The nature of venture capital (VC) investment is highly uncertain. When startup investors pick their investments, they may end up with a return anywhere from zero to 50 times what they put in. The National Venture Capital Association reports that companies financed in their early stages by VC account for over 20 percent of the US GDP today. The most successful investments of this generation have, in fact, come from VCs able to identify major industry disruptors before they fully reach market.

But while VC has grown in the size of capital investments, returns have not proved superior to those of other investment strategies. In 2012, the Kauffman Foundation released a report showing that VC returns (on average) had failed to beat public indices over the past 15 years. Hidden behind the impressive returns from unicorns, a colloquialism for startups with valuations exceeding one billion USD, the average VC firm does not return investor capital after transaction fees.

These findings have led to the question: is venture capital failing and ultimately in a position to be disrupted?

The first possibility to potentially explains the woes of VC is competition. The past few decades have seen an influx of capital into VC firms from a variety of sources. Independent investors, foundations and pensions have all been pouring money into the black box that is venture investment, especially in the United States. As a result, the number of venture funds has grown substantially. Assuming – albeit, somewhat simplistically – that the number of great startup ideas or unicorns each year stays constant, supply and demand easily explain the lower returns on venture capital, as there are many more VC firms each year vying for the same number of targets.

There is also a rising number of angel investors who overshadow VC firms when it comes to smaller investments. Angels are individuals who invest relatively smaller amounts of capital than VCs into early stage startups. These affluent investors fund over 15 times more companies than VCs. In fact, in 2011 venture investments totaled roughly $28 billion across 3,700 companies. In contrast, angel investment totaled $22 billion across 65,000 ventures.

Adding to the pressure on VCs is the fact that founders can now also pursue crowdfunding as a means to fund their venture. In crowdfunding, entrepreneurs receive very small amounts of capital from a wide range of people. In exchange, these average consumers receive rewards or products from the company at a later stage. Kickstarter, the world’s largest crowdfunding platform, has raised over three billion USD $3 billion for over 138,000 projects. The number of projects funded each year continues to grow as increasingly more consumers back companies they believe in. Crowdfunding has seen growth in part due to legislature like the JOBS (Jumpstart Our Business Startups) Act, allowing equity to be exchanged and more people to participate in this process. Thus, a rising number of avenues for innovative companies to find investment paired with lower barriers to entry for entrepreneurs and an increased supply of VC firms may be the reason behind lower returns for the average venture capitalist.

While this reasoning makes intuitive sense, there is another, far more troubling explanation for the reduction in VC returns. Perhaps today’s venture investment is inherently flawed. Certainly, the industry has had successes, as nearly every ground-breaking company that comes to mind has been backed by venture funds: Google, Facebook, Microsoft and more. The worrisome fact, though, is that the venture process has remained relatively unchanged since the early days of these older companies. Perhaps VC investors have not evolved to or adjusted their approach to identify winning companies over time.

It may be that the characteristics that most VCs look for in successful startups are flawed and outdated. Successful VCs often claim their key to incredible return is based on more qualitative, instinctual assessments of an investment, such as backing terrific teams or assessing how they might disrupt open market space. Common VC investor philosophy also describes that startup founders who have failed in the past will be more successful in their future ventures. Yet, Google Ventures, a VC organization using data to drive decisions, found that nearly 30 percent of startups created by a past successful founder succeed again, as compared to the 15 percent success rate of ventures founded by a past failed founder, demonstrating that common investor philosophies used to make key investment decisions in VCs might very well be misguided.
With clear benchmarks set, venture funds often look for the same key elements in a startup’s narrative. Budding entrepreneurs may find themselves concocting false stories about their past in order to fit this narrative, making predictions and returns for VCs even more difficult. Along the same lines, hundreds of venture funds all follow the same funding schedule: get investments to approximately one-million-dollars in annual recurring revenue (ARR), raise an initial round of venture investments (A-round) and continue gathering funding until either an IPO or failure. With the simplicity of the VC playbook, founders find themselves modifying their companies to match the ‘accepted’ funding schedule rather than attempting to experiment or pursue their own path to success and innovation.
Time is a key constraint in every VC firm and another contributor to poor returns. The most telling performance metric for venture firms is . As opposed to hedge fund investors, who are easily able to expel their capital into massive liquid markets, VCs have trouble scaling their time efficiently. A fifty-thousand-dollar seed investment might take the same amount of evaluation time as a five-million-dollar investment, yet the latter has 100 times the capital return. As mentioned earlier, the declining cost to create a venture makes VCs even more stretched for time. These funds must therefore invest in more companies within the same timeframe to deploy the same magnitude of capital. While capital scales, time does not, and so VCs find themselves increasingly against the clock.

In light of these shortcomings and failures to produce returns, venture capital is prime for disruption. In recent years, many VC firms have consolidated, resulting in larger funds. This concentration of capital means it is difficult for VCs to rationalize smaller and early stage investments. With billion-dollar funds now commonplace, moving the needle requires large transactions and large wins, and so funds care less and less about companies seeking seed investments of fifty-thousand dollars. Soon, larger funds will begin investing only in companies with a track record of success, growth and momentum. The relative lack of risk allows these ventures to raise and absorb larger capital. This also leads to a generally more conservative investment process.

The move of VC funds to become larger means a change in focus. Funds now find their investment processes less driven by pushing innovation at an early stage. Rather, they are guided by financial metrics, providing careful investments to satisfy their institutional investors – pension funds, endowments, and sovereign wealth funds. While the result may be more substantial and consistent returns across the industry, venture capital may soon become more about investing in numbers than investing in people. VC deals shy of $10M fell to a decade low in 2017, according to the National Venture Capital Association. As VC pivots to a less speculative investment approach, and the industry moves away from fast-moving, young and highly innovative companies. Today, three of the five largest companies in the world were funded by VC in their early stages. While these companies may have become giants without venture capital, the impressive number of successful startups that initially choose VC funding shows its pivotal role in the ecosystem. The question is whether, with industry-wide VC changes and more alternate funding sources for startups, venture capital will remain a dominating force in the entrepreneurial landscape.

In the investing world, investors are always trying to find an edge to beat the market. One of the fundamental ways many investors try to find this edge is by deciding between a growth investing strategy or a value investing strategy. Growth investing involves buying shares at a relative premium in companies that are growing quickly. Typical examples include stocks like Amazon and Tesla. Value investing involves buying stocks that are undervalued compared to what their results indicate. Examples include Goldman Sachs immediately after the financial crisis and Coca-Cola in the early 1990’s. Value stocks usually sell at low multiples and are not in business sectors that are popular or trending.

Many people have spent a lot of time analyzing the two styles of investing and their results over time to try and discern which strategy is superior. Their results and conclusions often contradict one another. The debate was put back into the spotlight when David Einhorn, a value investor and founder of Greenlight Capital, commented on the debate in one of his quarterly letters last year. Einhorn said that growth stocks had been outperforming value stocks and the market as a whole over the past few years, and that he worried that “the market has adopted an alternative paradigm for equity value.” He also stated that he didn’t know when value investing would yield superior results again.

The letter made waves in the finance community. Many took it to mean that he felt that value investing was no longer a viable way of achieving good returns in the market. Einhorn later clarified himself, saying that he still believes that value investing is the best way to invest and that his fund still uses this style of investing, but that he didn’t know when it would be very effective again. Nevertheless, his remarks highlight a fundamental and unavoidable debate in the world of investing.

It’s relatively easy to see why growth investing makes sense: growth is good for business. Companies like Amazon and Tesla are expensive by normal measures, but they’re also important companies that offer products and services that people love. The thesis for investing in these companies is that the value of their business will grow as the company continues to grow quickly. As Einhorn points out, a shareholder of Amazon, Facebook and Tesla would have earned a great return in recent years. As LPL Financial reports, growth stocks have outperformed value stocks by as much as 50 percent over the past decade, a huge and remarkable return.

However, there are a couple pitfalls to this kind of investing. First, growth stocks typically become popular and increase in price after they demonstrate their growth. By the time most investors catch on, much of their profit margin has disappeared as people have bought into the stock. This also ties into a second pitfall with this kind of investing: the lack of contrarianism. Every trade made in the stock market represents a disagreement between someone selling a stock because they don’t want it and someone buying a stock because they do. This obviously happens when growth stocks change hands, but the people that are selling the stock have probably already made a big gain and are choosing to cash in on their winnings, leaving much less to whomever buys the stock. However, as mentioned earlier, the performance of growth stocks and some growth companies can’t be denied.

Value investing began as a philosophy espoused by Ben Graham and David Dodd in the early 20th century but has grown immensely popular over the past few decades as the result of its most famous practitioner: Warren Buffett. In short, value investors are bargain hunters. They look for companies that are undervalued; to the general investing community, this means that a stock is selling for a low P/E or P/B ratio. As shown by the success of Buffett, Einhorn and others, value investing can be a very profitable strategy. The idea of buying a share in a company at a discount and waiting for the rest of the market to catch on to the bargain is a low-risk way of investing. In addition, a value investor’s focus on the company’s performance in the present moment as a measure of its value also reduces risk. It’s much easier for investors to discern whether companies will continue to perform as they are than it is for them to predict their rate of growth years into the future. Despite value investing’s success over many decades, however, it has not been the most profitable strategy over the past decade. Value investments have made money, but as shown earlier, they’ve been handily beaten by growth stocks. All investors want to invest in the companies that give them the greatest return, and the ones that have looked for those returns in growth stocks have done better in recent years.

It’s clear, after going through the advantages and disadvantages of each type of investing, that there is no outright winner. However, what’s less clear is that the debate itself is fundamentally flawed. The problem is that investors have historically confused strategy with philosophy. When people debate these two styles, they debate them as strategies – the growth strategy involves identifying companies with a strong growth history and potential and lots of public visibility, while the value strategy involves identifying companies with low P/E and P/B ratios. What people ought to be doing is analyzing the two philosophies. Philosophy involves understanding what one wants in an investment and why a particular style of investing works, while strategy involves the methodology with which an investor finds investments that fits a particular philosophy. The growth philosophy is to find businesses that are growing at a quick pace that with profitability on the horizon and the value philosophy is to treat stocks as shares of a business and only buy at discounts to intrinsic value. Having a solid understanding of the philosophical side of an investment style provides the bedrock for formulating a solid strategy. The debate over which style of investing is superior is flawed because many investors skip over philosophy and jump straight to strategy.

When framed this way, the debate gets much clearer, and investors realize something crucial: philosophy is essential to strategy, since it creates the foundation for good strategy. Not making this distinction forces people into making rushed decisions. For example, many investors perform top-down research, which involves identifying a trend or quality in the market and looking for companies that fall into that trend or have that quality. In this case, growth investors could just screen every stock in the market and invest in those that are growing revenue at a certain percentage and value investors could just screen for companies that are trading with a low P/E ratio. However, the people that buy stocks based on this methodology aren’t staying true to either philosophy. Just because a company is growing quickly doesn’t mean that it can turn that growth into profit, and a company that is selling at a low P/E ratio might be doing so because it’s a horrible business. It’s extremely easy to fall into this trap and lose sight of why someone looked for value stock or a growth stock in the first place.

A bottom-up approach, where investors go from company to company identifying the ones they like: either based on profitable growth or undervalued assets, would be a more appropriate way to go. This approach would force investors to focus on philosophy first and thereby avoid making investments that seem great but really aren’t.
Understanding this distinction also helps reinforce the idea that it’s unclear which style is “better”. Value investing, despite what some seem to believe, is still extremely profitable for well-managed funds like Allan Mecham’s Arlington Value, which was up 29 percent last year and Mohnish Pabrai’s Pabrai Funds, which has returned over 1100 percent since 2000, have done well employing a bottom-up approach and a strong understanding of value philosophy. Einhorn’s fund has averaged a 16 percent return net of fees since 1996. These funds are evidence that value investing is still a very profitable philosophy if applied with patience and deliberation, as opposed to a haphazard strategy. The same is true for growth investors. Sequoia Capital, for example, has become the most respected venture capital fund in the world despite investing in new technology start-ups because it has a strong understanding of philosophy and a great strategy.

In the investing world, investors are completely reliant on how many opportunities they can identify and exploit. So, it’s easy to understand why investors want to rush to identify opportunities based on a stock’s popularity or P/E ratio. It’s impossible to really know which type of investing is better, since that would require going through each stock in the stock market, identifying its investment merit and then seeing if it’s a growth or value stock. But this is the point. Investors ought to first understand a philosophy well, and then employ that philosophy in a strategic way. The greatest investors, from Ray Dalio to Warren Buffett, have demonstrated that the deliberate application of a philosophy is the best way to consistently achieve superior results.

The stock market has always been about using your knowledge and skills to accomplish returns. You buy stocks that you think are undervalued and you short stocks that you think are overvalued, and you either make money if you are right or lose money if you are wrong. However, since the 1990s, a new method of investment has been growing at a steady pace, one that uses as little of your knowledge and skills as possible. Passive investment, a strategy that aims to be the market rather than beat the market, has consistently beaten active investment in returns over the past decade. While the current market environment might suggest that passive investment is a superior approach to active investment, it does not cover all the uses that active investment has and, given enough market power, can create its own unique complications.

Rather than the traditional method of active investment, where one picks individual stocks to buy or sell, passive investment involves using an index or a collection of stocks, commonly known as a basket of stocks, to replicate the market portfolio. The advantages of passive investment are largely due to diversification, lower turnover and lower transaction costs. With a basket of stocks, one naturally has more diversification due to the inherent diversity of a basket replicating the market portfolio. Likewise, in tracking the market return, one does not need to constantly adjust his or her position in the market. Therefore, one does not need to worry about the transaction costs that come with adjusting one’s positions. Fundamentally, passive investment on average is more self-sufficient than active investment.

These advantages have allowed passive investment to consistently pull ahead of active investment. While active investment offers the possibilities of higher returns as opposed to passive investment’s restraint by the market return, active managers must reach a return greater than the market combined with their increased transaction costs. Active investment’s required return increases have been difficult to overcome. The Financial Times reports that, within a 10-year period, 83 percent of active funds in the U.S. fail to match their expected returns, 40 percent are terminated and 64 percent move away from their original styles of investment. Passive investment’s lower transaction costs have allowed it to offer a better risk return tradeoff than active investment.

While passive investment has consistently outperformed active investment, it cannot do everything active investment can. In order to keep low transactions costs, most indexes cover only large cap stocks to maintain low turnover. Because of this constraint to large cap stocks, passive investment leads to several types of risk. Passive investment is subject to the risk of large cap versus small cap stocks — a bull market in small cap stocks or a bear market in large cap stocks could put active investment returns ahead of their passive counterparts. Because it uses only large cap stocks, passive investment tends to follow the business cycle; in times of growth, returns on indexes are great, but recessions could easily inhibit passive investment. Time frames also matter. Passive investment cannot deliver the short-term returns of active investment, and it requires time for any market fluctuations to correct.

An increase in market power of passive investment funds may also cause certain unexpected problems. With an increase in the amount invested in indexes, the expectation is that this would cause increased correlation between stocks in different indexes. Likewise, an individual stock’s characteristics, such as membership in indexes or presence in exchanges will gain more importance in valuation over a firm’s operations or overall health.

Another issue is the measure of performance. A team from Goldman Sachs argued that stock returns and dividends are becoming increasingly inefficient measurements of performance due to the lower turnover of passive investments. With passive investment, returns and dividends are not solely determined by firm decisions. Boards must differentiate the “characteristic-driven” or “flow-driven” movements within their stock from fundamental ones in order to “better evaluate underlying corporate performance.” The team suggests that other measures, such as cash returns on investment or return on tangible equity, are more comparable across firms and better evaluate a firm’s health. Without taking these issues into consideration, passive investment can easily flip in performance given enough time.

The previously mentioned problems appear when passive investment gains a significant enough share of the market, and the evidence indicates that we are moving in that direction but are not quite there yet. According to Morningstar, an investment research firm, approximately $9.3 trillion is currently invested actively compared to the $5.5 trillion passively. However, those numbers have been shifting steadily. In 2016, Morningstar also reported that active funds experienced outflows of $285.2 billion while passive funds experienced inflows of $428.7 billion.

On the other hand, a study by Schaeffer’s Investment Research, a market information services and research firm, found, on average, stocks added to the NASDAQ 100 Index underperformed and averaged negative returns over the next year while stocks removed outperformed the index in the short term and stayed relatively on pace with the index in the long term. While the average returns of stocks removed from the NASDAQ 100 may be skewed due to data being limited to only stocks that were not bought out or did not go bankrupt, the underperforming average returns of stocks added to the index does imply an overvaluation. The overvaluation in this case suggests that investors have excessively optimistic expectations about stocks joining the index. In other words, investors on average overestimate the effect joining an index has on returns. The evidence signifies that passive investment has room to grow before their market power becomes a problem.

While the influence of passive investment has been increasing, it is not as large as expected. There has been no evidence that active investment on average will offer higher returns than passive investment within the near future. Even in the presence of a bear market, data shows that recessions affect active investment just the same (if not more) as they do passive investment. However, if passive investment gains enough steam with no change in structure, it is highly unlikely that passive investment will be able to maintain the success it currently has.

All over the Street, in every investment bank, on every trading floor, hysteria reigns. Phones are ringing, clients are calling, screens are blinking, and traders are yelling. “We appear high!” is a phrase I’ve gotten used to hearing most mornings. At Morgan Stanley the trading floor is so expansive you can almost see everyone in the room when standing. The fluorescent lighting and high ceilings accentuate the floor’s vastness even more. Oh, and there are monitors. So many monitors.

Now take the elevator up to the 40th floor, and the chaos of the trading floor fades into serenity. I enter the waiting area, and notice the immaculate, wood-finished walls, the panoramic view of the city, and the beautiful spiral staircase adorned with pristine portraits of prominent leaders from Morgan Stanley’s past. But what business does a twenty-year-old Dartmouth intern have making a trip up to the executive suite?

“I want to meet the CEO,” I said to the associate sitting next to me, earlier that morning.

Trying to find the perfect words to express my interest, I crafted an email and sent it over directly to Mr. James Gorman’s generic corporate email account. On the off chance he said yes, I did not want my fellow Dartmouth wintern, Jimmy, to miss out, so I invited him to come along. No more than five minutes later, I received a reply. The Chairman and CEO of Morgan Stanley invited us to stop by his office later that afternoon. I was shocked by the quick response, and even more shocked that Mr. Gorman wanted to see us that same day.

I spent the next hour researching and drafting questions I would ask, trying to demonstrate that this wintern had done her homework and was prepared to share her “groundbreaking” wintern perspectives. I tried to develop opinions on the firm’s new ROE target and the effect the firm’s summer acquisition of Smith Barney would have
going forward on the municipal bond market, a market in which I am clearly an expert.

When the time came Jimmy was unfortunately nowhere to be found. I knew I could not risk being late for Mr. Gorman, so I de-linted my suit jacket, put on my “sophisticated” glasses, and headed upstairs on my own.

As I walked into the executive suite, I was overwhelmed as I thought about all the monumental conversations and decisions that must have occurred in these rooms. Was this the place where John Mack had received the phone call from Henry Paulson urging him to sell the firm? Or where Tim Geithner advised him to merge with JP Morgan? Was it here that the decision to turn the bank into a bank holding company was made? And as I’m sure John Mack had to spend some nights at the office during the financial crisis, was that the closet where he kept his spare suits? History surrounded me and all I could do was smile at this opportunity.

I entered Mr. Gorman’s office and to my relief, the extensive Google searching was for naught. I was not expected to provide my hazy understanding of the firm’s strategy, nor did I feel obligated to try and impress Mr. Gorman with my overly specific and rehearsed questions. I realized I wasn’t just speaking with the CEO of one of the world’s top investment banks; I was sitting face to face with a father of two, a brother to nine, and a mentor to over 55,000.

We began talking about his upbringing in Australia and shared stories about our respective siblings. He described the university system in his home country, noting that his college courses were very career-focused, the exact opposite of the liberal arts education I am receiving at Dartmouth. He was interested in what drove my decision to attend Dartmouth, and while I do love many features of the College on the Hill, I admitted that the predominant reason was that my sister was a freshman there at the time.

I wanted to learn as much about Mr. Gorman’s life as I could in the short time we had together so I shifted gears and asked to hear more about the road he travelled on his journey to becoming CEO. I learned about his underlying passion for managing people, which appeared to motivate his progression from law to strategy consulting, and eventually to Wall Street. He expressed the aspects that ultimately drew him towards firm management, such as the importance of setting defined goals and designing appropriate strategic steps in order to achieve those objectives. I was fascinated by his unconventional career path, which stood in stark contrast to the typical Wall Street CEO, who rises through the ranks as a banker or trader. Despite a six-year stint in a senior management role at Merrill Lynch and a successful career at McKinsey, consulting for financial services companies, Mr. Gorman was relatively
new to the Street when he joined Morgan Stanley, and had been a lawyer in Australia earlier in his career. As a young adult who cannot be sure what her business card will read in five years, I found it refreshing to hear that there is no single formula for success.

I could sense that Mr. Gorman had to get back to his busy day, so I candidly asked him, “what is one piece of advice you could give me as a young woman who is planning to embark on a career in finance?” He stressed the importance of remaining in decision-making positions in my extracurricular activities at Dartmouth and emphasized how these would best prepare me to succeed in the years ahead if I had any desire to take on management roles at some point in my career.


Photographed by Craig Schneider
Photographed by Craig Schneider


He revealed that I was one of only a few people who had been in his office, and I left feeling fortunate to be interning at a place where even the most senior leader of the firm finds it worthwhile to connect with the individuals at the very bottom of the totem pole. I returned to my desk and it seemed like everyone had heard about my encounter. People were excited to hear that their CEO had made time to connect with an ordinary intern, truly embodying the flat and transparent structure that Morgan Stanley values so greatly.

I went to find Jimmy to share in my excitement and to find out why he had not made it upstairs. Regretfully he explained that he was sitting with a trader in CMBS and had not seen the invitation. “It must have been a pretty cool trade to blow off the CEO!” I joked. However, a few days before the end of our internship, Mr. Gorman was gracious enough to make time to sit down with Jimmy as well.

To those who say you have to sell your soul in order to succeed on Wall Street, I have to disagree. The amount of spirit, character, compassion, and generosity I’ve experienced in such a short time at Morgan Stanley has been incredible. While Mr. Gorman’s gesture was a unique and special opportunity, it was also a symbol of a culture of mentorship. I feel very fortunate to have worked in such a supportive environment and I hope that someday I will have the opportunity to pay it forward.

On Jan. 16, the Sacramento Kings announced that they would become the first NBA franchise to accept bitcoins. Starting March 1, fans will be able to buy tickets and merchandise in exchange for the virtual currency. The team, stationed in the capital of California, is no stranger to using new technology within their business. One of their recent marketing strategies uses Google Glass to give fans the vantage point of their favorite player during a dunk or defensive set. They have also utilized the Google technology to assist the coaching staff during games.

However, if successful, their acceptance of bitcoin may have the biggest implications for the rest of league and the sports world.

Launched in 2009, bitcoin is a virtual currency that allows for direct transactions between consumers and merchants without the use of banks. It allows for an anonymous and untraceable purchase between two parties. Currently, there are three ways to acquire bitcoins: through a bitcoin virtual marketplace, mobile transfers and mining. In a bitcoin marketplace, users can purchase bitcoins in exchange for different currencies. The market price for one bitcoin on Feb. 28 was $572.05. The public also acquire bitcoins through mobile apps that allow for the transfer the currency. Lastly, people can acquire the currency by mining which involves using software to generate new bitcoins.

Like any business decision, accepting the bitcoin comes with gains and risks. The Kings’ ownership changed  a year ago to prevent the relocation of the franchise. With new management, the timing is perfect for the Kings to introduce new technology and practices within their business.

The Kings hope that the introduction of the bitcoin will make transactions more convenient for NBA fans. Utilizing bitcoin will make allow fans take advantage of the currency’s anonymous and unregulated transactions thus allowing them to leave their wallets at home. Bitcoins will also allow fans to purchase merchandise without waiting for the currency to be assessable. Unlike banks, bitcoin transactions do not have waiting periods around weekends or holidays. Therefore, transactions will be able to be processed during days that banks when banks are closed.

There are also several disadvantages to the accepting bitcoin. Bitcoin have been known to be volatile with constantly fluctuating exchange rates. If the value of the bitcoin were to plummet, the Kings franchise could be at risk to lose money. There are further risks regarding the inflation rates of bitcoin. The most recent December consumer price index stated that inflation was at 1.3 percent while bitcoin is at a 98 percent deflation rate. Essentially, the bitcoin currency is declining in value against the dollar. Furthermore, by nature of the currency, the rate of new bitcoin generation is slowing over time which is predicted to further deflate the value of bitcoins. Although these risks have not detoured proponents of the currency, West Virginia Senator Joe Manchin has been lobbying for a ban on bitcoins.

From comparing the potential gains with very real risks, bitcoin does not seem like a secure decision for the Kings. While intended to increase the ease of transactions, the average basketball fan will most likely continue to use cash, debit or credit cards. While, bitcoin’s recent rise in popularity makes the decision worthwhile, I believe that the venture will not be as successful as expected.

Ultimately, it is hard to believe that bitcoin will replace the current prominent forms of payment. Bitcoin does not offer additional transactional convenience except to the select few users of bitcoin. For the Kings, bitcoin seems to be a high-risk, low-reward decision considering the immense fluctuations in value. However, if the acceptance of bitcoins proves to generate greater revenues, the Kings will be commended as innovative early adopters in the NBA causing other teams to adopt similar policies.


Imagine this: thousands of children sleeping in dirty, disease-infected streets because they lack the basic security that most people call a home… a tough image but one that in many places is a terrible reality. With $100,000 you could house possibly hundreds of these children and give them the chance they are entitled to have.

For those with an extra $100,000, donating to these impoverished youth might be an appealing action, but how about those who are not so wealthy themselves? They are less likely to give and more likely to give much smaller amounts. Now imagine a different scenario: make a $100,000 donation to the same children and receive $114,000 in return.  Now, this is an offer that almost no person would turn down, and with good reason.  Profit combined with positive social impact is simply irresistible, and recently it has become possible through the world of impact investment.

In a recent report, J.P. Morgan defines impact investments as “investments intended to create positive impact beyond financial return.”  These investments provide capital to businesses that are intended to create some sort of positive social or environmental impact on our world while still providing investors with a return on their capital.  Different investments offer different returns, ranging from a simple return of initial investment to high market-beating return rates.  Investors can choose their investment based on the type of positive change they would like to support as well as what magnitude of returns they would like to receive.  Both the positive impact and the opportunity for high returns make impact investments an appealing asset class.

The social benefits of impact investing set it apart from most other classes of assets.  Impact investments usually finance programs that serve “bottom of the pyramid” consumers who are normally ignored by regular business models.  Ignored consumers still have needs, and impact investments exist to serve these needs through a number of different objectives.  The social objectives range from helping to provide access to financial services to improving agricultural productivity.  These objectives are real, tangible efforts to help people improve their living conditions.

Impact investing not only serves worthwhile objectives but also does so in a way that philanthropic organizations and governments cannot.  These investments remain business deals framed by a competitive market.  In order to attract investors, businesses must compete to prove that they are efficient and viable companies, and this internal competition leads to cheaper, better, and more widely available services for bottom of the pyramid customers. Thus, social impact is reached effectively.

The possibility of financial return also sets impact investments apart from philanthropy.  The J.P Morgan report on impact investments predicts profits from these investments to reach between $183-667 billion in the next ten years, with the average expected return on investments in emerging markets ranging from 8-15%.  Profitability in this new asset class is a huge draw for many investors who want to promote social change but also wish to seek profit.  People can help create change without experiencing significant losses. Of course not all impact investments prove to be so highly successful.  Some investments may only realize a return of initial investment or possibly a loss, but in such scenarios hopefully the ultimate goal of impact investments, positive social impact, can console investors.

In addition to these clear benefits of impact investments, there has also never been a better time to invest in this emerging asset class.  In the recent past, impact investments proved to be tricky endeavors because it was difficult to find worthwhile investments or to measure just how much positive impact they generated.  Without the help of institutions to categorize and rate different investments, investors were more or less on their own.  In 2007, however, The Global Impact Investing Network (GIIN) was conceived with the prime purpose of building a more coherent and user-friendly industry of impact investing. The GIIN has since come very far to help the world of impact investing, most recently releasing its first full data report in a “universal language” for all impact investors to understand and utilize.

Impact investing is quickly becoming a popular and successful asset class as people begin to realize its many positive aspects. The concept of profitable investments that promote positive impact has strong appeal and now that the GIIN is marching forward to solve the problems that impact investors face, this asset class will only rise in popularity and success. Why not come grab a slice of the pie, providing others with some as you do so?

There is no denying the growing interconnectedness between the Chinese and American financial markets. Like other global financial centers, upswings and downswings in either the Shanghai Stock Exchange or the New York Stock Exchange have often been preceded by similar trends in the other. The surplus of recent global financial headlines and heightened index volatility appears to have strengthened this relationship. A simple investment simulation suggests that the Shanghai Stock Exchange can be moderately useful as an intraday trading strategy for the Dow Jones Index during the current periods of volatility.

Although this correlation has not always been present, the Chinese and American markets have gradually shifted toward each other. From 1993 to 2001, the Dow Jones Index China had only a 0.0332 correlation coefficient with the Dow Jones Industrial Average, suggesting no observable correlation. But a loosened economic policy has led to more intertwined financial markets between the U.S. and China. From 2000-2009, the correlation coefficient between the Shanghai Stock Exchange and the Dow Jones had risen to 0.731, indicating a strong  relationship.

The trading strategy I’ve tested is quite simple: use a moderate rise or drop (0.85% or more) in the Shanghai Stock Exchange (SSE) to invest in the same direction in the Dow Jones when the New York Stock Exchange opens, six and a half hours after the SSE closes. For example, if the SSE opens at $100 and closes at $100.86, then I would buy shares long on the Dow since the SSE gained greater than 0.85%. If the SSE closed at $99.14, I would short the Dow.

After running this model from 04/20/09 through 10/14/11, excluding the holidays of both exchanges from the model, the total return was 83.81%, with annualized returns of 27.57%. The hit rate for positive gains, in which a 0.85% increase in the SSE led to any positive gain for the Dow, was 64%, while the hit rate for negative gains was 54.55%. Total return from positive gains was 44.62% and total return from negative gains was 39.19%.

With a modest hit rate but a significant return, this trading strategy seems to capitalize on the volatility of both exchanges. Essentially, when the Dow goes in the same direction as the SSE, it’s able to rise or drop high enough to offset the losses incurred when it goes in the opposite direction as the SSE. Moreover, it seems that those losses incurred are also quite minimal. As a result, although this trading strategy does not have a very great predictability factor for total positive or total negative gains, it does suggest a sort of dual volatility.

This should come as no surprise. The rise of a deeply intertwined and globalized financial market has inevitably strengthened the relationship of the Chinese and American financial systems. At the same time, financial crises with implications for the world economy have increased volatility and shaken investor confidence. Although this is not a long-term trading strategy, it may have strong returns in the near future by taking advantage of the US-China correlation and world market volatility.

Walt Sosnowski is an economist at heart.

He’s a hedge fund manager whose fund beat the Standard & Poor’s 500 Index by more than fifty percentage points in 2008, while the rest of the investing world, still reeling from the United States credit crisis, struggled just to stay afloat.

He’s a Buffet-esque value investor. He’s a ruthlessly rational analyst of companies. But his greatest strength is his ability to apply sound economic principals to the playing field where irrationality rules the roost: the stock market. And a fundamental concept of economic theory motivates a big part of Sosnowski’s thinking: sunk costs.

According to Sosnowski, the intelligent investor is the one who ignores his or her past performance and makes sober, emotion-free investing choices. “What’s the right decision today?” Sosnowski asks himself before every investment. “You’ve got to be thinking about the next thing – not what just happened, but what’s going to happen next.”


“Investing is not for you.” Sosnowski vividly recalls balking at those entirely un-prophetic words his guidance counselor told him as a high school junior.

Told that his skills would be better suited if he became an engineer, Sosnowski went to Stanford two years later – and, further ignoring advice, immersed himself in the likes of St. Augustine, Aquinas, and Luther.

Recognizing that he eventually wanted to go into business but knowing that his true love was for history, he earned a history major, specializing in Renaissance and Reformation history and taking a senior study course on the Russian Orthodox theologians. He sprinkled the remainder of his schedule with classes in accounting, finance, and engineering.

Business history has struck his fancy of late. But Sosnowski’s background in history of all kinds has become much more relevant as he’s grown older, he says. “We’re going to a stage in world history right now where really understanding where nations and economies have been the last few hundred years will be important,” he says. “There are some profound changes going on in America, in Europe, and in Japan right now. “There are always changes going on. But I’m talking historical changes.”


Sosnowski never doubted his own aptitude as an investor. Other barriers to entry – the long, painful transition from one industry to another, the often-draconian regulations imposed on beleaguered managers, and myriad other obstacles – prevented Sosnowski from launching his own fund before he was forty.

Fortunately, Sosnowski surrounded himself with people who knew a natural hedge fund manager when they saw one. One day when Sosnowski was in his late thirties, the guy in the office next door, a financially shrewd Dallas lawyer and a recent acquaintance of Sosnowski’s, walked into Sosnowski’s office. “Why don’t you start your own fund?”

Before Sosnowski could utter three syllables about how he didn’t have any investors, he was forced to reevaluate. “I’ll put in $150,000,” the lawyer said.

Sosnowski’s friends weren’t the only ones who saw his talent for investing before he did.

Though naysayers like the evaluator of his aptitude test pushed him away from it, investing intrigued Sosnowski from the start. He bought his first stock as a high school freshman in 1979. But it wasn’t until he was a 26-year-old real estate agent that he had enough cash to start to invest.

So he started researching companies – researching with the same passion that sports enthusiasts pore over major league batting statistics. With no Internet to expedite the process, Sosnowski would order hard copies of 10Ks, 10Qs, and annual reports on companies he was interested in. When other twenty-somethings were as far as could be from financial statements on nights and weekends, Sosnowski found himself analyzing companies.

And then the light bulb went off. “One beautiful Saturday afternoon, when everybody was out running around and having fun, there I am analyzing some company. My wife walks in, and she goes, ‘What are you doing? Can’t you get paid for doing this?’”


The decision to become a full-time investor was easy. The choice to start his own fund was not. Sosnowski admits he has always had an entrepreneurial streak. When he was twenty-five, he’d tried to start a commercial real estate information firm from scratch. “Good idea, but I was undercapitalized,” he says.

With his nascent hedge fund, capital wasn’t an issue. The lawyer who had volunteered to be his first investor helped him find others willing to contribute to get the fund off the ground.

Next on the list was to define his fund’s strategy. This was the part that, consciously or not, Sosnowski had been planning for years.

Sosnowski’s fund runs a long-short equity strategy. But really, Sosnowski’s formula for beating the market is simple: he does more research than the other guys. Still, every investor has to have a couple of guidelines he follows when deciding whether or not to invest in a company. Right?

“There aren’t three top criteria,” Sosnowski explains. “There’s anywhere from ten to 200 criteria. My job is to figure out which of that huge amount of criteria are the two or three key issues. That’s part of the key to investing: to ignore the stuff that’s noise and to figure out what the important things are.”

Figuring out how to value a com  any is the basis of any value investor’s strategy. Sosnowski looks at valuations in a number of ways. First, he looks at a company’s price to earnings, or P/E, ratio. “But there’s different kinds of P/E,” he says. “There’s GAAP earnings, and there are different ways one can adjust GAAP earnings to look at what I call ‘Earnings 2’ and ‘Earnings 3.’ ‘Earnings 2’ backs out amortization of intangibles and some other things, like one-time items – true one-time items. And then ‘Earnings 3’ also backs out all that plus 123R, which the expensing of stock-based compensation.

“So I’m looking at different types of P/E ratios, I’m looking at different enterprise value to EBITDA, I’m looking at free cash flow.” But Sosnowski’s analysis doesn’t stop with the individual firm: supply and demand industry fundamentals, the competency of management and analyses from sell-side analysts weigh heavily in Sosnowski’s opinions of the companies he examines.

And Sosnowski isn’t one to abandon his roots: as his history background taught him, he never stops his research without finding a primary source. Secondary sources – in this case, sell-side analysts – are great, but there’s nothing like talking to the CEO or the CFO of the company he’s examining.Like most fund managers, Sosnowski is a numbers guy. He knows the financials of the companies he invests in inside and out.

But he’s not the stereotypical quant. “At the end of the day, these companies are run by people,” he says. “You’ve got to make judgments about the competency of the people running [the companies], their understanding of their business and their industry, whether they’re conservative or promotional, whether they’re trustworthy.”


“This business is very humbling,” Sosnowski admits. “Just when you think, ‘Oh, I’m smart, I’m doing really well,’ then here come the mistakes.”

According to Sosnowski, too many investors let what they could’ve, would’ve, should’ve done lead them to believe they’re wiser than they are. Rational discipline, not wishful thinking, bodes for success in the market, he says.

Sosnowski gives an example. “A stock’s down twenty percent, and there’s a fundamental reason,” he says. “Probably, the stock’s not been doing well because the fundamentals are eroding. Too many investors go, ‘I could’ve sold it three months ago for a higher price, so I’m going to hold on until it gets back up. Conversely, let’s say a stock is down twenty percent, and you’re angry. A lot of investors just puke it out.”

According to Sosnowski, both of these reactions are incredibly common but equally misguided. And no investor – even him – is completely immune, he says: “Even many highly educated people have trouble drawing that distinction.”

Sosnowski also sees many investors whose inflated perceptions of their investing abilities lead them to believe they know far more than they actually do. “How many times do you say, ‘Well, I knew that was going to happen’?” he asks. “Well, did you invest that way? ‘No, I didn’t.’ I can’t count how many times I hear that. “ Over time, Sosnowski says, investors who recognize their actual knowledge – and who aren’t falsely influenced by the investments they merely considered making – will come out on top.

Full disclosure, my father is an investor in Sosnowski’s fund. Sosnowski would not discuss his performance history with me, but I was able to see his annual results in the reports my father receives. In 2008, when the market was in a free-fall, Sosnowski’s fund beat the indices by more than fifty basis points – this coming after a year when his fund posted a return of forty-six percent. He followed his 2008 market-blistering year with a fifty-seven percent return in 2009.

When questioned on these results, Sosnowski demurs. Of all the traits that make Sosnowski an outstanding investor, perhaps humility is the one that best allows for his long-term success.

Sosnowski shakes his head. “Past performance is not indicative of future results.”