N/a
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You can’t pitch the past…you can use it as an example of analytical work, but the thing is that hindsight is 20/20 and you could have a selection bias.
It is hard, but look: everyone has their own MO, and I assume you have one already and know that, depending on a specific sector/segment/firm, you’re gonna have to do certain tweaks and different weights of significance for underlying drivers.
If you are struggling with idea generation, that is a tough one because it is extremely subjective. I start by thinking what are the current trends in the world, how they impact it, and who is impacted. Then select the most prominent sectors and segments for potential mis-pricing, map the industry (segments, players) and ultimately rank based on exposure to trends and operational efficiency. For instance, prior to COVID Semis were already a good bet: it is somewhat cyclical and was just coming off a big down-cycle due to oversupply, rate of digitalization was ramping up so demand probably would increase higher than normal. COVID came around and amplified the supply-demand dynamics. Who would most benefit? CPUs and GPUs mainly. How can I L/S? AMD is operationally much better than INTC, COVID amplified this disparity. AMD had potential due to very low market share vs the dominant INTC. Long AMD, Short INTC.
Lot of financials are trading at massive discounts
Everyone has caught that now though, the XLF has gone on a rampage in 1M (+10%)
Yeah, that’s the issue. Not many industries where growth isn’t priced in either.
Here’s the opportunity, which is harder at a LO because u can only take one side: but how much SHOULD the XLF have moved given recent news? Just bc something rips doesn’t mean it can’t keep ripping—that’s a bleak thing to point out as an obstacle in your process. Like yes markets are relatively overvalued right now, but saying there’s nothing to buy off fundamentals/whatever is blasphemous
Are you a generalist or are you covering a particular industry?
Generalist
You will struggle as a generalist. The way I see it, you arere either an industry specialist or a special situation type of investor. The former requires in-depth understanding of an industry and the other requires an in-depth understanding of legal due diligence and modeling out corporate actions. In-between are a bunch of dudes with Bloomberg terminals and tourist vibes, who do not add value, but perhaps get lucky by riding beta.
Ohhh boo hoo man…
That’s like saying you wanna make a billion dollars - why can’t I find a billion dollar idea yet?
If you can’t do the job function in the interview - you’re not good for the job.
This isn’t banking or ER recruiting where they develop talent. You are there to produce.
1. You can screen for positions with positive fundamentals, but that have decreased below say a certain moving average or took an extreme haircut on a recent earnings report.
2. does it need to be large cap? If not, you can find some gems using certain screens.
3. just because a position is up, doesn’t mean it’s finished.
4. I know people like to stay away from levered companies but you can find some serious discounted companies that hold leverage if you can factor in their ability to repay the debt as well as return via growth.
Genuine question on this LO fund—what do you mean the mandate is to get in on companies below their intrinsic value? What does intrinsic value entail? Sounds to me like a liquidation valuation or something like distressed investing which i doubt the LO is actually doing. the intrinsic value of a business is in the most concrete sense the NPV of its future cash flows, and the entire crux of market dynamics and movement is that nobody knows for sure what those future cash flows are going to be so the equity value of the business is constantly changing based on a whole host of factors. I feel like the mantra “get in below intrinsic value” is kinda hand-wavey because that’s what every single investor of all time ever is essentially trying to do. Not saying this fund is necessarily bad im sure they’re great, but I would imagine their still looking for future catalyst paths to change market assumptions about intrinsic value.
This is the essence of investing and the reason that investing is so difficult. It's easy to identify great businesses like CPRT but it's incredibly hard to get them at a decent prices that would imply good forward returns. So what you are feeling is normal. It should be difficult and frustrating.
For purposes of your interview, the firm is not necessarily looking for a breakthrough idea, although that would certainly be ideal. But short of that, the fund is looking for someone who understands how they invest and who has a personal investment philosophy that is aligned with theirs. There are a lot of ways to skin a cat -- just reading the ideas from the posters above is proof of that -- but you need to pitch the fund a name that is along the lines of CPRT because they are looking for compounders. Pitching something that doesn't reflect that understanding, such a short-term trade or a low-quality cyclical name, would be a death knell.
alright what are your ideas then huh
Idea generation is (by far) the easiest part of investing. The difficult part is converting the idea to an investment. If you are really stuck for ideas, read the reports Wall St sell side send around each week - "top ten picks", "highest conviction ideas", "best quality & value stocks"...
There is a perception, especially outside the HF/AM industry, that ideas are secretive, come from freedom-for-information requests, deep diggings into the notes of a dozen years' 10Ks, and so forth. Most of the time they do not.
Two of the most simple ways to generate ideas are, a) simply look at some big decliners and figure out whether the decline is warranted - was JPM right to fall from $170/share back to $100?, b) screen for relative valuation - is Exxon truly twice as good as BP or Total?
I mean this is a bit simplified. In my - albeit limited - experience, the majority of stocks at any given time are appropriately priced, with the ranges of outcomes being appropriately weighed by the market based off ST news flow. In the vast majority of situations I come across, you have the bear/base/bull cases all laid out and somewhat recognized by the market, but there is some overarching factor (whether it be the perception of the last few quarters or upcoming quarters, or more macro driven) that tends to be skewing the price slightly more towards one end as people weigh these probabilities. And usually that inherent uncertainty seems to be priced/weighed appropriately. For taking positions, what you are left with are the average ideas, where your thesis is just a slightly attractive risk/reward based on the expected value outcomes of these probabilities, rather than some big chunky idea with a super differentiated variant perception - so that the variant perception you lean on tends to just be a case that the market recognizes but is just weighing less (and maybe you have a few key data points that you are relying on more or giving more credit to for whatever reasons).
When it comes to the chunky ideas where the street is just totally missing the dots on the some key details, those tend to be much rarer in my experience, and at this point with how quickly and easily information is broadly accessible, the resources required to get that deep and differentiated is becoming much tougher (need to spend a lot of time doing differentiated research and use up valuable time, innovative + original data, etc.).
Anyways, I think to say that ideas are simple these days is a bit of a mischaracterization, but also open to other interpretations and/or the likelihood that I am biased by my current experience.
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