Colloquia at ASB have never let down the students in terms of the value they add to them, corroborating whatever they learn in the curriculum. On the 9th of January, 2006 when Mr. Sameer Kamath of Wachovia Bank, USA visited the campus, the students were prepared to satiate their hungry brain cells with wisdom flowing in words from one of the best in business. Wachovia Bank is the fourth largest bank holding company in the U.S, based on assets. It’s the third largest full service brokerage firm in the U.S based on client assets.
Five principles on which the market operates with respect to stock prices formed the crux of the talk. He started by talking about the Modiguilani-Miller theory and endorsed its various propositions. He then delved into the five principles; an investor has to keep in mind before venturing into the stock market. Firstly, the risk-adjusted rate of return should be at least equal to the cost of capital. Secondly, the correlation between the constituents of the portfolio must be considered. The overall variance of the portfolio must be less than the variance of the constituents. The problem that may arise here is the irregular nature of returns. Practically, the correlation does not matter much and a mean variance analysis is done to smoothen any irregularities. The Capital Asset Pricing theory comes third. The CAPM comes in when, companies (banks) pay returns complimentary to only undiversifiable risk.
Fourthly, markets are always right. The objective is to try and beat the market, which is what, mutual funds; banks, portfolio managers etc. try to do by gaining access to insider information. Investors should also be on the watch out for signals. One example of a genuine signal that he gave was, directors of a company selling or buying stocks of that company. Here he also mentioned the concept of January effect. This is a phenomenon observed in the United States wherein, stock prices rise very high in the month of January without any specific reason and investors make money during this time. The fifth principle is options, futures and swaps. Here he stressed the importance of the Black Scholes model and the practicality of applying it in real life situations.
Mr. Kamath displayed his forte and oratorical skills again in the Q&A session. He was awe inspiring and dealt with the questions impeccably. When asked about how to decide on a particular method to value a firm, he said that multiple methods are used. Different methods give different values and there is no one right or reliable method. Whichever method is chosen, a ‘what if analysis’ has to be done and has to be kept very simple.
A report by,
Anju Sara George
(MBA II yr) |
