Advance Praise for
Pitch the Perfect Investment
Pitch the Perfect Investment is the Essential Guide to Winning on Wall Street
Investors who succeed on Wall Street spend their career analyzing companies, and honing and refining their investment strategies. But they had to start somewhere.
Training for research analysts is basically non-existent on Wall Street resulting in a “baptism by fire” that forces the new analyst to develop expertise on their own through an agonizing process of trial and error. To overcome this deficiency, Sonkin and Johnson have written the ultimate “survival” guide for someone embarking on a career as an investment professional. Arnie Ursaner, a sell side veteran, who retired after 43-years on Wall Street said, “I wish I had this book when I started in the business. I remember my early days being characterized by a lot of hits and misses. This book provides valuable shortcuts to experience more hits and fewer misses.”
The single most important element in the survival is having knowledge, as knowledge dispels fear, and on Wall Street, fortune favors the prepared mind. Pitch the Perfect Investment accelerates the learning process, giving the college or MBA student the edge they need to succeed, whether they are pitching a stock idea in a job interview, in a stock pitch competition, or for a student-run investment fund. Echoing this sentiment, Aswath Damodaran, a prolific author of over 20 books on valuation and award-winning professor at New York University, said, “…this is a book that most of my students would have loved to have had before their first interview and job.”
Sonkin and Johnson also seek to push the open-minded, seasoned investment professional out of their comfort zone and challenge them to think about familiar concepts differently. In an industry where even the most successful veterans must worry about younger managers snapping at their heels, Pitch the Perfect Investment equips the Chief Investment Officer or Director of Research with new tools, enabling them to tighten their analytical process and significantly improve communication and efficiency throughout their organizations. As noted by Geoffrey Moore, author of several highly-acclaimed strategy books in the technology industry, “Much heartache will be avoided and faster decisions will be reached by any organization that adopts Sonkin and Johnson’s recommendations.”
Nicholas Gallucio, CEO of Teton Advisors, added, “In this era of hyper-competition on Wall Street, active portfolio management is under attack by ETFs and passive investment vehicles. In this new environment, beating the market is even more essential to the active portfolio manager and even the smallest edge can make the difference between success and failure. Pitch the Perfect Investment will give the professional investor that edge.”
No other single resource will provide students, money managers, analysts, bankers, executives, salespeople, and individual investors with a faster way to improve their performance. Pitch the Perfect Investment is the essential guide to winning on Wall Street.
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What You Can Expect to Learn
Pitch the Perfect Investment is divided into two primary sections. We selected this structure because an analyst has two distinctively different responsibilities. The analyst’s first assignment is to find a good investment, one where there is a large spread between the market price and intrinsic value. This part of the process requires the analyst to calculate the stock’s intrinsic value, determine whether a genuine mispricing exists, and identify a catalyst that will close the gap between the stock’s price and its intrinsic value, thus correcting the stock’s mispricing. The second part of the process is communicating (pitching) the idea to the portfolio manager. This step requires a completely different set of skills. We have structured the book accordingly, as shown below.
The first four chapters of the book layout the process of determining a company’s intrinsic value. This explanation begins with valuing an asset using a discounted cash flow model in Chapter 1, then uses this approach to value a business in Chapter 2. Because assessing competitive advantage is critical to determining the value of growth, we discuss these topics in depth in Chapter 3. Chapter 4 uses those tools to value a security.
We then explain how investors set stock prices, which entails a detailed discussion of market efficiency. We begin in Chapter 5 with an examination of Eugene Fama’s efficient market hypothesis, where we establish the rules the market follows to set prices. We discuss the wisdom of crowds in Chapter 6 and show how these rules are implemented in the market. We then discuss behavioral finance in Chapter 7 to show how these rules can become strained or broken.
In Chapter 8 we discuss how to add value through the research process. We show that the investor must develop an informational advantage, an analytical advantage, or a trading advantage to be able to claim that a stock is genuinely mispriced. If the investor cannot identify why other investors are wrong, show why he is right, and articulate what advantage he has, then it is unlikely that he has identified a true mispricing. We end the chapter by defining a catalyst as any event that begins to close the gap between the stock price and your estimate of intrinsic value.
In Chapter 9 we demonstrate that risk and uncertainty are not synonymous and show that their difference is misunderstood by most investors. We then highlight the components of an investment’s return and emphasize that while most investors focus on their estimate of intrinsic value, time is a critical, although often overlooked, factor. We demonstrate how an investor can significantly reduce risk by increasing the accuracy and precision of both their estimate of intrinsic value and the investment’s time horizon. The primary building blocks for this chapter are based on the work of Howard Marks and Nassim Nicholas Taleb. At this point in the book we will have shown how to vet the perfect investment. The next part discusses the key elements of pitching that investment to a portfolio manager.
We explain in Chapter 10 that for the analyst to select the proper security to pitch, he must know the portfolio manager’s selection criteria. We demonstrate that the manager will not even listen, much less adopt, an investment idea unless it matches his investment criteria. We show in Chapter 11 how to organize the content of the pitch to maximize its impact. Finally, we discuss in Chapter 12 the different elements necessary to ensure the effectiveness of the delivery, while minimizing extraneous factors.
About the Authors
Paul D. Sonkin
Paul D. Sonkin (New York, NY) is an analyst and portfolio manager at GAMCO Investors / Gabelli Funds. He is co-Portfolio Manager of the TETON Westwood Mighty Mites Fund, a value fund which primarily invests in micro-cap equity securities. Sonkin has over 25 years of experience researching small, micro and nanocap companies. Prior to analyzing stubs, spin-offs and micro-cap companies for GAMCO, Sonkin was for 14 years the portfolio manager of The Hummingbird Value Fund and the Tarsier Nanocap Value Fund. He holds an MBA from Columbia Business School and a BA in Economics from Adelphi University. For 16 years, Sonkin was an adjunct professor at Columbia Business School, where he taught courses on security analysis and value investing. For over 10 years, he was a member of the Executive Advisory Board of The Heilbrunn Center for Graham & Dodd Investing at Columbia Business School. Sonkin has extensive corporate governance experience having sat on six public company boards and is the co-author of Value Investing: From Graham to Buffett and Beyond (2001).
Paul Johnson
Paul Johnson has been an investment professional for more than 35 years and currently runs Nicusa Investment Advisors. Previously, he was a top-ranked sell side analyst, a hedge fund manager, and an investment banker. As a portfolio manager, he invested in virtually all sectors of the economy and has participated in more than 50 venture capital investments during his career. Johnson has taught 40 semester-long graduate business school courses on securities analysis and value investing to more than 2,000 students at Columbia Business School and Gabelli School of Business, Fordham University. Johnson received the Commitment to Excellence award in both 2016 and 2017 from the graduating class of Columbia Business School’s Executive MBA program as well as the 2017 Columbia Business School’s Dean’s Prize for Teaching Excellence. He received the Gabelli School of Business graduate-level Dean’s Award for Faculty Excellence in 2017. Johnson was a contributing annotator to The Most Important Thing Illuminated, by Howard Marks, co-author of the history of value investing in Columbia Business School: A Century of Ideas, and co-author of The Gorilla Game, Picking Winners in High Technology. Johnson has an MBA in Finance from the Executive Program at the Wharton School of the University of Pennsylvania and a BA in Economics from the University of California, Berkeley.