger departments were externalized, meaning they were allowed to open up their own bank accounts.  Before that, all of the AUS’s financial records were centralized, with the AUS VP Finance having overall responsibility for ensuring each transaction got appropriately. As the VP Finance was also responsible for the audit, he/she knew where to get any missing information from that would be needed for the audit.

Despite that, the AUS had still had had a lot of trouble fulfilling its financial obligations prior to 2008. After 2008, with records being maintained by multiple people across multiple locations with varying levels of consistency, it became nearly impossible to fulfill the AUS’s financial obligations.

The core issue
So, to recap, the core issue that the AUS was facing was externalized departmental accounts. Externalized accounts meant that departmental VP Finances/ Treasurers were responsible for making sure their records were up to legal accounting standards, so that the AUS could get its annual audit done. Legally the departments fell under the AUS, so if the departments weren’t doing their job, the consequences would be borne by the AUS. This gave the departments increased autonomy with increased responsibility, but no accountability if that responsibility wasn’t maintained.

In the next post, I will go over how this problem snowballed from 2008 on wards and almost brought the AUS to bankruptcy in the summer of 2012.

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The AUS job-Part 2

Debt Negotiations
The first thing to do was re-negotiate debt terms individually with each supplier. The AUS owed money for things such as office supplies, venue rentals and student reimbursements for AUS related expenditure, among many other things.

The amount totaled around $25,000 with the majority of it being owed to 3-4 suppliers. I had meetings separately with these suppliers and promised them that they would be paid back fully as soon as we received our student fees from McGill.

Debt Restructuring
I provided them a timeline, with several scenarios on when we could expect to pay them back. The important thing here was to maintain a good future relationship with the suppliers while obtaining the concessions I felt were necessary to avoid bankruptcy. In hindsight, I was able to do a much better job than I though I would, as at the moment, I was powering through everything in ’emergency mode’.

Or maybe people were more understanding and sympathetic than I thought they would be. After continuous rounds of emails and meetings over two stress-filled weeks, I was able to delay our accounts  payable sufficiently to be able to get us a shot at actually paying back our suppliers.

It was more a case of structuring and eroding away our debt in exactly the right way and making commitments to match with our projected cash inflows, then doing everything possible to ensure that the projected cash inflows turned into actual cash inflows.

Where the debt came from…
The second, and more complicated, part of the equation was getting the inflows of cash started again. The debt restructuring took place during the summer of 2012, when the only cash inflow we could expect was from the student fees held back by McGill for the previous year. The debt had built up because the AUS had continued to function as normal in the prior year, despite not having received the full student fees from McGill for that year.

The AUS had continued to function as normal because the previous AUS executive, in my opinion, were wary of projecting the image that AUS finances were in trouble. My perception of the preceding AUS exec’s reasoning is that they thought they were going through a very politically turbulent year because of the Quebec student strikes, and did not want to add anything else to the mix.

The Theft and its strategic implications
AUS finances that year were already dealing with a bad reputation, due to the theft of  $12,000 from the office earlier in the year, and they did not want to publicly reveal any other negative information on AUS finances. Ideally, however, the AUS would have significantly scaled back its operations to deal with the shortage of incoming student fees.

Before I get into what needed to be done to get our frozen student fees from McGill released , I will need to recap a bit of AUS history. It’s important to understand why exactly McGill froze these funds in the first place.

And so on to the next post!

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The AUS job- Part 1

I have focused this blog on the more quantitative side of finance, but I also want to talk about the softer, less quant-y side. I was elected as the Vice-President Finance for the Arts Undergraduate Society for 2012-2013, out of a student body of 7,600 students. I had based my campaign on minor things like faster response times to funding applications, more open communication from the VP Finance and the creation of a new fund for charitable initiatives. Unknown to me
at that time, the AUS was dealing with several problems which would have resulted in bankruptcy a few months down the line. The most immediate of these problems was an acute cash shortfall and a liquidity crisis.

The cash shortfall was a result of several hundred thousand dollars of frozen funds, frozen by McGill University and by Revenu Quebec (the Quebec Tax agency). The AUS had been facing this problem of frozen funds intermittently since 2009, but had been able to get enough funding from McGill to function, in exchange for promises on shaping up its finances. These promises were subsequently not upheld, despite the best efforts of those in charge of the AUS. Therefore, when I took over the finances of the AUS, because of these string of broken promises, there was almost no room to negotiate with McGill to get enough funding to avoid bankruptcy. So a few weeks into my position, I was in charge of an organization with around $25,000 dollars of debt and less than $800 in the checking and savings accounts, spiraling down the path to insolvency .

In the next post, I will cover the exciting things that happened next!

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