Annual Business Meeting 2019

CFA Society Chicago held its Annual Business Meeting on June 20th at Convene. The meeting was open to all CFA Society Chicago members.

After a welcoming from the Society’s CEO, Shannon Curley, CFA, the Society’s Chair, Tom Digenan, CFA, gave an overview of the successes over the past year. The Society is the sixth largest society in the world under CFA Institute and recently hit over 5,000 members.

Over the last year, the Society hosted over 130 events including the Annual Dinner featuring keynote speaker Richard Thaler with over 1,000 registered attendees. This event also welcomed our newest charterholders to the Society. The Distinguished Speaker Series Advisory Group continued to bring in leading speakers, the Professional Development Advisory Group expanded on its career development programming, the Education Advisory Group hosted a great series of panel events and recorded its first podcast, our CFA Women’s Network

Kristan Rowland, CFA, the secretary treasurer of CFA Society Chicago, shared the financial position of the Society over the prior fiscal year before Dan Kastholm, CFA, vice chair of the Society, provided remarks on the future direction of the Society. The event concluded with questions from members along with a post-event networking hour.

CFA Society Chicago would like to thank all of its board members, advisory group co-chairs and volunteers as the Society would not be where it is today without the time and effort these individuals dedicate to the Society.

CFA Society Chicago Executive Committee 2019 – 2020
(Starting September 1, 2019)

Chair: Dan Kastholm, CFA
Vice Chair: Kristan Rowland, CFA
Secretary/Treasurer: Garrett Glawe, CFA 
Immediate Past Chair: Thomas Digenan, CFA
CEO: Shannon Curley, CFA

CFA Society Chicago Directors 2019 – 2020
(Starting September 1, 2019)

New three-year terms ending  August 31
Class C Michael Miranda, CFA (2022)
Class C Alan Papier, CFA (2022)
Class C Sunitha Thomas, CFA (2022)

New one-year term ending August 31:
Class E William Fitzpatrick, CFA (2020)
Class E Linda Ruegsegger, CFA (2020)
Class E Mark Toledo, CFA (2020)
Class E James Schroeder (2020)

Directors continuing in their respective terms ending August 31:
Class A: Jenifer Aronson, CFA (2020)
Class A: Cosmin Lucaci, CFA (2020)
Class A: Tanya Williams, CFA (2020)

Class B: Michael Holt, CFA (2021)
Class B: Dhvani Shah, CFA (2021)
Class B: David Smith, CFA (2021)

Wine Tasting: Emerging Market Wines

The marvelous thing about tasting wine is that two people can split a bottle and experience something completely different, yet both opinions, shaped by each individual’s personal experiences, can still be valid.

On April 30th, CFA Society Chicago took in an educational wine tasting class presented by 40-under-40 Tastemaker Derrick Westbrook. After a stint as beverage director at Michelin-starred Elizabeth, Westbrook took his knowledge to Madison Vine Wines (now 1340 Beer Wine Spirits), a shop near the near West Side, where he recently became a partner.

Westbrook aimed to do a few things during his talk: make wine approachable and fun, introduce charterholders to some lesser-known wine regions, and equip tasters with a few tools that would increase overall enjoyment. We started our session by each naming a varietal. As we rattled off terms such as Malbec, Cabernet Sauvignon and Pinot Grigio, Westbrook explained that sommeliers such as himself tend to think of wines in terms of region, not grapes, as to limit the massive universe of wine types down to a manageable set. The regions will inform you of the types of grapes used and the varietals. For example, Burgundy in France features wines made from Pinot Noir and Chardonnay grapes as well as lesser known varieties such as Gamay.

According to Westbrook, “Is it yummy?” is the first question one should always ask after tasting wine. Drinking tasty wine that you like is the point and everything else is secondary. But before tasting a wine, it’s a good idea to both smell and look at the wine. The taste and color will inform how you expect a wine to taste. You should begin by raising your glass (holding it by the stem as not to raise the temperature) and looking at the color. Is it light, dark or medium? Darker wines will tend to be made from grapes with thicker skins. Then you ought to sniff it, with the goal of seeing if the wine smells ripe or tart. Warmer regions will tend to correlate to riper grapes, and colder growing regions will often see their grapes a bit more tart in flavor. Wines that are sweeter or less acidic are usually made with riper grapes in warmer growing regions.

We tasted some wines that are a little less known than California or French wines, and Westbrook said that savvy consumers can often get a good deal by buying from these lesser known areas. One wine we tasted was from Armenia. Westbook asked us to smell the wine in a glass and determine if it was more ripe or more tart. We thought it had a bit more of a tart odor, but when we drank it, we found that the alcohol feel (the burning sensation when it goes down your throat) indicated that the alcohol content was on the high side. This was a bit of a surprise given that the tart smell would typically be associated with less alcohol than a riper grape. Westbrook explained that the grapes were grown in Armenia in a mountainous region, so the terroir (the geographical characteristics where the grapes were grown, generally everything that the wine grower can’t control) includes very cold periods as well as a very warm summer, which can lead to higher alcohol content, yet with more tart flavor profile. Our crash course was a hit and well-attended, and those who couldn’t make it can sign up for classes on the 1340 Beer Wine Spirits’ website at https://www.1340bws.com/wine-class.

Storytelling: A Critical Brand Building Skill for Leaders

CFA Society Chicago hosted a storytelling event on May 14th at the Global Conference Center. The purpose of this program was to help society members claim their value using stories as a tool to highlight leadership and communication skills. Storytelling is a big part of personal branding. So, how can it help us and how do we tell a good story while remaining authentic? Daniella Levitt, president of Ovation Global Strategies and Executive Director of Leading Women Executives, engaged our right side of the brain and helped us become more comfortable talking about ourselves and the unique value proposition we bring to the table.

Storytelling shapes how others see us and embodies what we have learned about ourselves as leaders, but telling your own story can be uncomfortable. However, learning and practicing this does reap benefits because stories are 22x more effective than just rattling off a list of accomplishments. A story is a tool of authentic leadership. We started by creating the framework for our leadership stories and exploring the idea of leaders as teachers with a unique teachable point of view (TPOV). 

A TPOV includes the following attributes:

  1. In context of your role as a leader in your organization
  2. In context of your leadership identity.
  3. A direct tie-in with your leadership story and your persona brand.

Elements of this also include ideas, values, emotional energy and edge.  It should reflect how we take risks and make decisions. 

To create our TPOVs, we can create a chart mapping our leadership story placing events on the Y-axis and time on the X-axis. Organizing high events in our lives and careers above a horizontal dotted line and low events below will help uncover insights from our leadership stories. We will be able to answer questions such as: Am I a risk taker? Did my low points bring clarity and help facilitate change? These discoveries will become our TPOV.   

Levitt emphasized that developing this is an iterative process requiring reflection and feedback.  We should also develop a plan that encompasses the most important milestones we can think of and identify a small group of people who can help us move forward with the most critical aspects of our plans. 

We worked in groups at our tables on illustrating our own TPOV and the stories that would bring them to life. Levitt recommended we meet our fellow attendees again for coffee to practice and communicate our next iteration.

Levitt closed the event by providing a checklist for a good story:

  1. Know your theme and punchline.
  2. Draw from what you know.
  3. Simplicity works best.
  4. Adjust chronology as required.
  5. Make your audience care.
  6. Be passionate and value a dash of mystery, unpredictability and drama.

Hopefully with a TPOV and personal story, we will all feel better prepared the next time someone says “Tell me a little bit about yourself”. 

Distinguished Speaker Series: Charles K. Bobrinskoy, Ariel Investments

Some investors have great analytical skills in assessing current and potential future investments, but the best investors also possess an uncanny ability to both recognize and combat their own behavioral tendencies when making investment decisions. This was the topic of Charles “Charlie” Bobrinskoy’s presentation to a packed room of eager members of CFA Society Chicago and local investment professionals at the Society’s Distinguished Speaker Series luncheon held on May 15, 2019. The program titled, “Combating Unhealthy Behavioral Tendencies in an Investment Firm” discussed how Bobrinskoy’s firm Ariel Investments has adjusted its investment process to incorporate the latest academic findings in the field of Behavioral Economics, and how these process improvements have helped Ariel’s flagship Mutual Fund, The Ariel Fund, become number #1 in its mid-cap value category over the last 10 years.

As way of background, Charles Bobrinskoy is the vice chairman and head of Investment Group for Ariel Investments. Headquartered in Chicago, the firm offers six mutual funds for individual investors and defined contribution plans as well as separately managed accounts for institutions and high net worth individuals. He manages their focused value strategy—an all-cap, concentrated portfolio of U.S. stocks. Bobrinskoy also spearheads Ariel’s thought leadership efforts and takes an active role in representing Ariel’s investment strategies with prospective investors, clients and major media. Additionally, he is a member of the Ariel Investments board of directors. Bobrinskoy is frequently quoted in various news publications such as The Wall Street Journal, Barron’s, Money and USA Today, is a regular contributor to CNBC, and is frequently a guest on Bloomberg Radio.

Many in the room with a CFA curriculum under their belts were familiar with the inherent behavioral biases in our decision making, but Brobinskoy started off by suggesting that he not only was going to share with us the most influential biases, but more importantly, he was going to teach us how to combat them.  Some economists believe that no matter how much we recognize behavioral biases, we are helpless in trying to combat them.  Bobrinskoy and Ariel Investments don’t believe this, and they have purposefully instituted structural processes to combat each bias.

Before jumping into each bias, there are four common observations in the markets that defy efficient markets. The existence of behavioral finance is why each of these market anomalies exist.

  • Stocks beat bonds over the long term.
  • Until the last 10 years, value has consistently outperformed growth.
  • Small caps outperform large caps.
  • And finally, there is momentum in every asset class.

Here is what we learned by bias, in no particular order.

  • Confirmation bias. The tendency to seek data that is compatible with beliefs currently held and to reject conflicting data. Unfortunately, the smarter you are, the more susceptible you are to confirmation bias. A common example is people watch Fox News if they are a Republican and MSNBC if they are a Democrat.

Ways to combat: Appoint a fellow research analyst to play Devil’s Advocate. Challenging another analyst’s assumptions is inherently difficult because it creates conflict. Official appointment of a devil’s advocate actually removes the conflict inherent in challenging someone else’s assumptions because it is his/her job to contradict initial assumptions.

  • Overconfidence bias. The tendency to overestimate what one knows and underestimate the uncertainties of the future.

Ways to combat: Place probabilities on outcomes, and ask for feedback on those probabilities. Ask questions to narrow down the range on probabilities.

  • Anchoring on prior estimates. The tendency to adjust prior estimates insufficiently when presented with new information.   This is why momentum exists in the markets. 

Ways to combat: You need a culture that does not penalize analysts for revisions. Encourage analysts to change their views based on new information that is learned in the market.

  • Loss Aversion. The tendency to overweight losses relative to gains.  This is why there an equity premium.  Investors are willing to accept a certain $5 gain, versus an expected return of $10.

Ways to combat: Ignore your costs basis. Examine each investment decision as if you didn’t own the stock.  Ask yourself, “Would you buy it again today?”

  • Endowment Effect. The tendency to overvalue that which one owns versus that which one doesn’t own.  

Ways to combat: Keep a watch list of what you don’t own that is comparable to what you do own. Look at the data as if you didn’t have any portfolio positions in play and ask, “If I had fresh capital, what would I own today?”

  • Reliance on Intuition over Data. The tendency to think one’s gut instinct is superior to data and to overestimate the significance of very small samples. Model based decisions are always better than guy instinct.

Ways to combat: Always trust the data over intuition. Ask yourself if a decision is data based or on gut instinct. 

  • Vividness/Recency effect. The tendency to measure frequency by one’s ability to think of example which in turn produces a tendency to overweight recent examples.

Ways to combat: Be required to have several examples to prove your point.

For further reading, Brobinskoy suggested three books:

  • Thinking in Bets by Annie Duke.
  • Thinking Fast and Slow by Daniel Kahneman
  • Misbehaving: The Making of Behavioral Economics by Richard Thaler

Last but not least, if you’re a Republican, challenge yourself to watch MSNBC.  If you’re a Democrat, challenge yourself to watch Fox News!

Karyl Innis: Building a Distinguished Career through Personal Branding

The CFA Society Chicago Women’s Network hosted the third event of its four-part Alan Meder Empowerment Series on March 15th at The University Club. The series is intended to support career development and the advancement of women in the investment management profession. This event also attracted a number of men who were interested in the universal topic of Personal Branding.

In today’s workplace how you articulate your value proposition to the organization can make or break your career possibilities. Advocating for yourself, articulating your value and utilizing your branding statement as a part of your personal development strategy are all crucial to long term career success.  Your future at work is tied to who you think you are, as well as who your customers, clients, partners and prospects think you are.

This interactive session was led by Karyl Innis who knows why successful people succeed and, when they don’t, how to help them. She is a career expert, CEO and founder of The Innis Company, a global career management firm, and one of the most successful woman-owned businesses in the country.

Innis took the podium and quickly asked the audience “What do you think of me?” Write down one word that answers that question.  She then asked us to contemplate “what does that word mean to you?” and “what about me made you think that?” She then noted that we’d return to this topic later.

Innis went on to share that how you talk about yourself and how you let others talk about you is a career accelerator or killer! She next asked “how many of you have a brand?” By show of hands, about half the room indicated they have a brand and the other half felt that they didn’t.

Lesson #1: Everyone has a personal brand!  You may or may not know what it is; you may think you know, or you may think it is one thing while others think it’s something else.  You may like the brand people bandy about when they speak of you, or you may want to change it.  Why does personal brand matter?  Because people make decisions based on what they think they know about you. The more you/others hear what your “brand” is, the more it becomes truth and reality. Your brand is other people’s perception of you – rightly or wrongly.  That’s why it’s so important for you to be in charge of your narrative!

Take Oprah for example, she has a personal brand.  She has a lot of other stuff too – television networks, property, copyrights, licenses, and that very valuable personal brand of hers.  Some say the value of that personal brand is worth a tidy 2.4 billion dollars. So what do you get for that $2.4 billion?  Nothing – her brand belongs to her and your brand belongs to you. Oprah’s brand solidifies her reputation, transmits what matters to her, and creates future opportunities for her. Her brand does that for her and your brand can do that for you!

Lesson #2: Brand messaging and brand are different. Brand messaging = Look, Act, Sound, Say. Your brand is how people think and feel about you – it’s a combination of a thought and a feeling. Brand is the place YOU occupy in the decision maker’s mind relative to all others. It’s similar to the place a product occupies in your mind. 

Consider three pairs of leopard shoes: one from Target; one from Nine West; one from Jimmy Choo.  You have a different perception of each shoe based on various factors such as durability, price, styling, etc. Based on these factors you position and differentiate the shoes in your mind and have reasoning for why you would choose one over the other. There is a premium brand, a middle of the road brand, and a low-end brand.   This same positioning and differentiating translates to human capital hiring – are you worth the money? You want to be the premium brand!

Lesson #3: We tend to position ourselves as average. We talk about ourselves with average words, yet we want more pay and more responsibility! We should be using premium words to describe ourselves and our capabilities.  There are A, B, and C levels of words to describe your brand. People frequently use “competent” to describe themselves, when in fact this is a C-level adjective with broad interpretation (having the necessary ability, knowledge, or skill to do something successfully – capable, able, adept, qualified). The elevated or “A” version of this adjective is expert or executive.  Use A-level words to describe yourself and your competencies. How valuable is your personal brand? The more premium you are, the more you can command!

Start creating your brand by selecting three premium words which convey what you want your leader, hiring manager, or others to think of you. 

“A” Words                                                           “C” Words

Expert                                                                   Competent

Authority                                                             Skilled

Strategist                                                             Doer

Master                                                                 Reliable

Visionary                                                             Action-Oriented

Talent Scout

Champion

Guru

Futurist

Leader

Brand makes a difference – you will be hired for what you know and how you’ve applied it:

  • Oil and gas banker – an executive that fixes broken businesses
  • Client service advocate (voice of the client) – leader for everyone
  • Hard worker – powerful leader of people and teams

Lesson #4: Have what it takes to create an initial impression. Brand also has to do with how you look and how you deliver your message.  Initial impressions are key and based on the following: 55% visual; 38% vocal; 7% verbal (this goes up to 22% if you’re talking on a continuum). Everything from the tilt of your head, shoulder positioning, hand and leg placement, clothing, and smile factor in to how you are perceived by others. 

This takes us back to the start of Innis’ presentation when she asked the audience to write down one word describing her, before she had even delved into her presentation. This word was our first impression of her. Since she had barely spoken people’s perceptions of her were largely visual, as findings show.

Creating Your Personal Brand

Like those of us in the audience, you may be wondering how get an accurate assessment of your current brand. Innis suggests gathering performance reviews, email compliments, bio’s, casual notes, etc.  Additionally, interview at least five people, asking them all the same questions, clarifying with them what you thought they were telling you and recording their answers. The takeaways from these various sources will help you gain insight into others’ perceptions of your brand.

In the world of work, you will be talked about. People will describe you as they introduce, evaluate and sponsor you by using a succinct description attached to your name. It’s important that you control the brand attached to you and that it be one that accelerates your career and not one that stalls it. It takes about 18 months for a rebrand to take root, so write yours today!  If you desire Karyl’s help in crafting your brand, she can be reached at info@inniscompany.com

To learn more about career development and advancement, read about the previous events of the series – “Taking Control of Your Career” and “Tips and Tricks for Negotiating for Yourself” on the CFA Society Chicago blog.

Distinguished Speaker Series: Sheila Penrose, Jones Lang LaSalle

On April 9th, CFA Society Chicago’s Distinguished Speaker Series Advisory Group welcomed Sheila Penrose at The Metropolitan. Penrose is Non-Executive Lead Independent Chairman of the Board at Jones Lang LaSalle, a global real estate services company, and also serves on the Board of Directors for McDonald’s. Penrose retired from Northern Trust in 2000. In her 23 years at Northern Trust, she served as President of Corporate and Institutional Services and as a member of the Management Committee, where she was the first woman to serve. Subsequently, she served as an Executive Advisor to The Boston Consulting Group from 2001 to 2007. She has been on the boards of Entrust Datacard Group, eFunds Corporation, and Nalco Chemical Corp. She has also served on the advisory board of the Gender Parity initiative of the World Economic Forum, the board of the Chicago Council on Global Affairs, and as a founding member of the US 30% Club, a group whose initiative is to achieve female representation of at least 30% on corporate boards.

After detailing some of her credentials and experience, Penrose highlighted three topics she wanted to explore:

  1. What issues are boards of directors discussing the most?
  2. How are boards of directors handling the evolution of the business environment?
  3. How do a group of highly ambitious, competitive and capable people, all of whom are used to leading others, form a functioning team that can effectively oversee a company?

She emphasized that in each topic, boards are fiduciaries for both shareholders and stakeholders, and need to understand how to balance the needs of both groups. She also emphasized that individual board members should be listening and learning all the time, while contributing and remaining objective.

Penrose expounded upon the recent transformation of the business environment as it relates to the board of directors.  Recently, boards have become less dominated by the executive. The CEO/Chairman dual role that was so common in previous years is now no longer as accepted as it once was. This was spurred by Sarbanes-Oxley, but also investors and employees who now have more of a voice shareholder activism has increased. Digital disruption has also been a major category for boards to tackle, and relatedly, managing corporate reputation in an age of social media, where all voices have access to the public. Diversity on boards, and not just different kinds of people, but different viewpoints, has also been an important topic. Boards have been seeking to find people who have different types of experience and different types of expertise, as opposed to finding a group of CEOs for the board. Boards need to develop consensus, not groupthink. She brought up the dilemma of cybersecurity. Boards must wrestle with the questions of how much cybersecurity is enough and how quickly the company can react in the event of a breach. Boards must also consider the impact of global events, as almost all large corporations are now global in reach. Lastly, and importantly, she discussed the issue of talent and corporate culture. Boards must grapple with the future of work and the changes in expectations of their employees. Companies assume they will be able to find the skills they need in the labor market, but they are not doing much to develop those skills in employees and not moving quickly enough to develop people whose jobs might be redundant in the future.

Boards also have to understand how best to find directors. With the changing business environment, new skills are often necessary, and boards have begun looking for people who have those skills, such as digital experience, to help them stay current.

The composition of the board, its dynamic, and its leadership are all critically important. The board should be “collegial but not clubby”, and board decisions should be made in the room, not in private meetings.  Board members should maintain a healthy balance of both listening and contributing.

Individual board members should have what Penrose called “The Four Cs.”

  • Curiosity
  • Conviction
  • Courage
  • Compassion

During the Q&A portion of the event, Penrose described how she believes someone can become a member of a board of directors. She said the individual must have a good reason for why they want to join a board, should be strongly curious and constantly learning, should have experience trying to manage a business on some level, and should be wary of joining a board too quickly. Joining a board too quickly usually means that board is likely of lower quality, and the first board you join dictates one’s future opportunities.

The Equity Risk Premium: Applications for Investment Decision-Making

Professor Aswath Damodaran’s opening remarks at CFA Society Chicago’s Equity Risk Premium event on April 2, 2019 at the W Chicago City Center.

Aswath Damodaran, Kerschner Family Chair in Finance Education and a Professor of Finance at New York University Stern School of Business, is well known for his books and articles in the fields of valuation, corporate finance, and investment management, philosophies, and strategies. On April 2, he treated the CFA Society Chicago to a tour de force through the foundations of risk premia, the macroeconomic determinants of equity risk, and how the risk premium can me misused.

Damodaran’s talk was followed by a panel which included himself, Michele Gambera, co-head of Strategic Asset Allocation Modeling at UBS Asset Management, and Bryant Matthews, global director research at HOLT. The panel discussion was moderated by Patricia Halper, CFA, co-chief investment officer at Chicago Equity Partners.

Damodaran pointed out that while the risk-premium is referred to as one number, it contains several various risk factors, such as political and economic risks, information opacity, and liquidity risks. Despite the underlying complexity, a common way to derive the risk premium is from the average volatility of some historical period. This, Damodaran warns, is a dangerous approach. By using historical data you can derive any risk premium you want by using the time horizon of your choosing. When you look at historical averages, you are also searching for a number that nobody has ever experienced. And even if they did, you should not believe that history will simply repeat itself. And even if history did repeat itself, you are still estimating a number with large error margins. In the end, the exercise is just not useful.

Damodaran has done a lot of work determining equity risk premia for different countries and makes his data available on his homepage. His approach is to derive an implied risk premium based on consensus forecasts of earnings and adding country risk premia for different countries. He cautions that there is no pure national premium thanks to our integrated world. Much of S&P earnings, for instance, are derived from abroad, and this must be taken into account.

For a person who has devoted so much time to estimating risk premia, it may come as a surprise that Damodaran thinks people should spend less time on it. His approach is that once you observe the market-implied risk premium, you should use this in your valuation model and devote your attention to estimating cash-flows. Right now, too many people are wasting too much time on valuing companies through finding the perfect risk-premia when cash-flows are ultimately going to determine whether they will get valuations right. Academic finance is another culprit here, which spends too much research time on discount rates.

Ask yourself this, are you working on your model’s risk premia because that is where you have superior knowledge, or because it is your comfort zone?

Damodaran is also critical of the use of the price-to-earnings ratio to assess valuation, since it looks at earnings only for the current period. In the US market the ratio may look high, but the pictures very different for current implied risk premia. Since 2008, risk-free rates have come down while expected stock returns have remained roughly the same. This actually implies a higher risk premium.

 Michele Gambera shares Damodaran’s criticism of historically derived risk premia. He also pointed out that while the risk premium fluctuates a lot, we pretend in our models that it is constant. In effect, Gambera stressed, we are estimating a random-walk variable. A better approach for your valuations is to use a forward-looking covariance matrix with various factor loadings.

Should we therefore throw the historical data out the window? When asked the question, Bryant Matthews of HOLT pointed out that historical data are not all useless in a world where variables tend to mean-revert. But you may need to wait a long time for it to happen.

Is there a small-cap premium? Damodaran pointed out that if you estimate the historical premium since 1981, it is negative, which is clearly fictional. However, Matthews estimated a small cap premium of 0.6%, albeit with a standard error that makes it statistically zero. By slicing the equity market in other ways, he estimates that value stocks tend to have a 3.5% equity premium over growth stocks, while Fama and French’s quality stocks-factor enjoys a 2.1% premium over non-quality stocks.

Matthews has also calculated market implied risk premia for over 70 countries, and found it rising in the US from 0% in 2000 to 4% today. Such estimates, he pointed out, are often counterintuitive for clients. Surely, equities were riskier in 2000 when valuations were high. But precisely because valuations were so high, the implied risk premium, which was part of the discount rate, was low.

Can we make money by investing in high-risk premium stocks? After all, theory tells us returns are the reward for taking risk. Yet as Gambera pointed out, high-volatility stocks tend to be favored by investors in part as a way to leverage up according to the CAPM-models, as is done for instance in risk-parity models. At the same time, pointed out Matthews, low-volatility stocks are generally also high-quality stocks and therefore tend to have high return, despite their historically low risk.

Matthews argued that while profits are high for the US market as a whole, this really applies to only 100 companies. This concentration, he suggested, is due to lax regulations. Damodaran, however, suggested that antitrust measures cannot be relied on to change this fact. They may have been politically attractive in the time of Standard Oil, when that company’s dominated position allowed it to raise prices. The dominant firms of today are offering consumers very low prices. Break them apart and any politician will be met with discontent from voters.

Let us end with some historical perspective from Michele Gambera. Much of the early work on risk premia was made at a time of a very different market structure of industrialized countries. Steel and railroads ruled the day and many of today’s giants were not listed. The likes of Alphabet and Facebook pose new challenges in estimating risk premia. This suggests that now more than ever historical data will be misleading in estimating the risk premium, a modest number that means so much.

Present Like a Pro

In the third installment of a continuing series on communication, Scott Wentworth addressed members of CFA Society Chicago on how to make good business presentations on April 4th.  The capacity crowd of 90 in the Vault at 33 North LaSalle Street spoke to the popularity of the topic as well as the value of Wentworth’s previous two appearances before our society.  Wentworth founded Wentworth Financial Communications in 2015 to help financial businesses (especially investment managers) demonstrate their expertise through various forms of marketing content, including white papers, blogs, and newsletters. Prior to founding the company, he served as the head marketing writer at William Blair & Company. In his previous appearances with CFA Society Chicago (2017 and 2018), Wentworth addressed business writing, the primary focus of his company. This time, he spoke on oral communication, specifically how to make effective presentations.

Wentworth began by demonstrating (without announcing) several common presentation mistakes such as reading from a script, employing busy or confusing graphics, and relying on undependable technology. His point made, he quickly moved on to a very effective presentation embedding his recommendations within it. He pointed out that presenting is not the same as public speaking. A good presenter does not need to have a commanding presence or an abundance of charisma. Of greater importance is identifying and concentrating on one main idea, and then making a compelling case supporting it to the audience. Successful presenting requires skills that can be learned such as clarity, persuasion, concision, and good preparation.

Wentworth then went on to describe in detail his five tactics for a good presentation. First is identifying the goal of a presentation. He gave as examples motivating the audience to action, changing minds, correcting a misconception, or simply gathering information back from the audience. 

With the goal set, the second tactic is to analyze the audience. Is it hostile or supportive?  Uninterested or engaged? Uninformed or well-informed? This may be a difficult step if the presenter has limited information, but may be inferred from factors such as the type, purpose or setting of the presentation. It is important because it will direct the tone of the presentation.  To address a hostile audience, the presenter should emphasize areas of agreement first and seek out areas the audience would view as “win-win”. Whereas, with a supportive audience the presenter should reinforce their enthusiasm and provide an action plan or tools that lead to tangible benefits.

Wentworth described his third tactic as crafting your story arc. He admitted this is the most difficult aspect of a presentation because it is an art, not a science. It begins with identifying the one main idea he mentioned at the outset. This idea should be boiled down to as few words as possible and repeated throughout the presentation to drive it home.  In must be articulated early in the presentation to allow for this repetition, and also to protect against the risk of running out of time. Other features of the story arc include:

  • Using empathy to demonstrate that the presenter understands the audience’s situation and can help.
  • Focusing on the benefits offered rather than features (a common trap for investment managers who often focus on a product’s defining characteristics or performance).
  • Highlighting differentiating factors
  • Making things tangible.  Avoid abstract ideas, or if they’re necessary, convert them to a more tangible concept via examples or anecdotes.

The fourth tactic is creating effective visual aids. This can lead to another common error of presenters: considering the slide deck to be the presentation. Wentworth says it is not.  Rather, slides are a visual aid, just part of the presentation along with the equally-important delivery, the message or theme, and the interaction with the audience. He followed-up with a list of Do’s and Don’ts for slides.

Slides should

  • Reinforce the main idea,
  • Illustrate statistics or relationships,
  • Explain complex ideas, and
  • Keep the audience engaged. 

Slides should not

  • Outline the full presentation (they are just an aid),
  • Serve as a teleprompter, nor
  • Be distractive (too busy). 

As an aside, Wentworth recommended that the slides a presenter uses be pared down as much as possible with the bulk of the information conveyed by the presenter directly.  He recommended to having a more detailed deck as a “leave behind” for the audience.

The final recommended tactic is to practice with purpose for which Wentworth had several helpful hints:

  1. Do a dry run alone to learn the material and time the presentation
  2. Repeat with a reviewer (e.g., a co-presenter, team member, or even a spouse)
  3. Prepare for a failure of technology and have a plan B in case of a breakdown
  4. Don’t memorize lines. You’re likely to forget them which increases tension and nervousness.

Wentworth concluded his presentation, not by asking for questions, but rather asking the audience to provide examples of roadblocks or challenges they had faced in making presentations. Many offered up cases which proved to be good illustrations of how to apply the five tactics he had outlined. The discussion naturally led into a robust series of questions that extended for over half an hour. The level of audience engagement proved that Wentworth had both talked the talk, and walked the walk in demonstrating how to make a good presentation.

Past Wentworth Financial Communications Events:

CFA Society Chicago Book Club:

GDP: A Brief but Affectionate History by Diane Coyle

Don’t confuse familiarity with understanding. That’s perhaps the biggest takeaway from Diane Coyle’s short and highly readable GDP: A Brief but Affectionate History. The official guidance for calculating GDP, the System of National Accounts (SNA), published by the United Nations runs 722 pages. That combined with the difficulties of executing the actual calculation makes one wonder how many people, even ostensible experts, really understand the quarterly numbers. In addition to the intricacies of defining and calculating GDP, Ms. Coyle takes the reader through the short yet turbulent history of the metric, its uses and mis-uses, and several possible improvements and alternatives. The CFA Society Chicago Book Club members who met to discuss the book at their March 2019 meeting agreed that the book left the reader with more questions than answers, which is perhaps one of the marks of a good book.

As for GDP’s short yet turbulent history, Ms. Coyle traces the origins of the modern metric to Colin Clark and his pioneering work at the United Kingdom’s National Economic Advisory Council, an organization based on the then-novel concept of providing economic advice to governments to combat problems, the most notable problem at that time being the Great Depression. On the other side of the pond, the famed U.S. economist Simon Kuznets applied Clark’s concepts to the U.S. economy at the National Bureau of Economic Research, work for which he was later awarded the Nobel Memorial Prize in Economic Science. From the very beginning, Kuznets grappled with using the metric to read into welfare, well-being, or happiness, a theme that’s repeated throughout the book and a problem that persists to this day. 

Spawned in depression, the concept of national accounting gained maturity in war. The Allies’ efforts to defeat the Axis powers required a complete mobilization of their nations’ resources, so it’s no surprise that understanding what those nations’ resources were was vital to that effort.  During that time economists started meaningfully incorporating government spending into GDP calculations for the first time. The reasons for neglecting it previously were numerous.  For one, as is easy to forget with our current bloated governments, government spending prior to the war was miniscule in comparison to aggregate economic output. A second reason for incorporating government spending was a matter of mathematical necessity. Without taking into account government spending, national income would fall short of the market value of goods and services produced. Kuznets again warned that incorporating government spending into GDP “’tautologically ensured that fiscal spending would increase measured economic growth regardless of whether it actually benefited individuals’ economic welfare.’”

Fast forward nearly a century later, and that recurring theme of reading too deeply into GDP notions of happiness or welfare is no less tractable. Efforts to combat that shortcoming include the Human Development Index (HDI), the Index of Sustainable Economic Welfare (ISEW), the Measure of Economic Welfare (HEW), and several others. Those indices try to account for, among other things, leisure time, environmental degradation, crime, the negative impacts of defense spending, and several others. The most compelling response to attempts to read welfare and happiness into GDP might come from Clayton Christensen’s How Will You Measure Your Life.  In that classic book he discusses “motivators” and “hygiene factors” in the context of one’s personal life. Motivators are, like the name suggests, factors that compel people to go above and beyond the call of duty and can include the sense of duty or purpose that comes from curing disease, educating people, or defending the innocent in the military or as first responders. Hygiene factors, like salary, are necessary but not sufficient conditions for happiness. Below a certain level, people are unable to meet basic human needs and their happiness is adversely affected.  After a certain level income level ($75,000, according to a study by Angus Deaton and Daniel Kahneman), there’s little relationship between income and happiness.  Perhaps the same can be said of GDP. Below a certain level of economic output, a country likely will be unable to meet the basic needs of its people, such as nutrition, sanitation, and vaccinations. After a certain point, GDP and happiness likely has a more tenuous relationship. It might even be a negative relationship. Anecdotally, demand for mental health counselling seems to rise with income.

Perhaps people wish too much of one metric. Not only can GDP not explain human happiness and prosperity, but it’s very hard to make it account for economic output. How should GDP account for nominally free services like search engines, Wikipedia, or open-source software? How should GDP account for unpaid labor such as the cleaning and child care services performed by stay-at-home spouses (mostly women), a perennial bugbear among feminists?  Perhaps most consequentially, how should GDP account for the changing variety and quality of goods over time? To account for the change in quality, Ms. Coyle discusses hedonic price measures.  Instead of just looking at the price of a good over time, hedonic price measures regress the price of a good on measures of quality, such as screen size and screen resolution in the case of televisions and computer monitors. The consequences of hedonic price measures for health care and education, two of the goods with the highest inflation rates, could be striking.  The cost of health care has increased markedly in this author’s lifetime, but so have the availability and efficacy of several treatments. Education, unfortunately, has probably suffered the opposite fate. Despite the rising cost of higher education, there’s little evidence that the average graduate has gotten smarter based on measures of verbal and quantitative competency.

Those are just a few of the questions raised in a remarkably short book, only 145 pages. Although those questions deserve careful thought, one should only undertake such contemplation with Ms. Coyle’s warning about GDP: “the ‘object’ being measured is only an idea, not something with an independent existence waiting to be discovered and counted.” With all the variation in definition and measurement, one is unlikely to come to stable and satisfactory conclusions about GDP, but knowing that before contemplating GDP is perhaps the greatest lesson from an excellent book with several such lessons.

Curling at Kaiser Tiger

On a frosty evening where temperatures hovered just above ten degrees, CFA Society Chicago hosted an evening of curling and drinks at Kaiser Tiger, a bar with a large beer garden on Randolph Street. Curling, with origins dating back to 16th century Scotland, involves sliding a smooth stone across a sheet of ice, with the goal of centering the stone in the middle of a target (typically 146-150 feet away, the rink at Kaiser was a bit smaller though). It was added to the Olympics in 1924 as a “demonstration sport”, and was officially added in 1998. Curling is most popular in Canada, but many countries across the globe field teams in the world championships and Olympics, including Finland and Scandinavian nations, the UK and Japan.

This was our first curling occasion as a Society, and it was a packed event, with networking taking place in Kaiser Tiger’s large West Room and participants bearing the cold and taking turns hurling stones outdoors in the ice curling rinks in the beer garden. If you missed the event, you can get a group of friends together rent a lane for $40 per half hour here – Kaiser Tiger Curling. Aside from the networking, attendees were treated to a fantastic menu of craft beers, wine and appetizers. Despite the chilly temperatures, fun was had by all, and curling very well may turn into an annual CFA Society Chicago winter tradition!