Following on from the last article about growth vs value as two investing strategies, here are lessons that beginner investors can take from some of the most well-known women in the investment world on how they invest their money and their best pieces of advice. One such example is Cathie Wood, CEO of Ark Investment Management. Wood studied Economics and Finance at the University of Southern California and then began managing money all the way from analyst to portfolio manager to CIO.

Her company launched its own ETF, characterised by its non-specific sector allocation to try to capitalise on a broad range of markets. Moreover, the ETF mainly focused on disruptive technology companies, who use existing successful technologies and innovate by improving them or replacing them with better, cheaper or faster products. Wood, as an active investor, looks for companies with huge growth potential, purchasing young Tesla as a hallmark investment.

However, last year was not the most successful year for Cathie Wood and Ark Invest. Many of its holdings steeply declined and the fund lost customers as a result; this tested the strength of Wood’s active investment strategy. Wood made new investments during the tech sell off despite criticism.

A second fascinating woman in finance is Mary Callahan Erdoes, CEO of JP Morgan Asset & Wealth Management since 2009. Her work primarily involves retaining and growing clients’ assets. As a result, she has increased client assets at JP Morgan Asset & Wealth Management to over $4T.

Her advice, as she said in an interview with David Rubenstein, is that first of all you should not invest into something which cannot be explained to you in simple terms. You should also start saving early to have an impact, because only over long periods of time does investing become very successful with less risk. When it comes to risk management, people should never excessively risk the money they have worked hard for. This stress test can be carried out as a measure of portfolio diversification. If one position heavily declines in the worst case scenario, the rest of the portfolio holdings should be able to salvage a bad investment.

In finance, networking, lobbying and the influence of office politics make people like Erdoes or Wood very successful. This is not easily applicable to the average retail investor, but it is important to mention to understand top investors’ success stories. Specifically, networking is key because of the private information which might not be as available to the public. Lobbying and politics are two factors that you can only predict and incorporate into your investment strategy if you have the relevant information as an established institutional investor.

An obvious, but often easily forgotten factor that should not be overlooked is the actual product(s) the company offers, not just the company and its potentially good management. Taking a closer look at the products a company offers, as well as the product life cycle is vital. This cycle shows the development from its introduction to the withdrawal of the product from the market. The four stages are introduction, growth, maturity, and decline. If a company’s product is relatively well established and has had huge success, it is now in the maturity stage and the market might soon become saturated. If the company does not innovate a new product or add-ons, its sales will drop thus hurting earnings. Hence, this might not be the best investment.

These pieces of advice from some of the most renowned investors are invaluable as their experiences help smaller retail investors, like us, find the right investments and avoid the wrong ones. Echoing one final piece of advice from Mary Callahan Erdoes, “if something is too good to be true, there’s a high likelihood that it is”.

For many people who start investing, it is difficult to figure out the most important criteria in making their investment decision. In addition to knowing basic investing vocabulary, it is also helpful to understand some of the basic investing methods. Star investors like Warren Buffett and Cathie Wood are famous today for their value and growth approaches to investing, respectively.

Warren Buffett is one of the most famous investors worldwide and is known for his strategy of value investing. Buffett is the CEO of Berkshire Hathaway and has more than half a century of experience. His net worth now amounts to over $115.5 billion. One of his secrets to success is that he started investing when he was unimaginable eleven years old. However, that is not realistic for most people to achieve since interest in finance often develops at a later stage. That being said, the lesson to be learned is that there is no time to lose when it comes to starting to invest. Success most likely comes in the long run. Buffett’s success also lays in his acquisition of 60 companies which now account for Berkshire Hathaway. Buffett first contact with value investing was through his former mentor Benjamin Graham at Columbia Business School. He first applied and defined this strategy.

The core idea behind value investing is to first determine the intrinsic value of a company and then compare the value of the company to the current stock market price. When also comparing the stock price to that companies’ competitors, one can see if the stock is underpriced. Then, a decision can be made as to whether a company is worth investing in.

When looking at a company from a value investing point of view, one must first look at the management and fundamental quality of a company before looking at the price. One should be able to see whether the company has a leading, experienced team, and if they have a track record of overcoming challenges. A long term strategy is key with this investment method since one must believe the quality of the business behind the stock will push up the price; short-term price falls mean value investors can buy the same business at a cheaper price.

Growth investing, meanwhile, is all about a fast approach to get to the desired price target. Obviously, like the name already predicates, the most important criterium is fast growth in comparison to the market, apparent through higher than average returns. Companies which show these characteristics are often younger firms in futuristic markets, such as electric vehicles. Because growth companies tend to be younger, investors often do not get dividends when investing in companies like this; rather, the company’s profit is used to reinvest back into the company.

Each of these investment methods offer a different way to view a business and its investment decisions. One can look for stocks selling at discounts based on a fundamental analysis, or one can look for a stock that is poised for rapid price growth. These strategies are often used by successful investors in the financial world, especially women like Cathie Wood. Stay tuned for the next finance article that will delve into inspiring women in the world of finance.

I am delighted to welcome you all to a new segment at Trinity Business Review, Trinance. This segment aims to introduce you to global markets and the general world of finance. Whether it is your first time reading about finance or you are a more seasoned reader, I am sure you will gain new insights you had not known previously.

Trinance will explore recent market trends and career opportunities as well as including student, alumni, and recruiter commentary. Finance is a bit odd in the sense that it tends to have a lot of acronyms and many words for the same thing, but you will soon come to tell which ones are the same. To make matters easier, I have compiled a list of five financial terms you should know and additional resources to help you keep up with the markets.

1. Time Value of Money

This concept means that a lump sum amount of money is worth more now than at a later point in the future. This is because said money has the opportunity to grow until you reach that point later in the future, as opposed to receiving the same lump sum later.

Of course, money can only grow through investing which will compound over time, which leads us to our next term.

2. Compounding

This process occurs when an investment’s appreciation (increase in price) is reinvested again. This appreciation can occur through interest accumulation (say interest earned on a savings account in a bank or other financial instruments). This process can repeat itself an unlimited number of times so it can lead to exponential growth over a sustained period.

Albert Einstein is reported to have said that compound interest is “the eighth wonder of the world”. The idea with compounding is to ensure your investment outpaces inflation which again leads us to our next term quite nicely.

3. Inflation

A very topical macroeconomic indicator right now, inflation is the increase in prices observed across the economy; this decreases the purchasing power of local currency at a specific moment in time. Most developed countries’ central banks set an inflation target of 2% per annum, including the European Central Bank, the Federal Reserve (U.S. Central Bank), the Bank of England and the Bank of Japan.

However, inflation is not as bad as it sounds and is actually healthy for the economic growth. Very low or negative inflation (deflation) would lead to consumers buying less because they anticipate falling prices, which make businesses earn less, which in turn may end up dismissing employees or cutting salaries to make up for these losses. All of this can lead to an alarming series of events very quickly as seen in the Great Depression of the 1930s and most recently in the Global Financial Crisis of 2008-09. A small but steady increase in inflation causes the opposite of the deflationary effects mentioned above and keeps the economy ticking.

4. Debt

A sum of borrowed capital due to be repaid before a specific point in time. Regular interest repayments are also expected to be paid before the principal (lump sum borrowed) is paid back. Debt can be taken out by people, businesses and countries so these types of debt differ greatly. 

Many companies like to take out debt because it is tax-deductible. This means that it can ask the relevant tax authority for a tax deduction for that fiscal year because it has been responsible in repaying the interest on that debt. However, too much debt can also quickly spiral out of control; for example, Hertz, a car rental company, filed for bankruptcy in 2020 due to their inability to pay back debt worth $19 billion. It has managed to restructure its debt since then, but not every company who goes bankrupt due to excessive debt is that lucky.

5. Equity

Equity is the capital that belongs to the company’s owners and would be given to them if all the assets and debts were sold and repaid, respectively. This would occur if the company went into bankruptcy and had to be liquidated to be sold off to its debtors and creditors.

In accounting, this is equal to total assets minus total liabilities on the balance sheet. This capital is used for financing activities such as investing in a new research and development (R&D) project or purchasing new assets. Retained earnings (profits kept back from the previous accounting period) is another component of equity that may be used for future operations or to pay dividends to shareholders (company owners).

Resources for Further Learning

There are many fantastic resources to keep up with finance and as a Trinity student you get access to some of the world’s best financial journalism. The Financial Times and The Economist are free to read for Trinity students so you can log on to Stella Search to read The Economist and sign up to TCD’s FT license here.

Podcasts

• FT News Briefing: fantastic summary of business news (10 minutes at most)
• Numbers by Barrons: interesting markets recap by numbers (5 minutes at most)
• The Economist Morning Briefing: current affairs round up (5 minutes at most)
• Trinity SMF Podcast: great interviews with business leaders organised by Trinity’s very own SMF (1 hour at most)

Newsletters

• Bloomberg Five Things You Need to Know to Start Your Day: daily morning setup
• Bloomberg The Weekly Fix: the bond market
• FT Unhedged: recent market trends
• FT Due Diligence: mergers and acquisitions
• FT Moral Money: sustainable investing

2022 FTxBocconi Talent Challenge

I would also recommend applying for the 2022 FTxBocconi Talent Challenge. I took part in the 2021 edition and found it brilliant. It is a fantastic competition that allows you to meet some of the FT’s best journalists and Bocconi’s leading business academics in the FT HQ that I recently had the chance to visit! You can apply here before the 24th November and feel free to get in touch with me with any questions.