Blog 8

For the last blog of the semester, I have chosen to watch a documentary on the Olympus scandal that happened in Japan. Japan has been known all over the world for the fact that the corporate world is strict and that the stress in the working force is low. People also have a lot of respect to the senior workers and leaders in companies so much so that they could not see this scandal that has been happening for a long time before it was exposed. Michael Woodford, as shown in the documentary, has been associated with Olympus from a very young age and has since climbed the corporate ladder at a fast pace and eventually became the president of Olympus. During his time as the president, he questioned the loss-hiding arrangements of the company and got voted to be sacked by the board. Olympus also paid questionable amounts of money to acquire some of the lesser known companies and this has been exposed by financial magazine FACTA. After the public found out about this scandal, the company’s share prices fell and Michael Woodford won damages for the wrongful dismissal and defamation.

I am fascinated by the ability of the company to have kept this wrongdoing for so long without getting caught or questioned until recently. Had FACTA not publish the story to the public, who knows when will this scandal end? Although it is wrong in the ethical sense, how I see this is that the power of connection among well-known people could lead to this kind of wrongdoings that may be difficult to discover. It could be happening to any major companies in the world right now and we would not even know. I believe that a majority of the world’s population are greedy for wealth hence the scandals and corruption incidents. Previously, I thought that bribery and corruption cases would definitely be solved someday but having seen so many unethical events that has happened, I believe that there is no definite solution for this issue. When the opportunity arises, people will do things that benefit themselves the most. Having watched this documentary has somewhat change my perception of Japan because I always think that it is one of the most corrupt-free country in the world. 

Blog 7

Warren Buffett, widely deemed the most successful investor in the world. This week I learned more about the man as I watched a documentary titled “The World’s Greatest Money Maker”. Having known that he is one of the richest man in the world, he has been an inspiration for me to pursue my path to the finance world. There are many ways to invest our money and after watching this documentary, it has expanded my knowledge that there are different ways to look at investments.

Warren Buffett is the chairman and CEO of Berkshire Hathaway, multinational conglomerate holding company. Unlike the others on Wall Street who invest on stocks by speculating that the price would go up, Warren Buffett invests in things that he is capable of understanding. I have learned that investing through understanding the fundamentals of the earning power is better than speculating as it is less risky. I used to always believe in the saying “do not put all your eggs in one basket”. Although Warren Buffett believes in what he does and sticks to his own belief that it is better to not diversify so much, I feel that it depends on how confident you feel about an investment. If you are confident in your analysis of the investments you are making, then putting more money in them is better than spreading the risk throughout your portfolio. Although the tips that Warren Buffett shared may sound simple, it definitely is not easy to put them into practice, or else everyone will be rich like him.

After watching this documentary, I have learned to see things from different perspectives and not stick to only one idea or way of doing something. I have also learned that determination is the key to success in anything that we do, be in succeeding in the financial world or simply succeeding in play a game of football. This understanding is important to me in future and I will keep in mind of the different things I have learned watching this. Being humble is also an important trait as we can see, the financial crisis in 2008 means that anyone can fail at any given time. 

Blog 6

I have always thought that only big companies in the market can buy off smaller companies to use them to their advantage. After attending this week’s lectures, I have learned that a company that intends to buy another company off its owners does not necessarily mean it wants more power or to gain more market shares. Mergers and acquisitions happen almost every day and it is not surprising because of the advantages it brings. Two companies working together will bring more synergy than their competitors and will also have more market power, good economies of scale and many other benefits. If things work out well, a successful merge will often result in an increase of profitability. However, not ever mergers and acquisition work out and the attempt of doing so might affect the companies’ share prices. The knowledge acquired in the lectures this week will be useful to me in writing my assignment as it talks about the failure of Fiat Chrysler to start merger discussions with General Motors.

The seminar for this week is rather laid back as we do not have to prepare anything prior because there is an assignment discussion with the tutor. For me, the most significant experience that I have gained here is definitely how to be more prepared. Previously, I do not really prepare for classes and because tutors would just give us the answers to the questions. Unlike studying here, we have to prepare for classes or else we might be asked to leave the class and that has somewhat improved my way of learning. Another thing that I have noticed is that the European students are generally more vocal and brave to voice out their opinions in the classroom. Looking back, and even now whenever I am with my fellow Asian friends in class, I realized that we tend to be quiet and timid when asked for opinions that we shy away from voicing them. We would just let the lecturers and tutors do all the talking. After the assignment discussion in the seminar, we were asked to form groups to have an informal evaluation of our blogs progress so far. I was grouped with 2 Europeans and 1 Chinese. We looked at each other’s’ blog posts and needless to say, I did not have much to comment. However, I received a lot of comments from both the European students and I have learned things that I would not have thought about. I kind of feel bad for them as the Chinese girl and I did not really give constructive comments to the European students. Having attended the seminar this week has helped me form a deeper understanding of what the assignment questions really ask of us. Additionally, I have received constructive criticism on how to write my blog posts better from my fellow classmates. 

Blog 5

This week I chose to watch the movie Wall Street: Money Never Sleeps. This 2010 movie is a sequel the Wall Street, the 1987 film. This movie talks about the financial crisis that happened in 2008. While this is a fiction, it has made me understand more about the working life in investment banks and the greed of bankers in the financial world. Following a documentary about the collapse of the Lehman Brothers about 3 weeks ago, this movie has a little similarity at the beginning where Keller Zabel Investments (KZI) faces loss during the 2008 financial crisis and is forced to arrange a bailout with other Wall Street banks. While KZI is facing bankruptcy, Bretten James of Churchill Schwartz saw the opportunity to make money by buying out the company’s shares at a very much cheaper price compared to what they were trading for before this. This shows that instead of helping each other out, the bankers are actually trying to benefit from the downfall of one another on Wall Street. The downfall of the company also meant that all of the employees have lost their jobs.

Later on, Gordon Gekko, the man who went to jail for insider trading and fraud revealed that the collapse of KZI was due to rumours about toxic debt that the company has being spread around. This reminds me about the lecture topic a few weeks ago about the stock market and the efficiency of it. It is basically how the public react to information that are being circulated or spread. Initially, I did not see how the theories I learned in class could be applied to real life scenario but this movie opened my eyes and after reading about the lectures again, I could see it being applied. A hypothesis called efficient market hypothesis (EMH) suggests that prices of stocks fully reflect on available information that are related to them. There are 3 degree of efficiencies which are strong efficiency, semi-strong efficiency and weak efficiency. In my opinion, there is no absolute one definite form of efficiency in any given market. With the improved technology we have now, information are being spread every second but are the information legit?

Having watched this movie has improved my understanding of how stock market efficiency can be applied to the real world. However these are just my thoughts and opinions and may be wrong. I would definitely love to learn more about this when I am older and can therefore take this into practice by working in an investment bank or just by trading stocks and see how this can be applied.

Blog 4

Dividends, something that I see myself receiving in the future when I invest in the shares market. I have always looked at dividends as some forms of passive income and that with good investing decisions in the share market, I will essentially have my money working for me to generate even more money. After this week’s lecture, I learned more about what are some of the dividends policy and the reality of how dividends actually work.

Every company that is funded by shareholders have to ask themselves 2 questions; do we reinvest the money into the company in hopes for better returns or do we pay out dividends to our shareholders in hopes of attracting more people to buy our shares? Ultimately, a company’s goal is to increase profits and to maximize shareholder’s wealth. This week’s lectures have opened my mind up to the 2 argument of dividend policies which are the Dividend Irrelevance School and the Dividend Relevance School. Based on what I have understood, the Dividend Irrelevance School states that dividends are merely residual payment that are paid only if there is a surplus after investing all the earnings. This would have the same results according to Modigliani and Millar as investment and dividends payout both increase shareholder’s wealth. The Dividend Relevance School however, states that because the future is uncertain, investors would prefer to have the dividends paid out now than to leave it in the uncertainty of investments.

Having learned this and thinking about some of the shares that my parents have bought back home, I think that dividends truly matter to companies and are definitely relevant. This is because companies generally do not want to lose investors’ confidence by paying out low dividends but at the same time paying overly high dividends may be unsustainable in the long run so they need to find the right balance. 

Blog 3

Capital structure is the topic for this week’s lecture. Coming into the lecture I expected that the idea of raising capital using different sources would be discussed, which is what it is all about anyway, at least that is what I presumed. Being a person who has a short attention span of about 20-30 minutes, I listen attentively during the first half of the lecture because I know that the remaining of that would be difficult for me to endure. True enough to what I have assumed, the introduction started with the lecturer stating the equity vs debt discussion, where raising capital through debt has lower risk and costs compared to raising capital through equity. However, it does not necessarily have to be only one way of raising the capital. A company can use a mixture of both debt and equity to raise capital. The weighted average cost of capital calculation is then introduced and it suggested the concept of an optimal capital structure. For me, the most significant aspect of this idea is that theoretically by increasing the gearing of the company, the weighted average cost of capital will be lowered. However, there are some risks of financial distress as the debt goes higher and higher. In 1958, Modigliani and Millar argued that a company’s capital structure has no impact on the weighted average cost of capital and that there is no optimal structure. This is questionable as they assumed that they is no taxation and that there are no costs of financial distress. In 1963, they revised the argument and included tax into the assumption. Having attended the lectures and reading the slides again when I went home, I have understood that as gearing increases, weighted average cost of capital decreases because of the tax benefit and in turn, this will increase the value of the company. The next thing that I would like to do is to read more about the effects of the costs of financial distress on the levels of debt which I will when I have the free time.

Blog 2

This week I watched a documentary series on the collapse of the American investment bank Lehman Brothers. It is a 1 hour film that shows the events that happened before the company declared bankruptcy. Prior to watching this, I had no idea that the Lehman Brothers is one of the biggest investment bank in America. After watching the documentary, I went on to Google to look for more information about this incident because the film itself is not very clear to me. I am ashamed of calling myself a finance student when I have no clue about one of the biggest financial crisis in the world back in 2008. However, to be fair I was only 14 at that time but from now onwards, I will start reading the news and find out what is happening in the business and finance world to keep myself updated.

From what I have learnt watching this film is that Lehman Brothers borrowed a large amount of money to fund its investments. They had the confidence that the house market is a lucrative market to invest money in. Having a high leverage ratio means that a small change in the value of the assets that they own would change the value of equity of the company. Lehman Brothers lost a lot of money after the housing bubble burst due to the mortgage negligence and foreclosures as well as the securities related to housing being devalued. Their shares continued to drop and investors gradually had lower confidence in the company. To save themselves, they tried to sell off a majority stake of the company to Bank of America and Barclays Bank. Bank of America rejected the deal because of the company’s poor valuation but Lehman Brothers see signs of hope as Barclays were interested in acquiring them. However, in the film, it was portrayed to the viewers that under British law, Barclays cannot guarantee Lehman's debts until its own shareholders vote on the matter. The Federal Reserve Bank of New York refuses to bailout on the company therefore they had no choice but to file for bankruptcy.

The most interesting part of the documentary was when Paulson gathered all the major bosses of investment banks on Wall Street to have a meeting to save Lehman Brothers. Having watched this documentary, I have learned that even the biggest player in the industry can fail. Furthermore, I have now also acquired the knowledge of this incident so whenever my friends or future colleagues talk about this, I will not be as clueless as before. This knowledge could be important for me as I intend to work in an investment bank in the future after I graduate before I eventually start my own business.