Issachar Investment Group Pte Ltd

Part 4

Loss Aversion
Established financial efficient market theory holds that there is a direct relationship and trade-off between risk and return. The higher the risk associated with an investment, the greater the return. The theory assumes that investors seek the highest return for the level of risk they are willing and able to take on. Behavioral finance and related research seem to indicate otherwise.

FEAR OF LOSS
In their seminal study “Prospect Theory: An Analysis of Decision under Risk,” behavioral finance pioneers Dan Kahneman and Amos Taversky found that investors are more sensitive to loss than to risk and possible return. In short, people prefer to avoid loss over acquiring an equivalent gain: It’s better not to lose $10 than to find $10. Some estimates suggest people weigh losses more than twice as heavily as potential gains. Even though the likelihood of a costly event may be miniscule, people would rather agree to a smaller, sure loss than risk a large expense.

For example, when asked to choose between receiving $900 or taking a 90% chance of winning $1000 (and a 10% chance of winning nothing), most people avoid the risk and take the $900. This is despite the fact that the expected outcome is the same in both cases. However, if choosing between losing $900 and take a 90% chance of losing $1000, most people would prefer the second option (with the 90% chance of losing $1000) and thus engage in the risk-seeking behavior in hopes of avoiding the loss.

Part 3

ACTIVE TRADING
In many studies, it has been shown that traders who trade excessively (active traders) actually underperform the market. In a study conducted by Professors Brad Barber and Terrance Odean, investors utilizing traditional brokers (communicating via telephone) achieved better results than online traders who trade more actively and speculatively. In another of their studies Barber and Odean analyzed 78,000 U.S. household investors with accounts at the same retail brokerage house. After segmenting the group into quintiles by monthly turnover rates in their common stock portfolio, they found that active traders earned the lowest returns (see table below). They found investor overconfidence to be an important motivation for active trading.

Part 2

OVERCONFIDENCE BIAS
Overconfidence is an emotional bias. Overconfident investors believe they have more control over their investments than they truly do. Since investing involves complex forecasts of the future, overconfident investors may overestimate their abilities to identify successful investments. In fact, experts often overestimate their own abilities more than the average person does. In a 1998 study, affluent investors indicated that their own stock-picking skills were critical to portfolio performance. In reality, they had overlooked broader influences on performance. At its most extreme, an overconfident investor can become involved in investment fraud. Economist Steven Pressman identifies overconfidence as the primary culprit responsible for the susceptibility of investors to financial fraud.

SELF-ATTRIBUTION BIAS
Self-attribution bias occurs when investors attribute successful outcomes to their own actions and bad outcomes to external factors. This bias is often exhibited as a means of self-protection or self-enhancement. Investors with self-attribution bias may become overconfident, which can lead to underperformance. To mitigate these effects, investors should track personal mistakes and successes and develop accountability mechanisms.

Why Investors Are Irrational, According to Behavioral Finance
Traditional vs. Behavioral Finance

Established economic and financial theory posits that individuals are well-informed and consistent in their decision-making. It holds that investors are “rational,” which means two things. First, that when individuals receive new information, they update their beliefs correctly. Second, individuals then make choices that are normatively acceptable. While this framework is appealingly simple, it’s clear that in reality, humans do not act rationally. In fact, humans often act irrationally–in counterproductive, systematic patterns. 80% of individual investors and 30% of institutional investors are more inertial than logical.

These deviations from theoretical predictions have paved the way for behavioral finance. Behavioral finance focuses on the cognitive and emotional aspects of investing, drawing on psychology, sociology, and even biology to investigate true financial behavior.

Behavioral Biases and Their Impact on Investment Decisions
We all have strongly-ingrained biases that exist deep within our psyche. While they can serve us well in our day-to-day lives, they can have the opposite effect with investing. Investing behavioral biases encompass both cognitive and emotional biases. While cognitive biases stem from statistical, information processing, or memory errors, an emotional bias stems from impulse or intuition and results in action based on feelings instead of facts.

Overconfidence
In general, humans tend to view the world positively. Outside of finance, in a 1980 study, 70-80% of drivers reported themselves to be in the safer half of the distribution. Multiple studies – of doctors, lawyers, students, CEOs – have also found these individuals to have unrealistically positive self-evaluations and overestimations of contributions to past positive outcomes. While confidence can be a valuable trait, it can also lead to biased investing decisions.

Never Stop Learning
After the Revolutionary War, the tastes of Americans changed, and the well-to-do were definitely out of style—including their expensive tastes in silver. That didn’t stop Revere. He grew with the new market, offering everyday items like cutlery, buckles and teapots. But that was just a start. He also became known for making bells and copper plate engravings, printing this country’s first money, and opening America’s first rolling copper mill.

The Takeaway:
In order to grow your business, you have to grow yourself. Never stop learning. Paul was famous for mastering new skills and learning new styles. He continued educating himself and expanding his company until nearly the end of his life. He became one of America’s earliest industrialists.

Be Generous to Your Community
There’s no doubt about it. Paul was a busy man. Aside from his companies and political activities, including that famous Tea Party and even more well-known ride, Paul took time to become involved in his community. He acted as Suffolk County coroner and the first president of the Boston Board of Health. He even helped organize one of Beantown’s first mutual fire insurance companies.

Do What You Love
Revere’s father unexpectedly died when the young colonist was only 19 years old. As the eldest of seven children, he took over Paul Senior’s silversmith shop—and made a huge success of it. He soon became the darling of high society, who clamored after his fine tea sets and flatware.

The Takeaway:
With six siblings and a mother to support, Paul could have sold the business. But he truly loved making things and the business, itself, and that passion translated into excellence. It was his passion that allowed him to become a master craftsman. Owning a business is never easy. But if you’re passionate about what you’re doing, there’s no obstacle you can’t overcome. Never go into business just for the payoff. You won’t succeed.

How to Become a Legend?

An immigrant’s son with minimal schooling, he was running a business in the absolute poorest part of town at a time when class was everything. His chances of making it big were about as likely as someone naming their child North West. Okay, bad example. But, name aside, make it he did. Today, more than 230 years later, every American child knows the story of Paul Revere.

But this patriot was much more than the guy who warned everyone the British were coming. Revere was a crazy good business man. In fact, one of his companies—Revere Copper Products—still exists today. So how was he able to succeed against all odds?

We decided this Fourth of July holiday week is the perfect time to find out. We’ll also show you how to apply those lessons using the principles Dave teaches at Entre Leadership Master Series. Here are a few takeaways from the man whose midnight ride wasn’t the only thing that made him a legend.

10-Step M&A Process
If you work in either investment banking or corporate development, you’ll need to develop an M&A deal process to follow. Investment bankers advise their clients (the CEO, CFO, and corporate development professionals) on the various M&A steps in this process.

A typical 10-step M&A deal process includes:

(1) Develop an acquisition strategy – Developing a good acquisition strategy revolves around the acquirer having a clear idea of what they expect to gain from making the acquisition – what their business purpose is for acquiring the target company (e.g., expand product lines or gain access to new markets)

(2) Set the M&A search criteria – Determining the key criteria for identifying potential target companies (e.g., profit margins, geographic location, or customer base)

(3) Search for potential acquisition targets – The acquirer uses their identified search criteria to look for and then evaluate potential target companies

(4) Begin acquisition planning – The acquirer makes contact with one or more companies that meet its search criteria and appear to offer good value; the purpose of initial conversations is to get more information and to see how amenable to a merger or acquisition the target company is

(5) Perform valuation analysis – Assuming initial contact and conversations go well, the acquirer asks the target company to provide substantial information (current financials, etc.) that will enable the acquirer to further evaluate the target, both as a business on its own and as a suitable acquisition target

(6) Negotiations – After producing several valuation models of the target company, the acquirer should have sufficient information to enable it to construct a reasonable offer; Once the initial offer has been presented, the two companies can negotiate terms in more detail

(7) M&A due diligence – Due diligence is an exhaustive process that begins when the offer has been accepted; due diligence aims to confirm or correct the acquirer’s assessment of the value of the target company by conducting a detailed examination and analysis of every aspect of the target company’s operations – its financial metrics, assets and liabilities, customers, human resources, etc.

(8) Purchase and sale contract – Assuming due diligence is completed with no major problems or concerns arising, the next step forward is executing a final contract for sale; the parties make a final decision on the type of purchase agreement, whether it is to be an asset purchase or share purchase

(9) Financing strategy for the acquisition – The acquirer will, of course, have explored financing options for the deal earlier, but the details of financing typically come together after the purchase and sale agreement has been signed

(10) Closing and integration of the acquisition – The acquisition deal closes, and management teams of the target and acquirer work together on the process of merging the two firms

Issachar Investment Group Pte Ltd updated their business hours.

The Private Equity Sweet Spot

Clearly, buying to sell can’t be an all-purpose strategy for public companies to adopt. It doesn’t make sense when an acquired business will benefit from important synergies with the buyer’s existing portfolio of businesses. It certainly isn’t the way for a company to profit from an acquisition whose main appeal is its prospects for long-term organic growth.

However, as private equity firms have shown, the strategy is ideally suited when, in order to realize a onetime, short- to medium-term value-creation opportunity, buyers must take outright ownership and control. Such an opportunity most often arises when a business hasn’t been aggressively managed and so is underperforming. It can also be found with businesses that are undervalued because their potential isn’t readily apparent. In those cases, once the changes necessary to achieve the uplift in value have been made—usually over a period of two to six years—it makes sense for the owner to sell the business and move on to new opportunities. (In fact, private equity firms are obligated to eventually dispose of the businesses

Private equity

The very term continues to evoke admiration, envy, and—in the hearts of many public company CEOs—fear. In recent years, private equity firms have pocketed huge—and controversial—sums, while stalking ever larger acquisition targets. Indeed, the global value of private equity buyouts bigger than $1 billion grew from $28 billion in 2000 to $502 billion in 2006, according to Dealogic, a firm that tracks acquisitions. Despite the private equity environment’s becoming more challenging amid rising interest rates and greater government scrutiny, that figure reached $501 billion in just the first half of 2007.

Private equity firms’ reputation for dramatically increasing the value of their investments has helped fuel this growth. Their ability to achieve high returns is typically attributed to a number of factors: high-powered incentives both for private equity portfolio managers and for the operating managers of businesses in the portfolio; the aggressive use of debt, which provides financing and tax advantages; a determined focus on cash flow and margin improvement; and freedom from restrictive public company regulations.

But the fundamental reason behind private equity’s growth and high rates of return is something that has received little attention, perhaps because it’s so obvious: the firms’ standard practice of buying businesses and then, after steering them through a transition of rapid performance improvement, selling them. That strategy, which embodies a combination of business and investment-portfolio management, is at the core of private equity’s success.

Public companies—which invariably acquire businesses with the intention of holding on to them and integrating them into their operations—can profitably learn or borrow from this buy-to-sell approach. To do so, they first need to understand just how private equity firms employ it so effectively.

At midnight on August 31st 1602, the public offering of shares in a new kind of enterprise closed. The charter for the venture, the Dutch East India Company, granted it a monopoly on trade with Asia until 1623, at which time, it was assumed, the firm would be liquidated. Twenty-one years is a long wait for capital to be returned. Smaller maritime ventures were generally wound up and the spoils divided after three or four years, when (and if) the ships returned. So shareholders were given an option to cash out after ten years. It hardly mattered. A faster exit route soon opened up.

The merchants who gathered daily around Amsterdam’s New Bridge to trade spices and grain proved as willing to buy and sell shares. These developments are recounted in “The World’s First Stock Exchange”, by Lodewijk Petram, a historian. One of the book’s many lessons is that wherever there is a primary market for a new kind of asset, there will soon be a secondary market.

Why the market for secondhand private-equity stakes is thriving?

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