Hi, I'm Scott Weisbenner, a Professor of Finance at the University of Illinois, and this is my online course on investments. You may naturally be wondering who am I, I mentioned I'm a professor of finance. I've actually been here since 2000. When I first arrived, I could blend in very well with, at least like the MBA students but I've been here now for about 15 years as of the summer of 2015, so I'm not blending in as well as I used to. I teach courses to several students. One of the benefits of teaching in our executive MBA program, in Chicago, is now I'm closer in age to the students again, so I enjoy that, but I'm teaching all of our programs, a lot of our graduate programs, executive MBA, MBAs, Master's in Finance and teaching a wide array of courses, investment finance, corporate finance, and then behavioral finance. We're looking at psychological motivations for financial decisions. I think this gives me a good background to put together to offer this online course on investments. Besides being a professor at Illinois, I'm also a research associate, the National Bureau of Economic Research. In particular, my research interests are in studying the financial decisions of individuals and, various motivations for their portfolio allocations, and I also do research on various topics and corporate finance. Before I came to the University of Illinois, I worked at the Federal Reserve Board in Washington DC when Alan Greenspan was chairman and I was in the capital market section, actually in a very interesting time. I was there during the time period when technology valuations were getting to this high point in 1999 and then love to come to the University of Illinois in 2000 when the technology valuation started to crash, so I got to see the up and down of the market in my time in the Federal Reserve, and then I got my training as an economist. I got a PhD in economics at the Massachusetts Institute of Technology, MIT in Boston. In fact, a little fun fact about me, first time I ever flew on a plane or rode on a subway was actually my trip out to Boston to visit MIT to decide if I want it to go there as a graduate student. If you want to find out a little more about me in terms of my teaching credentials or the research projects I've been engaged with, feel free to visit my website. Here you can see these interesting, it looks like a before and after photo here. Most of the time I'm known as Scott Weisbenner, but I also have a Chinese name [inaudible]. I'm told that translates to knowledgeable mine, but part of me thinks it might mean drunken donkey, so maybe our Chinese friends out there can chime in on the actual translation of that name here. What I like about this online teaching is it combines two of my passions. One is, I like my job as a professor. I like communicating, teaching. My grandmother taught in a one-room schoolhouse. I'm keeping on the family tradition, but taking it to a much different medium, so teaching is, one of the passions, another is travel. Given I was as raised in a rural environment, I didn't travel much but since then, you can see I've been to about 35 countries here, reasonable coverage, except I see some big holes, particularly in South America. I was impressed with my travel but then I saw the coverage of students for the course and that was very humbling for me, and particularly when I look at this map, this is a number those countries with at least 100 students registered for the course as of May of 2015. I look at this map, go back to mind. I see I still have a lot of work to do of interesting places in the globe to explore. But this international representation, that course is very exciting for me. Why should you take this course? Why care about investments? I think it was at least three reasons. For one, investments gives a formal way to judge past performance and set benchmarks for the future. If we want to evaluate a mutual fund manager, we want to look at the performance of firms, we want to set objectives, hurdle rates for the firm in the future, you need to have some model from which to do that, and investments provides us those tools. From a personal perspective, our wealth accumulation and then our consumption smoothing after retirement is determined by saving and borrowing decisions. We need to have a sense of the return to risk tradeoffs offered by different assets, and that also informs our decision of given we do save, how should we spread our savings out across various assets? What should our asset allocation be? Then finally, from a broader economy-wide or firm perspective, we need the tools from investments to come up with a way to assess the required return or hurdle rate, firms should have for their project. For example, is it better for a firm to take money it's made and invest internally, or instead, should the firm take the money it's made and return it to shareholders? To evaluate that trade-off, we need to come up or what would be the required return or hurdle rate investors need the firm to achieve for it to hold its stock. That comes from knowledge of investments. How do we judge a performance of different assets, different firms, different stocks? That's really key to the investments course, key to this one as well. Historically, certain assets have certainly yielded higher returns than others. Key question that investments can offer some insight as to why do some assets yield higher returns than others. Does it represent compensation for different levels of risk? You've probably heard the phrase, higher return, higher risk. Are the higher returns due to some assets being riskier than others? What investments does, is formally define what we mean by risk. Or does the difference in return not represent differences in underlying risk, but instead just represent that some assets have performed better than others, and those that have all those assets have earned abnormal risk-adjusted profits that are positive. What do we think about looking at different assets and looking at their difference in returns over the last 40 years here? I threw out five possible investment strategies you could have had from the beginning of 1975 through the end of 2014. Let's say you started out investing $1 at the beginning of this period, you held this asset for 40 years. What are these possible strategies? One, the under-the-mattress strategy. You just take the dollar, put it under the mattress. A second, investing in a very safe asset, one month US treasury bill. Think about this as the short-term certificate of deposit you can get in your bank. What would that strategy have yielded? What would it have grown to over the 40-year period? Investing in the broad US stock market, investing in the stocks of small US firms on the bottom 10 percent, so investing in the stocks of firms who are the smallest in terms of the overall market value of their equity. Then the fifth strategy is investing in a combination of small firms, but firms are also known as value stocks. These are firms that have a lot of tangible assets. Think about your cement company being more the value stock as opposed to the startup Internet company, which would be more of the growth stock. Here are the five strategies. What difference in returns have we observed from these over the last 40 years? The under-the-mattress strategy is easy. It happens to be a nice coincidence that $1, it's about equal to one foot under the mattress. That $1 fast forward to 2014, still a dollar in 2014. Now how about if we go from the under-the-mattress strategy to investing in US treasury bills over 1975-2014? This $1 under the mattress, that grows by a factor of almost seven, it's $6.90. That's basically going from the cat under the mattress, now going to the height of LeBron James. Sorry, I have a photo here, Miami Heat. We need to update this and get a Cleveland Cavalier. As opposed to under the mattress, the treasury bills at the end of the 40 years, it's yielded wealth that's about seven times higher, like going from under the mattress to going to the height of LeBron James. How about instead of investing in treasury bills, we're investing in the US stock market? Well now, instead of having $6.90 at the end of the 40-year period, we have over $100, a difference of a factor of 16. That's this very small here, LeBron James. Why is it so small? Because that's the equivalent of growing from the height of LeBron James to going to the Christ Redeemer overlooking Rio de Janeiro in Brazil. That gives you the sense of the differences in wealth generated over these 40 years going from treasury bills to the US stock market. How about if we go from instead of investing in US stocks to investing in the stock of the smallest firms in the US? Well, the stocks of the small firms have grown from $1-$253 over this 40-year period as opposed to 111 for the overall stock market. That's like going from the Christ Redeemer statue to a 747 jet. Here, we're doing a shout out to [inaudible] and our friends in Australia here. Not just investing in small stocks, but investing in small stocks that also have a value characteristic to the firm. I'll talk later about what do we mean value growth. Think of value of firms being firms with a lot of tangible assets. Think of the cement company as opposed to the opposite of that. The growth companies with a lot of intangible assets, think of the Internet startup. If we had focused on this simple strategy of investing in small value stocks and held that strategy over this 40-year period, our initial one dollar would have grown to a little over $1,000. That's like going from the 747 jet up to the height of the Eiffel Tower. This raises a question: should we all just go to Paris and like hey, usually what's wrong? I'm happy to sign up for a trip to Paris. Taking back to investments, why do stocks offer higher returns in US Treasury bills? Why have the stocks of small and value firms outperform the stock market as a whole? This is where the investment course comes in, is a way to quantify these differences in returns, these differences in performance, how much of these differences are due, are attributable to differences in risk of the strategy? How much is this just represent outperformance that's a profit opportunity? Key in the investments course is allowing us to do a risk adjusted comparison of the performance of different securities, of different firms, of different mutual fund managers. What's the game plan for this course? Broken down into four modules, Module 1, the investments toolkit, basics on portfolio formation. Topics will include looking at the historical pattern in returns. Will past necessarily be the future? Who knows, but at least it's useful as a starting point to understand the return patterns in the past and then basics on portfolio formation, how to form efficient portfolios of risky assets given you have a certain level of volatility you're willing to take, how do you construct a portfolio of assets to give you the highest return subject to that volatility in performance you're willing to undertake and also talk about how to avoid certain dominated assets. My advice on certain securities that should never be in your portfolio. Module 2, it's all about the capital asset pricing model here, the CAPM. In this module, we'll talk about the motivation for this, implementing this model, actually using it to run regressions, to analyze the performance of returns, and then interpreting the two key parameters that come out of the capital asset pricing model, beta sensitivity of a security's performance to the overall state of the economy to the market, and then alpha, whether this security has overperformed or underperformed on a risk-adjusted basis. Capital asset pricing model has a nice insight that it's not the total volatility of the firm that should be reflected in returns or price, it's actually only the risk of the firm that's tied to movements in the overall economy. The key factor that should predict returns should be this beta. Module 3 then, given the use of the capital asset pricing model in the real-world given its development lead to multiple prizes and Nobel economics, Module 3 is all about how well does the capital asset pricing model ultimately perform the development of other multi-factor models beyond the CAPM that take into account the return patterns we observe in the data, such as small stocks outperforming large stocks, value stocks outperforming growth stocks, momentum, effects and return. We talk about those and the development of multi-factor models. In Module 3, we also will talk about market efficiency and its implication for understanding patterns and returns and what the notion of market efficiency means in the world of money management. What is an efficient markets world? What's the value of active portfolio management? What's nice about Modules 2 and Module 3 is we'll get plenty of practical experience. I've designed several Excel spreadsheets where we'll go in, get our hands dirty doing analyses to look at and evaluate the performance of various securities and firms. Then finally, fourth topic, take our investment finance knowledge, apply it to firm valuation techniques and in particular, we'll look at two valuation techniques taking market multiples like price earnings ratio, market to book ratio of similar firms to us. Take their market value data, apply it to our accounting data to get a market estimate for our firm value. That's a market multiple approach and then the textbook discounted cash-flow analysis, where we make certain assumptions about cash flows, growth rate, and the riskiness of those cash flows to value the firm with the old textbook way of doing it, the value of the firm is just the discount stream of cash flows it generates. When you're thinking about this course, do you have similar questions to any of these folks? I was wondering what determines the return a project needs to earn for the firm to proceed with it. Also, why do firms have such different price to earnings ratios? Scott, can you help me? I get these statements from my financial advisor and mutual funds, giving me my account balance. But I really have no sense whether my manager is doing a good job or a bad job, or even what types of stock my manager's invested in. Scott, can you help me? I'm tired of feeling lost. While I'm meeting with my finance colleagues or while I read the Wall Street Journal, while I hear words like Beta, Alpha or Sharpe ratio, I start to tune out. Scott, can you help me? I want to know whether the stock market would go up or down tomorrow. Scott, can you, please, help me? I can definitely help the first three. But in response to the fourth person, whether the stock market is going to go up or down in the future, your guess is as good as mine. In fact, if you're an advocate of efficient markets, you'd say it's pointless for any of us to guess, because all the information to predict stock prices that's publicly known is already embedded in the stock price. It's hard to predict if markets are going to go up or down from this point. I can help the first three. For the fourth, not so much. That actually brings up an interesting point. It's useful to highlight what this course is not. We talked about what will be in the course. What this course is not, as I just talked about, I'm not offering predictions whether the stock market go up or down. We'll go into what are determinants of returns, ways to evaluate past performance, whether it's been good or bad, accounting for the risk of the investment strategies, ways to project hurdle rates or discount rate benchmarks that should be set for firms or investment strategies in the future. But it's not about offering predictions should the market go up or down, will the Federal Reserve raise interest rates or not. That's not what we're doing in this course. I'm also not trying to sell you a textbook or promote my own research. Throughout the course, I will highlight some academic research I think is state of the art and adds a lot of value to the underlying lesson. Occasionally, that might be research of myself. But the point of this course is not to sell you a textbook or not to promote my own research. Then finally, I want to point out that this is not meant to be a full semester course equivalent on investments. It's meant to be the first half of an MBA style investments course, first half of a two-part sequence. This is the first half that I'll be offering online, to be followed by the second component. Stay tuned. Upcoming attraction, Scott's second course on investments. Here are topics that we'll cover in the second course, which means we're not going to cover them very much. We may touch on them briefly, but more coverage will be occurring in the second course. Evaluate the performance of individual investors. What are some behavioral biases as some individual investors seem to be prone to institutional investors? Are there any pockets of information that we see embedded in the trades and positions of some institutional investors like mutual funds or state pension plans? Tax-timing strategies. At least in the US, there's a capital gains tax that investors have to pay, but they only have to pay it when they sell the stock, so that leads to tax-timing strategies that can be profitable for individual investors. We'll also talk about the effect that taxes have on returns and stock prices, such as the January effect, study the reaction of the market to various firm financial decisions and accounting disclosures, like the post-earnings announcement drift strategy. Then also we'll talk about how options can be used to reduce risk or speculate. These are all great topics, not room to put everything in a half course, so this is going to the second course on investments. Hi, I'm animation Scott. You'll see a lot of me in Scott's second course, Investments 2, but I'm here to provide some occasional updates and clarifications to the material in Investments 1. You can view me as a new and improved version of Scott, actually a younger version, although a better looking one. My second course on investments ultimately did not delve into options or market reactions to firm decisions. Investments 2, lessons and applications for investors, instead focuses on the composition of returns, capital gains versus dividends, investment decisions and pension plans, the performance of individual investors, and the performance of mutual funds, and the search for Alpha, so a lot of good stuff. Check it out. Remember, there'll be plenty of animation Scott in the Investments 2 course. We talked about for this course, building finance fundamentals is key to this course, motivating, using and interpreting popular asset pricing model. I have developed several Excel spreadsheets. We can go in, do the regression analysis, evaluate the performance on our own. I think the best way to learn is by doing and we'll be doing a lot in this course. Discuss the medium market efficiency, what its implications are for return patterns, asset management industry as we talked about prior, studying firm valuation techniques. These are the topics that will be appearing in this course. What you'll find in the course layout, four modules, each containing 6-7 separate lessons, not counting the introduction and the conclusion to each lesson. Each module will have an introduction that's going to highlight what topics will be addressed. I'll also emphasize the practical skills and experiences that will be acquired. For each lesson I put together, I made an emphasis to think about what are going to be the practical knowledge and experiences that you as a student would take away. That was always at the top of my mind when I'm designing these individual modules and the individual lessons imparting some practical takeaways from this material within each lesson, so each module has 6-7 lessons. Within each lesson, a clear marking of the path both at the beginning and end. What are the objectives? What do I hope you'll take away from the course? Then everyone's favorites there, maybe I'll become famous. What have we learned? That will always be clearly emphasized. Within each lesson you're going to know where we plan to go and where we've been. Online course, does that mean easy course? I don t think so in my case. This course represents, as I said, the first half of an MBA level investments course. I've packed a lot of material into the four course modules for you to do. At the end of the day, it probably ends up being more than a standard half week, which University Illinois is 14, 15 weeks worth of course, for a half course. Probably a little more material than that than half, but online you're allowed to do that. Important to be successful in this course is to have a knowledge of both statistics and the spreadsheet program Excel. We'll be using Excel a lot. Assuming, you know terms like correlation variants, average, we'll do a quick review. I'll do a quick review of how to do certain things in Excel, but it will be even better if you come into the course with that knowledge. Things to remember during the course, Internet's a new medium for course delivery. That's certainly the case,. At least it's new for me, but the basic role of academics still applies. The course is only going to be fruitful if you are willing to put in the work. During this investments course, I've put together four assignments for you, four quizzes. The quizzes are at the end of each module to test that you get the basic point from each module. I've put several in-lesson questions and exercises for you to take a break during the lesson. Think about the concepts that we have developed. I mentioned I've generated several assignments and spreadsheets for you to do the assignments and in-class exercises, so you're dealing with real return data when you're doing these analyses. The key thing is, I'm going to be there working with you. Final things to remember while you're watching these videos. Number 1, green screen backdrops are new to me. I'm not a weatherman. I had no experience being a weatherman, but after doing this course, I have more appreciation for weathermen and they're being able to point to the different regions on the map. I'm not using any teleprompter here. I just have my slides, I talk through them. Sometimes my explanation doesn't come out in the most efficient way, so I have to do it again, but this just makes it more like a real brick and mortar course here. Number 2, it's well known by people on the TV biz that being on video adds makes you look 20 or 30 pounds heavier. I think on my side it might be adding more like 30, 40, maybe 50. Keep that in mind. Looks like I'm bulging out of this shirt here, but live it doesn't look as bad. Then finally, I know during the course of this there is going to be some attempts at humor that I make that oftentimes may seem like a little strain, but then I'm like trying too hard. But believe me if you were here live in the studio, the people here are laughing a lot. It's just the only problem is I don't know if they're laughing with me or if they're laughing at me. I guess you could decide at home which is which here. Are you ready for the course? I know I am. Let's get started.
