Elite Hedge Fund Manager Guides Student Management of Active Fund: Q&A with Robert Scannell, MBA, JD, CFA®

Robert Scannell, MBA, JD, CFA® will be co-teaching the Student Managed Investment Fund course at GGU in which students choose investments for an active fund. Scannell will bring his experience to the class, which includes starting and running the Tradewinds Investment Management, LP, an emerging-market hedge fund that peaked at $400 million and gained 22% per annum over 20 years.

Would you give us a brief overview of your education and career?

I earned an MBA from Penn State, a JD from Purdue, and later became a CFA® charterholder. I spent 10 years at Merrill Lynch in fixed income sales. I also established and ran a hedge fund for 20 years.

What do you bring to the students based on this experience?

Investment management is part art and part science and most business schools just teach the science — it’s really the same everywhere. They give you the tools. The art side of it is about how and when you employ the tools. My hope is to add perspective on the art side, having “been there and done that.”

There is no substitute for real-world experience and that is what the Student Managed Investment Fund course is all about. By managing an active fund they get real experience, and I will bring mine to the discussion.

Robert Scannell

Tell us about running the hedge fund.

Tradewinds was one of the first emerging market funds in the US, and it was wonderful. At the time I started the fund the Berlin Wall had come down, and socialist and communist governments wanted to move to a capitalist model. We traveled around the world and looked for unusual securities and situations. During that time, most emerging market countries exchanged debt they had defaulted on years earlier for new bonds, and if you understood that process it was extremely profitable. These sorts of trades helped us generate returns that were in the top 10% of global alternative asset managers (i.e.: hedge funds) from 1994-2015. Besides making money, we witnessed and participated in an economic renaissance around the world. The fund closed after twenty years because I was simply tired and the opportunities had diminished — alas, that is what happens to new markets.

We investigated investment opportunities at the country- and government-levels, talking to the finance ministers and central banks for macro information. Then we’d go to company-level analysis and that experience will play into the Student Managed Investment Fund class.

 “I teach students to always look for corroborating evidence. As Ronald Reagan said during nuclear negotiations with Russia, you want to “trust but verify.”

What did you learn over the course of your travels and how does that translate to students?

The biggest thing is that you learn over 30 years that the markets are a merry-go-round and that cycles repeat. You look for characteristic points in the cycle at which you want to do certain things. Where are we in the cycle of economic growth in the U.S.? The answer is that we are something like 8 years into a 5-year cycle. That is a joke of course, but the point is that the current economic expansion is one of the longest on record, and we are closer to the end than the beginning. This may color the investment decisions we make in the Student Managed Investment Fund course. We’ll probably want to err on the side of caution.

I also learned that people are the same all over. They are economically motivated in the same way, and they have the same flaws in a business context: it is not uncommon to run into lies, fraud, and exaggeration. You learn to be cynical and cautious about what people tell you.

You also learn that sometimes you have to throw out the investment research playbook. A good example is that at one point we had a big investment in Gazprom, the biggest company in Russia and one of the biggest energy companies in the world. Besides the fact that it was cheap, the biggest reason we owned was that we knew that everyone in the Duma owned it as well! And lo and behold it ended up moving much higher.

What is it like to have a fund, day-to-day, when you are in the domestic office?

A client from San Francisco once came into my office for a meeting. He called the next day and was troubled: “I didn’t hear anything going on in your office.” He had a mental image, probably from Hollywood, of computer screens and screaming traders. By contrast, our office was like a monastery. We just read research and tried to get smart. It is not what most people think. At least in our case, being a fund manager was more like being an analyst at the CIA.

Based on your real-world experience, how do you teach students to detect exaggeration when they are sitting at their office desks?

Well, one way is by accumulating experience and learning from your mistakes. Like we said earlier, there is no substitute for experience.

But more broadly, I teach students to always look for corroborating evidence. As Ronald Reagan said during nuclear negotiations with Russia, you want to “trust but verify.”

I also urge investors to get out there and see for yourself. If you are researching a company, walk the factory floor and speak to everyone you can. Speak to the company officers, the Directors, the customers and especially to competitors. I am a big believer in getting up close and personal. It is much harder to bluffed in person than it is on the phone.

What is your understanding of Russia’s macroeconomic and political vector since the 90s? Are we moving like the U.S. from robber barons or oligarchs to managed capitalism?

One vision is that Russia is simply a mutant capitalist country and a mutant democracy; they are sort of a failed experiment in evolution from communism to democracy. Another theory is that it’s a slow and ugly process, but they are gradually evolving. Sometimes it’s hard to tell. It’s interesting that they look at a lot of what goes on here in the U.S. and call it legalized, sanitized corruption. For example, the pharmaceutical industry spends billions on lobbyists and on political candidates and the result is our insane healthcare system. Is that a healthy capitalist economy in action or is it a form of institutionalized corruption?

“The biggest thing is that you learn over 30 years that the markets are a merry go round and that cycles repeat. You look for characteristic points in the cycle at which you want to do certain things.”

Do they eventually go from robber barons to a more respectable model? I hope so. Historically, there is a scrum for money and the winners eventually want to memorialize themselves, so they build foundations and museums and universities. An interesting case in point is Leland Stanford, who was reviled as a Robber Barron at the time he founded Stanford University. Hopefully, over time we’ll see a similar pattern in Russia, where oligarch money is recycled in positive ways for society.

Being that you and Dave Kaczorowski, who will co-teach the class, have so much real-world experience and are CFA® charterholders, how do you teach students to make their own decisions and reach their own investment decisions? Is it training wheels?

In the context of this class, we are not going to hand them a pile of money. We are going to be involved in every decision but want to give them as much responsibility as they can handle. We want to give them the tools, teach them, and then let go of training wheels. That is a perfect analogy.

We asked Robert Scannell the top three things he will bring to students…

  1. See the big picture and not get lost in minutiae.
  2. Take a real-world perspective: Many students at GGU are in the workforce, and they want to change their career. There are major changes happening in finance that will affect their future and we want to speak to some of those issues. For example, there is a powerful trend away from active portfolio management toward passive management (in the form of index funds). Also, the U.S. federal deficit and entitlement spending are both exploding, and this will eventually have huge implications for financial markets. These are tangential issues for the class but we’d like to try to weave them into the discussion.
  3. Infuse them with my enthusiasm for the investment game. It is like being a child on a treasure hunt every day.

More About Robert Scannell

Robert Scannell is the founder of Tradewinds Investment Management, LP, which from 1994 through 2015 managed numerous funds investing in emerging markets, distressed assets and healthcare. Tradewinds’ flagship fund ranked in the top 10% of funds globally over its 20-year history. Prior to founding Tradewinds, he spent 9 years in institutional fixed-income sales with Merrill Lynch Capital Markets. He holds a BA and MBA from Penn State University, a JD from Concord Law School at Purdue University and is a Chartered Financial Analyst. He also holds an MSc in Pharmaceutical Bioengineering from the University of Washington and has completed programs in drug discovery, drug development and clinical trial management at UC Berkeley, UCSF, and the University of Chicago, respectively.

CFA® (Chartered Financial Analyst) is a registered trademark owned by CFA Institute.

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Learning Sell-Side Finance: Students Manage an Active Investment Fund at Golden Gate University


If you want to move from the sell-side to the buy-side in Finance or get bankable experience you can use to get a first job in the field, the Student Managed Investment Fund course can be a pillar of your career development. This fall, students in the MBA or MSF programs who take the class will get hands-on experience in portfolio management and security analysis with an active fund with a substantial endowment. The course is taught by Dave Kaczorowski, CFA® who worked in investment research for seven years and Robert Scannell, CFA® who founded and ran Tradewinds Investment Management, a $400 million hedge fund. The course was developed by Professor Kaczorowski and Professor Andrea Anthony, PhD, Finance and Economics Department Chair, and funded through the generosity of the Golden Gate University Board of Directors.

Wall Street in the Classroom

“When it comes to learning how to invest, there is no substitute for managing real money,” says Professor Kaczorowski, who also serves as Academic Program Manager at GGU. “The emotional attachment of having dollars at stake is crucial and better prepares students for the real world. From informal observation, students that are working with an active fund can be more tentative at first, but over time get accustomed to the risk of losing real money.  That is the situation that buy-side investors face every day.”

In the Student Managed Investment Fund course, students will start by choosing a sector of the U.S. economy to cover, and deliver a report on the macro trends in that sector.  Then, during the term, they will limit their recommendations to the sectors they cover.  This not only teaches the students to analyze specific stocks, but also the respect for the industry around them.  “Without this restriction, I expect most students would be attracted to high profile tech companies,” says Kaczorowski, “but in the real world we don’t always get to choose our coverage spaces.”

“When it comes to learning how to invest, there is no substitute for managing real money.”
Professor Dave Kaczorowski, CFA

Presentation Skills Needed in Finance

Whether you’re a hedge fund analyst reporting to a portfolio manager, or a capital markets analyst talking to a client, the ability to convince others of your view is crucial to the investment profession. In the upcoming class, students will have to stand in front of their peers and present their recommendations, and face the scrutiny of their experienced instructors in real time.

“What works for presenters in these situations is knowing your stuff, and stating very clearly and concisely your position. Presenters who give long rambling answers, or don’t have an answer to every question, likely won’t convince others of their views. You can rehearse ahead of time, but in the real world, you will have no way of knowing the questions the clients will ask.  You just need to know as much about the topic as you can.”

If you want to learn more about the course or the MS in Finance program, you are welcome to email Dave Kaczorowski directly.

CFA® (Chartered Financial Analyst) is a registered trademark owned by CFA Institute.

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Bringing Global Experience to the CFA® Program Exam Prep: Q&A with Vincent Deluard, CFA®

Vincent Deluard, Chartered Financial Analyst® (CFA) is the Global Macro Strategist at INTL FCStone Financial Inc. and teaches several CFA® Program exam prep classes: Ethics & Professional Standards (Level I & Level III) and Private Wealth Management (Level III).

How would you sum up your career, in brief?

I write weekly reports discussing global macroeconomic topics, such as monetary policy, exchange rates, and capital market forecasts. I also do frequent roadshows and conferences to advise pension funds and other institutional investors on various investment strategies. Last, I present my research findings in the financial media and various industry publications.

You appear on TV and have contributed to Forbes, the Financial Times, and the Wall Street Journal. Your concept of “DUMB beta” seems to have gained a lot of traction lately. Can you explain what it means, and how it relates to the CFA® Program curriculum?

Sure. “Smart Beta” is currently a big buzz word in the ETF industry. The CFA® Program curriculum shows that it is an oxymoron: investors either pursue active returns with research (the “smart” part), or they simply try to capture the broad market premium (the “beta” part). As a joke, I illustrated the emptiness of the promise of “Smart Beta” providers by creating a “basket of deplorables,” buying only the stocks that are ignored by the “smart beta” indices. So far, my “DUMB” basket has outperformed an equal-weighted portfolio of the major “Smart Beta” ETFs.

I think the lesson for CFA® candidates is that the CFA® Program provides the analytical and quantitative tools to see through marketing claims. In our industry, many are more interested in generating commissions and fees than in generating long-term returns for investors. The rigor of CFA® Program curriculum helps in achieving the latter.

Why do you teach CFA® Program exam prep classes?

I was a student in this program ten years ago. I do not think I would have passed if it had not been for the outstanding quality of the classes, the energy of the professors, and the support of my study groups. I moved to work on Wall Street for a few years after I passed Level III, but I reached out to CFA Society San Francisco immediately after I moved back to San Francisco: I wanted to give back to a program that had given me so much. I have now taught CFA® Program exam prep classes [register here] for four years, and I have enjoyed every minute of it.

…the CFA® Program provides the analytical and quantitative tools to see through marketing claims. 

It sounds like study groups helped you. What worked for you in passing all the exams?

Groups are very important. The CFA® Program exams are very difficult, with a lot of material to assimilate. It can be overwhelming at times, so it is important to have a good support network. Study groups help with motivation. As a bonus, many of my old study group peers are good friends today!

Also, I cannot stress enough the importance of doing as many practice tests, as early as possible. The format of the exams can be quite unsettling at first, especially for non-native speakers such as me. You need not only to know the material, but also to understand what the CFA Institute expects on exam day.

Will you be teaching in the fall after exam prep classes have started to be taught at Golden Gate University?

Yes, I will teach Ethics & Professional Standards (Level I and Level III) and Private Wealth Management (Level III). It is excellent that Golden Gate University is involved. The teaching candidates get from accomplished people from around the Bay Area, from various universities and companies, is more than just test-focused. Giving students a broader view will help them be better investors, and that is what the CFA® exam should be about.

How do you bring your international experience to the CFA® Program curriculum?

I travel in Latin America and Europe every other month to present my global macro outlook. Incorporating the global picture is a lot more important today than it was in the 70s and 80s. I try to incorporate this global perspective in the classes I teach: students need to understand the perspective of a Singapore-based investor, or the specific challenges of working in an emerging economy, because their careers may well take them there.

I believe the CFA Institute has gone a long way down this road. Its initial focus was how to value domestically-listed securities, in the spirit of Graham and Dodd. These tools are still crucial today: they are the building blocks of securities analysis. But you need to complement them with a global perspective, factoring macro forces such as exchange rates, monetary policy, and international capital flows.

The fact that there are now more CFA® candidates in Asia than in North America illustrates how the CFA® program has changed. Also, a Canadian client once told me that the city with the highest number of candidates per capita is Toronto, not New York.

“Incorporating the global picture is a lot more important today than it was in the 70s and 80s. I try to incorporate this global perspective in the classes I teach: students need to understand the perspective of a Singapore-based investor, or the specific challenges of working in an emerging economy, because their careers may well take them there.”

Please tell us about the ethics classes you teach.

Ethics and professional standards have become more and important across the entire financial industry. After the great financial crisis of 2008, the industry has become much more regulated, and that is a good thing.

Finance cannot thrive if everyone just thinks about short-term profits: when we consider an action, we must ask ourselves first whether it is right. The investment profession has a huge challenge ahead of itself: for right and wrong reasons, the industry suffers from a trust deficit – only politicians are less trusted in public surveys!

With its tireless promotion of ethical decision-making, codes & standards, and industry guidelines, the CFA Institute is on the front line of this battle. There could not be a better time to get the CFA® designation.

CFA® Program exam prep weeknight classes start on Tuesday, September 18th and Saturday classes begin on September 22nd at Golden Gate University [map] . You can register now on the CFA Society San Francisco website.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

It Feels Good to Be A CFA® Charterholder: How I Passed the Exams and How I Teach

By Dave Kaczorowski, CFA® charterholder and Adjunct Professor & Academic Program Manager at Golden Gate University

At a recent CFA Society San Francisco (CFA-SF) event, I caught the eye of a few people across the room, and we gave each other a friendly look. They too, are CFA® charterholders. Passing the CFA exams is a hard mountain to climb, but it places you among the elite in your profession. My friend loosely compared it to being a war veteran. You may not use everything on the exams – which is everything! – on the job, but you will have a lasting camaraderie. Having “those three letters” after your name means you have gone through something hard – and you have beaten it.

What will be on the exams?

Now that I have become an instructor for CFA® Program Exam Preparation Classes for Equity Analysis, people ask me what will be on the exams. I tell them that it’s all fair game. You need to know as much as you can and ask yourself how you can accomplish learning that much material. It’s all about detail and memorization. In general, studying is the only thing you should be doing besides your job.

The volume of questions on the exam is heavy. You will see questions that you can’t remember anything about, but you have to minimize those occurrences. Level II is the same topics as Level I, and the material goes a lot deeper. Candidates should know that Level II is the most dreaded and stops many people from getting the CFA® designation – but it is not impossible if you are willing to prepare.

Another secondary issue to consider is time management on the day of the exam. The first two levels are two sessions of 180 questions, and Level III has an essay portion and a multiple choice portion. That leaves you with just a few minutes per question. Some you get right away, and some are going to take a long time. Don’t get too wrapped up in the time and freak yourself out about the pace. It’s not about answering the most questions, but about getting the most correct answers.

How to Study for the CFA Exams

The best way to study is the best way for you. Everybody’s brain works differently. My advice for students is to think back to college and remember, in four years, what became their most preferred study style. Some people find a study group to be crucial. They might form close relationships that last long after becoming charterholders. If you are a CFA® Program candidate, you may have been working in bonds, real estate, or equities. There are some sections you will know better than others because you do them for a living. Maybe you want to juice that more, to get more points, or study that section less because you think you can get by with what you know.

In my working and study style, I like structure; so I took a review course from  CFA-SF in 2015 and 2016 to prepare for Levels II and III. I passed both of those exams.

Getting My Three Letters

Because all paths are different, I will tell you mine. One way I like to study is by drilling: doing the questions over and over. I gobbled up questions from a variety of sources. The CFA Institute website has practice questions, and I probably used all of them. I also took prep courses. But unfortunately not for Level I!

I started an MBA in 2005 and took Level I in the summer of 2006. I didn’t open the CFA Level I CFA Program exam books at all until my MBA classes ended in May. The exam was early to mid-June. I had only three weeks of study. That was a terrible idea, but I had no choice since I had to finish off my classes. Ironically, I passed because there was so much overlap between Level I of the exam and my recent MBA. In essence, I spent the whole year studying the core concepts of the exam like financial statement analysis, economics, and statistics. I look back on those three weeks as hell, but I was able to pull it out. I do not recommend that way of studying!

In my working and study style, I like structure; so I took the review class from CFA-SF in 2015 and 2016 to prepare for levels two and three. I passed both of those exams. The biggest benefit of the classes was helping me stay on track. I started studying before Christmas for the June exam. When classes started in January, I had already studied the material covered in that class. That gave me the chance to go over it again in an entirely different environment.

In 2007, I got a sell-side job. I took Level II in 2008 and 2009 and failed both times because I simply did not have the time and energy I needed. I decided to put it down and focus on my job. (I also joined CFA-SF as a non-charterholder in 2007. I became an active volunteer, which was a huge help for my career.) I left the capital markets business in 2012 and got a job managing a private portfolio. It had been in the back of my mind to finish the exams. When I got a job with a better quality of life, I decided to take another run at it.

I became a CFA exam-taking machine. God bless you if you are the kind of person who is naturally good at taking exams; but for the rest of us, that’s what we have to do.

Beginning in 2015, I took a CFA review class in San Francisco. For several months you have to give up your life. I accepted that. I became a CFA exam-taking machine. God bless you if you are one of those people who are naturally good at taking exams; but for the rest of us, that’s what we have to do. I passed Level II that year. I replicated my process for Level III and passed it in 2016.

How I Teach Exam Prep Classes

Now that I have my “three letters,” I hope to make this process a little less difficult for the next person.

The review class divides each of the 18 study sessions into one, 2 ½ hour class.  While that’s not enough time to cover every detail, it is enough to teach the core concepts that underpin the lesson. For example, the study session on discounted cash flow analysis looks like a million formulas and models in the textbook.  It can feel overwhelming. When I deliver the material, I concentrate on the idea that a company’s future earnings dictate its value. It’s a simple concept that is the foundation of the lesson.  We dig into the different ways of calculating all of the components like free cash flow and discount rate, but keeping an eye on the relationship between future earnings and value helps the students keep it all in perspective.

Another part of that study session covers valuation ratios, comparing the value of an asset to its price. I developed an explanation for this concept in an undergraduate finance class I taught early in my career.  I refer to a valuation ratio as a “price per pound” where the price is expressed per unit of benefit. It makes it clearer when you keep people’s minds trained on the relationship between the price, and what you’re getting for that price.

About the CFA Program Exam Prep Courses

Aside from structure and the big-picture view, you can also learn from working professionals who have been teaching exam prep courses for years. For example, Johnathan Masse, CFA has been teaching for 15 years and explained in a recent post on this blog that he knows how the exams have evolved and that some, like him, learn best in a sensory environment. Vincent Deluard, CFA, a Global Macro Strategist for the broker division of INTL FCSton, who has written for Forbes, will also be teaching.

If you think classes are the way to go for you, you can register for the CFA Level I classes on the website of CFA-SF or contact me for more information.

About David Kaczorowski, MBA, CFA®

Dave (David) Kaczorowski has worked in finance for more than 13 years. An experienced investment manager of private and family office portfolios, he has investment expertise in all the five major asset classes and experience in the holistic management of a family office. His most recent position was as the primary investment manager for a highly diversified family office portfolio. Prior to that position, he spent five years in the investment banking industry as an equity research associate, covering technology companies. His resume in the industry includes Signal Hill Capital, Wedbush Securities, and Stifel Financial. He also spent seven years as a financial analyst in the actuarial department of Liberty Mutual Insurance Group. Currently, he is an Adjunct Professor of Finance and Academic Program Manager at Golden Gate University. He is a CFA® charterholder.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Contrarian Investing Can Be Profitable Investing

By Raj Sharma

Raj Sharma has 12 years’ teaching experience as a Golden Gate University Adjunct Professor teaching Equity Analysis. He is also a Portfolio Manager at Polestar Capital LLC, a value-driven, contrarian investment fund and research boutique, which he founded in May 2005.


Golden Gate University has a reputation for focusing on the real skills our students will need today and are taught primarily by people currently working in their fields. Like many of my peers at GGU, I teach a very practical course and draw on my current work as a securities analyst. No textbooks allowed!  Here are a few of the fundamentals of analyzing companies that I teach, and what I call a contrarian attitude that can be profitable in the long term:

  • A detailed and instinctive look at financial statements going back a decade – financial history of a company can tell us a lot about the likelihood that this company would succeed in the future.
  • Studying and understanding the culture of a company and how important it is in determining future success.
  • An opportunistic look at strong companies during times of minor missteps and bumps – affording them attractive valuations for investment.

Recent News in the Market

Tesla’s dramatic rocket display may not mean that the actual value of the stock is going to get to the Red Planet. Tesla seems to be everyone’s darling now; but you can, as a professional investor, ask pointed questions. Is there new competition? Well, VW says they are going to put 3 million electric cars out by 2020, and Tesla barely makes 300,000.

When Amazon bought Whole Foods that was big news, but it is best to talk about specific situations that a given company may face—not just M&A. Amazon also announced this year a potentially market-changing partnership with Berkshire Hathaway and J.P. Morgan announced focused on healthcare. Many questions have to be answered to make investment decisions based on this news. What does that do to the existing companies? What happens to CVS (pharmacy benefit manager) or Walgreens (pharmacy stores) or McKesson (drug distributor)?

It is essential to understand what consumers want and what are the demographic trends influencing the healthcare companies. And what is the industry structure that serves these aging consumers? Everyone complains that healthcare costs are high and you can cut costs, but cutting costs (and austerity) also brings down the overall GDP contribution of this massive industry and who likes GDP reductions! Which companies in this space will be best positioned to help reduce healthcare costs while improving outcomes for their consumers and for the country?

Like many of my peers at GGU, I teach a very practical course and draw on my current work as a securities analyst. No textbooks allowed!

IPOs and Tech Stocks in the Silicon Valley

Tech companies have had a huge impact on our lives and on the economy of the country. How to best invest in tech companies at levels and valuations that seem to head into the stratosphere every day making them riskier investments. Not all tech companies are risky though, and a careful analysis of their business models, their competitive positioning and their balance sheets can help an analyst and an investor separate the wheat from the chaff! Tesla on one had may appear sexy appear to have a lucrative future but investing in it at today’s levels could be fraught with significant capital loss! On the other hand, certain leaders like Amazon, Apple, and Google could still be excellent investments into the future.

Marketplace Behavior

As recently as ten months ago, the market had assigned Apple shares a low value because of repeated concerns that Apple was just a hardware company with a massive reliance on iPhones as its primary source of revenue and that all hardware companies eventually approach zero-margin profitabilities. When you do the fundamental analysis the right way, you see that the company exists in a broader ecosystem. When consumers use an iPhone or iPad, they don’t want to switch out because there is a time hurdle. That user base can keep consuming and add to revenues.

Apple is not a hardware company but more of an ecosystem with a massive installed base that should get a much higher multiple than usual hardware companies. It is not just that you sold someone a printer knowing that people don’t buy printers every year, so you price it really cheap (at zero margins) so that you can get lucrative printer ink business from these consumers till they come back for a new printer (and ink) from you. What Apple has done (and is doing) is creating an ecosystem that is very successful at keeping its users happy and satisfied, consuming digital products and expanding the ecosystem at solid profit margins – such ecosystems should sell at higher valuation multiples than the ones accorded to low-margin hardware companies!

The actual price of a stock relates to the mood of the market and to the current attitude to the industry that it is in. Being a contrarian can help. Being a contrarian versus going with the herd, your answers from a disciplined analysis can often be very counter-intuitive.

I teach that it is very important to know invest in what you know. Buying a great company is important but so is buying the great company at a reasonable price – and that usually only happens for great companies if they are experiencing an operational hiccup or are currently out-of-favor in the market.  The actual price of a stock relates to the mood of the market and to the current attitude to the industry that it is in. Being a contrarian can help. Being a contrarian versus going with the herd, your answers from a disciplined analysis can often be very counter-intuitive. When everything is “hot,” and things look great, it is typically not a good time to invest. People and investors have pushed the stock up in their excitement.

If you generally buy businesses only when all the news is positive, it may not pay off in the long run. If you buy based on this confirmation bias (that trends will continue) — and your friends are saying that you will always make money on this company – you may be falling into a psychological trap. Smart investors go step back and be skeptical of this hype. When there is fear in the market, be “greedy” and roll up your sleeves and get to your analytical best and deploy the cash into solid companies at hopefully reasonable prices!

When Bad Things Happen to Good Companies

Contrarian investors may step back when there is hype. This is an important mind-set and skill set that feeds the ability to spot what I call a “contrarian situation.”  You can look for solid businesses that are run by smart people and have competitive advantages. If they are having issues, the market may see them as a big deal because they are focused on the short term. Buying when a great company has had a misstep or people are questioning their strategy can be something to consider. After your analysis, you may realize the company may work through the current problem.

A way to see if you’re paying a good price for a great or a good company is to use its steady state (past three years’ average) free cash flow and estimate its present value. If the company is not growing much at all but its free cash flows are steady and very reliable then that $1 in annual free cash flows should have a value of at least $1 divided by the average return you would expect from a company in the U.S. to yield on a yearly basis

Getting Going in Investing Research

Valuation of the company is as important as picking a good or a great company to invest in. Warren Buffet is fond of saying that it is far better to buy a great company at a good price than a good company at a great price. A way to see if you’re paying a good price for a great or a good company is to use its steady state (past three years’ average) free cash flow and estimate its present value. If the company is not growing much at all but its free cash flows are steady and very reliable then that $1 in annual free cash flows should have a value of at least $1 divided by the average return you would expect from a company in the U.S. to yield on a yearly basis. That average over the last 100 years has been around 10%, to keep things simple and to be able to compare different companies using the same discount rate.

So perpetual free cash that flows to you from a steady, no-growth, solid company should be worth at least $10 ($1/0.10). I should be willing to pay $10 for a $1 in annual free cash flows from an asset with no growth or a Price-earnings Ratio (P/E) of 10x ($10 value / $1 in free cash flow). Now if you know that this company is growing and is expected to grow at least 5% a year for a long time, the value of that steady state $1 becomes $1 / (discount rate of 10% minus growth rate of 5%) or $20. The P/E on this growing asset is then 20x ($20 / $1) accounting for the growth in the free cash flows every year. If the asset is not growing it is worth $10 and if it can continue to grow its worth $20. Now, this is a modest risk company in the U.S.

If the company resides in an emerging market with greater market and political risks, then we would use a discount rate higher than 10%n (because we should expect a higher return in this riskier situation) and subsequently get a value lower than $10 for no growth and lower than $20 for growth. Again this is a way to put a conservative value on a $1 in free cash flows in the market. Now you may say the discount rate to value a stream of free cash flows should be a lot lower — in case you haven’t noticed the historically low interest rates in the US! That’s why we take a super long-term average of the discount rate to see how companies would compare apple to apples.

More about Raj Sharma

Prof. Sharma is currently Portfolio Manager of Polestar Capital LLC, a value-driven, contrarian investment fund and research boutique, which he founded in May 2005. Prior to Polestar, he was a Managing Director, Equity Research, at Merriman, Curhan, Ford & Co., a boutique investment bank in San Francisco where he covered specialty growth companies and special situations. Before Merriman, he was a co-founder of Landmark Research Group, active in the last few years in advising U.S. hedge funds, mutual funds and corporate clients in investment strategy. Prior, Mr. Sharma was Vice President at Onyx Partners, Inc., an investment banking and buyout boutique analyzing equity and mezzanine debt investments in companies in various industries in the U.S. Mr. Sharma was responsible for due diligence, financial analysis and operational nurturing and turnaround management of portfolio companies.  Prof. Sharma is passionate about pursuing leading, successful companies as long-term investments and is particularly interested in those companies that excel in business and in social responsibility. He counts Warren Buffet, Peter Lynch, and Joel Greenblatt as his primary influences in the shaping of his investment philosophy. Mr. Sharma has an MBA in Finance from the McCombs School of Business at the University of Texas at Austin and a BS in Engineering from the Indian Institute of Technology (IIT) at New Delhi, India.

Raj Sharma teaches Equity Analysis in the master’s degree in Finance program. We invite you to request information about the degree.  >>

How to Pass the CFA Exams: It’s a Marathon, Not a Sprint


The following is an interview with Jonathan Masse, a CFA® charterholder who has been a CFA Program exam prep instructor for the last 12 years, a member of the steering committee of CFA Society San Francisco (CFA-SF) and formal mentor to many finance professionals.

Can you tell us about your career trajectory?

pass-cfa-examsRight now, I am a Financial Advisor at Merrill Lynch specializing in Options and ETFs. I spent the first seven years of my finance career on the trading floor of the CBOE and moved to the Pacific Stock Exchange. Then I spent time adjusting to “upstairs life” as a Trading Analyst at Barclays Global Investors as they started their iShares product set. I am also a CFA® charterholder, and that helped me make the transition to life off the floor.

Why is getting the CFA designation important?

In 2004, the designation was a near guarantee of a job or a promotion. It is less so now, but you definitely want the credential if you want to manage money. It helps you gain notoriety at your company, positions you as very capable to future employers, but perhaps most significantly, it signals your commitment to the industry and your commitment to excellence within it.

Marathons require more effort than sprints..it’s so critical to start your weekly study session back in January (for the June exam) to pace yourself.

What was your experience in passing the CFA exam?

I finished in three years and was more than thrilled. I was a student in CFA-SF Exam Review program for all three years. It was very helpful that their 18-week curriculum ended a month prior to the exam. With that month, I took as many diverse practice exams as possible (that is, from multiple exam prep providers).

I also tell people to do these practice exams on their own in a hostile environment. You never know if the heater might be broken or some other factor may cause them to lose focus. When I was studying, I sat in the food court of Hillsdale mall. It was loud, and the air conditioning was broken. A woman got my attention and mouthed “I’m sorry.” She apologized for her two kids running around me like a tornado. I told her: “This ain’t the library. The fact that I don’t even notice your kids indicates I am READY to take this exam.”

Why take exam prep classes?

You should take CFA Program exam prep courses because getting your CFA designation is a marathon and not a sprint.  The Bay Area is as delightful as it is distracting. It’s so easy to say “I’m going surfing/skiing/hiking/wine-tasting this weekend, and I’ll study twice as hard next week.” You know what never happens? Getting back on track. That’s why it’s so critical to start your weekly study session back in January (for the June exam) to pace yourself. If you think you can pass by cramming all the courses at the end, you are gravely mistaken. Also, if you do not pass, you have to wait another year. You want to give this thing three years of life and don’t do more than that. I’ve taught over a dozen years for the review program and know 9- and 10-year candidates.

I tell people to do these practice exams on their own in a hostile environment. You never know if the heater might be broken or some other factor may cause them to lose focus.

Marathons require more effort than sprints. So you should study for a minimum of 300 hours or 15 hours a week. Do 400. Why leave things to chance? If one study session is light and you think more reading would help, do it.

You need to finish a lap of what you need to know one month before the exam, so you have time to review. That’s when the classes end. In your last month, keep study sessions 1-4 fresh in your mind, and then go through 1-8 as a whole.

Statistics also show that review program students have a higher pass rate. Don’t fight the math.

What can you say to people who have failed the exam multiple times?

Prepare accordingly. It’s like taking your Econ, Accounting, Quant, Derivatives, Fixed Income, Finance, Investment finals all in one day – and with much graver consequence: If you don’t pass, you often have to wait an ENTIRE YEAR to retake it. That’s a lot of life.

You need to finish a lap of what you need to know one month before the exam, so you have time to review. That’s when the classes end. In your last month, keep study sessions 1-4 fresh in your mind, and then go through 1-8 as a whole.

What about studying in groups?

Study groups are good for people to be accountable to study at a good pace and to brainstorm. However, they can become whine sessions. Group sessions need to be disciplined like the classes. Bring questions for each other and limit the discussion to 5-10 minutes each. Stay on point. Then have a 10-minute wrap up at the end.  It should be held within 60-90 minutes depending on the size.

What is the difference between online or in-person exam preparation classes?

I happen to learn best through engaging the senses, like writing things down (touch) and listening (hearing) live, ay slides and writing on the board (sight). When you hear something repeated in class you are feeling it. If there were a way to smell/taste the CFA Program curriculum, you would take it in that way!

[To people who have failed multiple times] … Prepare accordingly. It’s like taking your Econ, Accounting, Quant, Derivatives, Fixed Income, Finance, Investment finals all in one day.

Why make the commitment to teaching, when you have such a demanding job?

I have taught for over 12 years, and currently cover International Investing and Behavioral Finance for Level III and Alternatives for Level I. I enjoy helping people get through this review program. It is a very difficult exam to pass, as it was for me, so I want to give back and show my dedication to this field. I also am active in the CFA-SF Continuing Education committee that brings further in-depth educational events to our area members – at the level of CFA Level IV if there was such a thing (which I’m sure the mention of which would send a chill down many candidates’ spines). As a group, we often bring in authors of the CFA Program curriculum to speak to their latest and greatest research.

Also, I have seen the exam change over 12 years. Certain themes have been emphasized on the exam at certain times; and, having taught all three levels, I am able to highlight themes that continue throughout the curriculum.

Jonathan Masse teaches Level III International Investing and will be teaching Level I Alternative Investments this fall at the Golden Gate University campus in downtown San Francisco. Weeknight classes start on Tuesday, September 18th and Saturday classes begin on September 22ndYou can register now on the CFA Society San Francisco website.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Take the Chartered Financial Analyst® (CFA) Program Exam Preparation Classes in San Francisco at GGU

Golden Gate University will now offer live, on-campus Chartered Financial Analyst® (CFA) Program Exam Preparation Classes — thanks to a new partnership with CFA Society San Francisco (CFASF). Candidates may choose CFA/GGU exam prep classes for all three levels of the exam, held on weekends or weeknights, at Golden Gate University (downtown San Francisco).  Weeknight classes for the Level I exam start on Tuesday, September 18th and Saturday classes begin on September 22nd.  All students must register by the class start date.

A live review course carries a number of benefits for CFA® Program exam preparation, including access to CFA® charterholder instructors who are specialists in each study session topic, as well as a structure that is tailored to the timeline of the exam.

About the Partnership with CFASF

Since its founding in 1929, CFASF has led the finance profession by promoting the highest standards of ethics, professional excellence, and fellowship.  The new partnership combines GGU’s long tradition of providing a world-class education to working professionals with CFASF’s depth in the industry and expertise in CFA Program exam material.


CFA Program exam preparation is the next chapter of the growing partnership between CFASF and GGU. In 2017, GGU’s Masters of Science in Finance (MSF) program became certified as a University Affiliate of the CFA Institute, meaning that 70% of the curriculum conforms to the learning outcomes of the CFA exam.

You can find details classes for all levels on CFASF’s website.  For more information, contact David Kaczorowski, CFA, GGU Academic Program Manager.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.


Envisioning the Digital Ethics Officer at Banks and Financial Institutions


As Regulatory Innovation Officer at Wells Fargo’s Innovation Group, Yvette Hollingsworth Clark responds to the impact of adopting emerging technology on banking and financial institutions. Working with other financial experts, strategists, coders, data analysts, risk managers, and lawyers at the bank’s San Francisco headquarters, she leads the integration of risk management requirements during the design stage of transformative digital solutions.

In a recent blog post, Hollingsworth Clark wrote:

“..the traditional role of a compliance officer or risk manager may evolve to a role such as digital ethics officer, or DEO. I envision a DEO being responsible for creating and maintaining a ‘responsible digital network policy…'”

You can read the full post on the American Bankers Association’s Journal.

Hollingsworth Clark is an adjunct professor in GGU’s Master of Finance degree program and was named to American Banker’s Most Powerful Women in Banking: Women to Watch in 2017.


Which Financial Industry Designation is Right for Me?

Thursday, March 1st (12:00 P.M. – 1:30 P.M.)
Golden Gate University, San Francisco [Map]
Room 6208 (6th Fl.)

Whether you’re searching for a new career path or just curious about the different finance credentials, this panel will help guide you through some of the best known professional designations in the financial industry: Chartered Financial Analyst (CFA), Certified Financial Planner (CFP®), Certified Public Accountant (CPA), Certified Management Accountant (CMA),  Financial Risk Manager (FRM), Master of Business Administration (MBA) and Master of Finance (MFin). Each of these has a core career focus, and although their abbreviations often sound interchangeable, each designation gives you something unique. Join us for lunch* on  March 1st to discover what careers each designation typically leads to.

Register Now >>

Registration is free for Golden Gate Unversity Students. For the special registration code, contact David Kaczorowski Professor of Finance and Program Manager at GGU.


Lu Cheng, CFA, CPA
Associate Portfolio Manager, BlackRock

Lu Cheng, CFA, CPA, is an Associate Portfolio Manager within BlackRock’s ETF and Index Investments (“EII”) group, currently responsible for the US iShares ETFs. Prior to joining BlackRock, Ms. Cheng was an Assistant Vice President at State Street managing the Equity Index Client Operations team providing fund accounting, custodial services and financial reporting for index equity and asset allocation portfolios. Ms. Cheng earned her B.A. in Economics and International Relations in 2009 from University of California, Davis.

Bryan Hasling, CFP, EASenior Financial Planner, JW Harrison

Bryan Hasling, CFP, is a certified financial planner and enjoys using his expertise to guide clients through their various financial topics, such as tax planning, investments, stock options, retirement, and more. Previously, he worked with firms in the Dallas-Ft Worth and Lubbock, TX areas, serving high net worth families and business owners. Mr. Hasling is Co-Director of his local chapter’s NexGen group within the Financial Planning Association – a group dedicated to helping young professionals with their personal growth and continuing education. Mr. Hasling attended Texas Tech University, receiving a degree in Personal Financial Planning and a minor in economics. In addition to his CFP® designation, Mr. Hasling also earned the IRS Enrolled Agent certification, which marks one of the highest degrees in tax education.

Jonathan Short, CMA, MBADirector of Revenue Management – Wine & Spirits, Constellation Brands

Jonathan Short joined Constellation Brands in 2008 to build out the company’s Grape Strategy capabilities. He was responsible for optimizing the $0.5 Billion spend on Constellation’s annual grape and bulk wine purchases and 12,000 acres of internally farmed fruit. Since 2014 Jon has worked in his current role where he manages pricing and promotional effectiveness for Constellation’s Wine & Spirits business. Mr. Short holds a B.A. in Economics from UCLA and an M.B.A. from UC Davis. He earned the Certified Management Accountant credential in 2016 and is the Director of Outreach for the San Francisco chapter of the Institute of Management Accountants.

Valerie Wong, MFinVice President, BlackRock

Valerie Wong, Vice President, is an Equity Index Strategist within BlackRock’s ETF and Index Investments group. Ms. Wong joined BlackRock from MSCI where she spent almost 8 years, most recently as a Senior Associate and part of the Index Client Coverage team supporting West Coast Asset Managers. Before MSCI, she served as a Financial Analyst at HSBC. She began her career as an Auditor at KPMG. Ms. Wong graduated Summa Cum Laude from the EGADE Business School (Tec de Monterey) with an MFin. She earned a B.Sc. in Accounting with a minor in Public Accounting and a B.A. in International Business with a minor in Economics from John Brown University. Ms. Wong passed Level II of the CFA Program.

Gene Yoshida, CFA, Senior Director of Enterprise Risk Management, Prosper Marketplace

Gene Yoshida is the Senior Director of Enterprise Risk Management at Prosper Marketplace and became a CFA charterholder in 2014.  Gene is a practitioner of operational, credit, and new product risk at the line and in an oversight capacity. Diverse background in asset management, insurance, real estate, and consumer finance.


Dave Kaczorowski, CFA, MBAProfessor of Finance & Program Manager, Golden Gate University

David Kaczorowski has experience in the finance industry that spans both academic and industry practice.  He is a Professor of Finance and Program Manager at Golden Gate University.  He has also worked in both equity research and portfolio management.  His most recent industry position was as lead manager of a startup family office. Prior to that position, he spent five years as an equity research associate, covering technology companies.  Dave has both a CFA charter and an MBA in Investment Management from Yale University.


$15 Member/$25 Non-Member

This event qualifies for 1.5 hours of continuing education credit for CFA Charterholders.

*Lunch Provided.

Register Now >>

A Behavioral Finance View of Cryptocurrencies

By Rick Lehman, Adjunct Professor of Behavioral Finance, Golden Gate University


We are in the grip of a social phenomenon like no other we’ve ever experienced. People are paying thousands of dollars for something that is essentially a reward for playing a computer game. It has no physical properties, questionable use, no regulation, and only exists when a sufficient number of other people’s computers say it does. It may already qualify as the greatest asset bubble in recorded history, yet may only just be getting started. National governments have been compelled to denounce it or restrict their citizens from purchasing it out of concerns for mass hysteria and the corruption of their youth. It exists on a software system that is maintained through a consensus of volunteer software engineers, and no one seems to know the true identity of the creator. If it were a futuristic novel, it would certainly be on the best seller list, but it’s a striking reality – a live theater performance unfolding before us in real time, and a financial, political, and social phenomenon of historic proportion. It may yet end up as having been a total farce or the beginning of a radically new global payment system.

Opinions on the cryptocurrencies are buzzing all over the Internet. Most, however, rely upon conventional financial analysis and historic comparisons, mixed with a stew of personal emotions and biases. Representative bias is rampant in these assessments, as people try to evaluate the concept of a cryptocurrency in the context of a stock, which is as grossly inadequate as comparing an iPhone to a dial telephone. While elements of conventional finance and economics do exist, they must be viewed as only partially applicable here and elements totally unique to cryptocurrencies must be considered. In sum, I contend that…

the cryptocurrency phenomenon is better understood from a behavioral perspective – one that understands the key behavioral groups involved and the motivations of each.

The intent of this writing is to add a behavioral dimension to the current discourse on cryptocurrencies and to raise awareness of the behavioral impact on financial markets. It should be viewed in the context that behavioral science is still a relatively new approach to financial markets and that there is extremely little empirical data to draw from regarding cryptocurrencies.

Nonetheless, I expect to provide insights I believe will be valuable to those involved, or looking to get involved, and I expect to build upon this foundation with future writings on the topic. References to other articles and contributions from others on the subject are welcome.


As a behavioral science academic, it is almost impossible not to be captivated by the cryptocurrency phenomenon, which is easily the most significant behavioral event to occur since the emergence of behavioral science and its application to financial markets (which the world is only now beginning to comprehend). For a behaviorist, this could be as momentous as a physicist witnessing the discovery of a new atomic particle. Bitcoin may be as pure a behaviorally driven market as we will ever see. Among other things, we are witnessing herding, fear of regret, speculation, envy, and anti-establishment sentiment on a grand scale. In addition, adopters are placing faith and trust in a radically new concept. Wherever it eventually goes, it will undoubtedly provide some of the most enlightening information to date on the psychological and emotional mechanisms that drive human financial actions.

A common view is that the bitcoin market is totally irrational and therefore simply a house of cards waiting to collapse. By historic standards, this would be true, but such an approach fails to see irrationality as a human reality, and forces one to treat events such as the market crashes of 1987, 2000, and 2008 as either never having happened or simply unexplainable, neither of which represent a constructive conclusion. Behavior has been proven to violate the principles of Rational Utility in many instances, and efforts to deny or ignore irrational behavior are therefore counterproductive. How humans should act is often different from how humans do act, and those who only look at the should part are simply altering reality to suit their own judgments. Evaluated on the basis of conventional financial fundamentals, the intrinsic value of bitcoin would most certainly be zero and the market value considered to be 100% anomalous. Where does that leave you? Evaluated on a behavioral basis, you can at least make judgments about the speculative value of a potential new world currency, the speculative value of a possible a gold substitute, the merits of cryptography for securing value, the effectiveness of blockchain as a secure and sustainable technology, and the value of supporting bitcoin’s anti-establishment mission. I find this to represent a far more insightful and productive approach.


This has rarely been done effectively for current, let alone historic markets, even by professional analysts. Market analysis, whether fundamental, economic, or technical tends to be far too limited in context and all too frequently tainted by the author’s employment, training, self-interests, or inherent biases to be objective or complete. In addition, most market assessments have paid too little attention to behavioral science to appreciate the full nature and scope of emotional and psychological influences.


Viewed through a behavioral lens, cryptocurrencies come into focus not only as an entirely new concept with unique characteristics, but as an item that has a different identity and appeal to different people. We know that people use cognitive shortcuts to simplify their purchase or investment decisions, often reducing the decision to perhaps only one or two key criteria or rationales. We can take these key purchase rationales and define arbitrary market segments around them. While this represents an oversimplification of the market, it can be very useful for establishing a high-level view of the key psychographic variables at work here.

People are purchasing bitcoin, for example, not just because it has multiple characteristics as a currency (costless transferability, cryptographic security, etc.), but different groups are buying it for entirely different reasons altogether. Using the cell-phone analogy again, a certain group of people purchase iPhones because they represent the next generation of telephones. Another group purchased because iPhones represented the next generation of music-playing devices. A third group purchased because iPhones represented a new type of personal data assistant, and a fourth may have purchased primarily to have hand-held access to the Internet. Of course, there is overlap in these purchase rationales, but the incredible popularity and acceptance of iPhones was at least in part due to its ability to appeal to different audiences for different reasons, and bitcoin has these same properties.


In the absence of empirical data, we can hypothesize that we would probably see segments such as these:

Bitcoin founders, insiders, and whales

Description: This is the inner circle of bitcoin developers, originators, miners and major backers. It includes Satoshi, the Winklevoss Brothers; miners; etc.

Insights: This group holds most of the largest positions in bitcoin and stands to gain the most from its success or lose the most from its failure. They are the insiders who are dealing most closely with the evolution and sustainability of the concept.

Behavior profile: These are the most ardent promoters and supporters. They are most likely to hold their assets for some time and see it through. They are also the strongest advocates of the bitcoin mission and they would likely act to preserve the mission before they would be tempted to sell out.

Bitcoin believers

Description: Large numbers of small players who support the mission and who view bitcoin as a political statement

Insights: These would be small players from around the world who bought into the mission during the initial years. They were likely making a statement of support rather than investing. Some might be tempted to take a profit, but most are probably going to support the cause for as long as they can.

Behavior: This group is likely to represent net buyers and holders rather than sellers for some time.

Techies, millennials & disruption hopefuls

Description: Young investors with a tech orientation who embrace digital technology as the driving force of the future and who buy into every new technology. This includes programmers, technophiles, gamers, etc.)

Insights: These are the early adopters who view this as a valid alternative investment and a worthy cause. Many thrive on the idea that they can use clever software to disrupt the global financial system and governments.

Behavior: This group is likely to hang on as well, and is likely still adding to its overall stake as more enter the market.

Currency players

Description: Those who see bitcoin as replacing fiat currencies as a medium of exchange.

Insights: These are people (or institutions) that trade the currencies or who make markets I the currencies and who will simply add new ones that come online.

Behavior: The traders will do pairs and spreads using bitcoin, mostly in the futures markets. Exchange players (banks & forex firms) will need to own bitcoin for inventory, but will likely hedge it to remain neutral.

Gamblers, speculators, day traders, etc. 

Description: Those who see bitcoin as a get rich quick or trading vehicle (these are people who day trade, buy small-cap stocks, etc.) Gold-rushers and gold-bugs.

Insights: This is arguably the largest and fastest growing group of participants now. These are small to medium-sized individual traders who are the ones propelling price into the stratosphere and creating all the volatility.

Behavior: These are primarily traders and they will hedge and short as necessary. They will create liquidity and will attempt to trade bitcoin in the short term along with the other cryptos. They will likely be net long as they accumulate trading positions.

Traditional Investors

Description: Broad section of mom and pop investors, many of which may already hold gold or other alt investments

Insights: This group is ripe for diversifying into any reasonable new asset class, just to augment their stock and bond holdings. Also included are those who (mistakenly) believe that they are essentially investing in blockchain technology. Little of this group is probably in yet, but they could represent a huge upswing when they do get in. When an ETF is available, this is the group that will be the prime market for it.

Behavior: This group will also be looking to execute long holdings, which will force the ETFs to buy. These people may hedge a little with derivatives, but will not short.

Professional traders & Arbitrageurs

Description: Hedge funds, big banks, exchanges, ETF issuers, Goldman Sachs, etc.

Insights: These are the professionals who are purchasing to establish market-making inventories, hedge derivatives, build ETFs, etc. They would love to get a shot at an inefficient market like this with lots of volume from non-professionals to exploit and they will jump in to the maximum extent liquidity allows. For arbs and market-makers, it will be like shooting fish in a barrel. However, there will have to be improvements in electronic connections and clearing before they can jump in whole hog. The derivatives will also be rich with arb opportunity, but few players are likely to short without hedging.

Behavior: Professional traders will primarily be scalpers, market makers, and arbitrageurs. They will improve the market tremendously once they can easily trade, clear, and cross trade. They may end up net long or short at different times, but they can make plenty of money just being neutral and making markets for others.

US financial institutions

Exchanges, banks, ETF issuers, broker/dealers, currency dealers.

Insights:  They want in, lest they be caught on the outside. Bank America received a patent for Cryptocurrency exchange already and several others have announced others are definitely working on participating.

Behavior: Banks are extremely defensive here as they have a lot to lose. They will likely look to provide exchange services and maybe even offer wallets. But they are unlikely to take net positions unless required for their operations.


Importantly, there are new behavioral factors inherent to this phenomenon that transcend formal finance and economics, and which bear serious consideration.

The founders of bitcoin did not conceive it in a vacuum, nor was it put into effect frivolously. There are clearly stated goals that seek to remedy global problems such as inflated fiat currencies, mistrust of financial institutions, high payment transaction fees, and the impracticalities of using gold as an international store of value. These are unique rationales that can appeal to different audiences. This adds a non-trivial social component – a statement being uttered by (and on behalf of) a large and agitated segment of earth’s population. We have witnessed these statements through populist events around the planet and in elections in numerous countries, including our own. They convey highly charged emotions of mistrust and frustration regarding the actions and policies of governments and large financial institutions.


By design (and as a direct snub to central banks), bitcoin has also been positioned as a possible replacement for gold as a long-term store of value. As the argument has both inherent merit from a practical viewpoint (easy storage and transferability, limited supply, etc.) and a healthy techno-appeal to the younger generations, bitcoin is experiencing a speculative rush, not unlike the dotcom rush of the late 1990s and the California gold rush of 1848. This introduces a behavioral group interested almost solely in making fast money. A few years ago, bitcoin was an interesting experiment that few took seriously, except for the usefulness of the underlying blockchain technology. But it appears to have hit a tipping point, arguably around June of 2017 when the price broke out of a long slow multi-year trend to go parabolic. This was likely caused, or at least aided by the addition of this speculation group.


It is also this group who is likely adding the most to price volatility, though that will abate as the bitcoin exchanges become more efficient and the professional market makers enter the fray.

This article was previously published on Lehman’s Bitcoin Blog, where you can read part II of this series: Millions Of Blind People And A Very Large Elephant. You can also subscribe to his blog.

About Richard Lehman

Richard Lehman teaches behavioral finance at GGU. His financial career spans more than thirty years beginning with an eleven-year stint on Wall Street with EF Hutton, Thomson McKinnon, and the New York Stock Exchange. An authority on options, Rick was named Top Broker in the US Trading Championships – Option Division in the 1980s and assisted in the launch of two closed-end mutual funds specializing in covered call writing. Rick’s first book with co-author Lawrence McMillan, New Insights on Covered Call Writing – the powerful technique that lowers risk and enhances returns in stock investing, was published by Bloomberg Press in 2003. Concentrating now on technical analysis and behavioral finance, Rick’s latest book, Far From Random, draws a link between these two disciplines, creating an entirely new avenue of opportunities to employ behavioral factors in trading and long-term investment management. Rick holds a BS in Management Engineering from Rensselaer Polytechnic Institute in Troy New York and an MBA from the State University of New York at Albany.  He is also the founder of the San Francisco Behavioral Finance Symposium.