QUOTE OF THE DAY
"Markets can remain irrational longer than you can remain solvent" - John Maynard Keynes
"Apes together strong" -- Popular saying on WSB
"Buy the dip! No, the other dip! No, the other other dip!" - Every Financial Guru on YouTube
"Everyone is a genius in a bull market" - Mark Cuban
"Be fearful when others are greedy, and greedy when others are fearful" - Warren Buffett
ADDITIONAL WISDOM
“Price is what you pay. Value is what you get.” – Warren Buffett
“Time in the market beats timing the market.” – Ken Fisher
“The four most dangerous words in investing are: ‘this time it’s different.’” – Sir John Templeton
SUMMARY
🚀 TO THE MOON, FELLOW RAMS!
Time to get those diamond hands ready for some serious financial analysis! While Jim Cramer might tell you to buy one stock on Monday, and sell it on Tuesday, and then buy it again on Wednesday, and then ... you get the point ... here, we are going to take a *slightly* more methodical approach to understanding a company's financials. And by methodical, I mean actually looking at real numbers – not the "trust me bro" accounting that made Sam Bankman-Fried go from "crypto genius" to "prison Excel expert."
Speaking of SBF, apparently, he's been dispensing invaluable crypto advise to his prison guards. I guess, being convicted of seven counts of fraud and conspiracy, misappropriating billions, taking a company from $32 billion valuation to bankruptcy in 11 months, and facing 110 years of prison time makes you a financial guru (I now feel confident I can teach you some great things this semester!).
But first, let's get something out of the way. Unless you have the legendary market-timing abilities of certain politicians (who shall remain nameless but somehow consistently outperformed every hedge fund in 2024), you will have to put in the work and dig into these financials. And by dig, I mean really dig – like a Wall Street Bets member searching for confirmation bias by sifting through hundreds of Reddit posts. After all, this is where dreams of early retirement begin, or where they quickly turn into valuable lessons about due diligence.
Joke aside, examining a company's financials is crucial in understanding its internal strengths, weaknesses, and overall potential for long-term growth. By looking at metrics such as revenue, profitability, and cash flow, you can develop deeper insights into how well a company can execute its strategy, adapt to changing market conditions, and compete effectively.
No, this doesn't mean watching YouTube videos titled "WHY THIS STOCK WILL 100X" or following Twitter/X financial gurus who somehow always "called it" after the fact. Remember, as Warren Buffet say “Price is what you pay. Value is what you get.” (I strongly recommend watching his great financial advice above).
In this section, we will use FinChat (an AI-powered platform) to access and analyze real company financial statements. This hands-on approach will help you practice gathering and interpreting the data needed for a well-rounded strategic management analysis. After all, “successful investing takes time, discipline, and patience,” as Benjamin Graham noted.
Finally, remember what Warren Buffett said: "No risk it, no biscuit" (ok, that was Bruce Arians, the legendary Bucs coach). Buffett actually said "Risk comes from not knowing what you are doing." Of course, he also ate at McDonald's every day during the 2008 financial crisis, so maybe the real lesson here is that comfort food and solid financial analysis go hand in hand (so enjoy those McDonalds french fries while you dig into the 10k statements).
Speaking of which, it is probably a good time to mention, as they say on r/wallstreetbets: Nothing in this section is financial advice. So please don't gamble your life with options.
To save you time, you should invest in funds that track S&P500 (e.g., VOO) and enjoy your life.
Below, you can also watch Buffett's million dollar bet that S&P500 will outperform any hedge fund over a ten year period. I created an artifact in Claude so you can see the movement over time [see Claude's artifact]
REQUIRED READINGS
You should be familiar with the basics of financial accounting by the time you take this class. So here we are going to focus on the application. But if you need a refresher, I am including some links to different resources in the exercise below. Also, you textbook provides some very basic explanation of financial analysis on p.45-46. Also, feel free to use AI to explain what different concepts mean (gross & net income, p/e ration, etc.)
To start with, create an account with Fiscal.ai if you haven't done so already (you get a 14 day free trial, which gives you access to 10 years of financial data and access to the AI Copilot).
- How To Use Fiscal.ai [watch here] You can read this short tutorial here (or watch the video) to familiarize yourself with the platform.
CLASSROOM EXERCISE
"The investor’s chief problem — and even his worst enemy — is likely to be himself."
— Benjamin Graham
Strategic Financial Analysis of Your Company
In this assignment, you will conduct a comprehensive financial analysis of your assigned company using a two-stage approach:
First, you will use AI to generate an initial financial analysis based on the company's 10-K report.
Then, you will use Fiscal.ai to verify key data, create supporting visualizations, and enhance the analysis with additional insights.
This approach mirrors modern financial analysis workflows where professionals use AI to accelerate initial analysis, then apply their expertise to verify, interpret, and communicate the findings.
In fact, recent research shows that even without narrative or industry-specific information, LLMs outperform financial analysts in their ability to predict earnings changes directionally [read paper here]. And that was the old (not as smart) GPT-4 model.
The paper above demonstrates that LLMs excel in areas requiring consistent numerical analysis, detecting patterns in financial statements, and remaining less susceptible to certain cognitive biases than human analysts.
However, humans maintain advantage in incorporating broader contextual knowledge, understanding industry-specific factors, and integrating qualitative information not available in financial statements.Because of this complementary approach where human analysts work with AI together--with AI accelerating initial data processing while humans provide interpretation, judgment, and communication of complex financial insights--seems to be the most efficient approach.
Download instructions here [download]