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UNIT presents


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OUR SPONSORS & AFFILIATES special thanks to our sponsors: Citi Australian Financial Review Bell Direct Eclipse Options KVB Kunlun YoutradeFX Intelligent Investor Bloomberg UBS Finsia ATAA and also our affiliates: Australian School of Business Australian Investors Association Australian Shareholders’ Association




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Investing 101 by Rodger Gu



MARCH 2013

by Jesse Zhou



articles What the harvard phds won’t tell you about

18 economics

by Sukrit Sabhlok

20 Disclaimer: The articles throughout the publication are written and compiled by students. The information contained in the articles is general in nature, and should not be construed as professional financial advice. Statements and opinions expressed in articles are those of the authors and do not represent the opinion of Fully Franked and UNIT. Fully Franked and UNIT will not be held responsible for any liability arising from your actions. Please do your own research and come to your own conclusions, or consult with a licensed professional advisor.

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WHO Caused the gfc? An inconvenient truth by Vinay Kolhatkar

What’s Next for Google by Marc Lerner

unit how-to:







PRESIDENTS Dear reader,

Dear reader,

On behalf of UNIT I would like to welcome everyone back to another year at university. For those of you who are new to UNIT, we are a student society aimed at helping students gain practical skills in the areas of finance, investing and trading.

It is with great pleasure that I present to you the first edition of Fully Franked for 2013. With issues such as the looming double dip recession faced by Europe and Japan, stabilising Chinese Economic growth, the resolution of the Fiscal Cliff unleashing a wave of optimism and unforeseen political developments that have the potential to surprise us on the upside.

After a successful year for UNIT in 2012 we have been thinking long and hard about what you, our members, want and have a great new line up of events ready for this year, including competitions, workshops and seminars to keep both novice and advanced students engaged. I would like to take this opportunity to announce the UNIT Stock Pitch Competition which is to be held towards the middle of this semester. As an Australian first, the initiative will be run across UNSW, USyd and MAQ, and will provide a fantastic opportunity to apply your finance knowledge in an exciting context. I’d also like to give a special thanks to all the UNIT teams, especially the publications committee for putting together this fantastic second edition for your reading pleasure! If you would like to learn more about UNIT join our Facebook page, or sign up to our mailing list through your respective chapter’s website. If you would like to go one step further and get involved, make sure to look out for our subcommittee and intern applications in the coming weeks. Whether you are an old or new member, I hope you enjoy this edition of Fully Franked and continue to be involved with UNIT in the year to come. Warm Regards, Hansaka Fernando President UNSW UNIT



Whether you are a novice or experienced trader, this edition provides some interesting insights into different investing styles, the lessons of Buffett, technical analysis and charting and differing economic models. I want to take this opportunity to also thank the UNIT Publication Team, for taking the time to edit and compile the articles in this edition in the transition process as well as for their guidance in producing Fully Franked. 2013 is an exciting year for UNIT – with our new Stock Pitch Competition, Forex Trading Competition, Educational Workshop, Roundtables and Seminars – there will be plenty of events on for you to attend. Keep an eye out on Facebook (Search up “University Network for Investing and Trading) and sign-up on your chapter’s website for more details!

Jason Wu President USyd UNIT



The University Network for Investing and Trading (UNIT) is a student-run society that involves 3500 members spanning across three universities – UNSW, University of Sydney and Macquarie. This makes us currently the largest investing and trading related student society in Australia. At UNIT, our mission is simple – to provide free education to students interested in trading and investing from all walks of life. We host seminars and presentations from industry leaders that not only introduce students to the fundamentals of investing and trading, but expose students to practices not taught inside the classroom. Whether it may be for your future career, or just for interest, we aim to equip all students with the skills, knowledge and confidence to start up and manage their own portfolios and invest for life. Regardless of degree, background or level of expertise, there will always be something at UNIT for everyone! 2013 brings a new beginning for UNIT, as we hope you will learn even more about investing and trading from our industry professionals and fellow UNIT members. While 2012 was a blast, we look forward to bringing you a society that is bigger and better than ever before – more sponsors, seminars, more diversified events. Stay tuned! Visit




A NOTE FROM THE EDITORS Dear reader, Welcome to the special O-WEEK EDITION of Fully Franked. On behalf of UNIT we hope you had a fantastic summer; we expect three month long vacations to be harder to come by post-graduation. We are extraodinarily excited to see what new beginnings come about in 2013, especially as Fully Franked now has ties with other universities! Many thanks to Michael Kong who has brought together a range of writers for this publication and Derek Lau who has been a great help in organising and coordination behind-the-scenes. We thank Hansaka Pasindu Fernando (President UNSW UNIT) for supporting this initiative and working hard with us to deliver this publication and also the USYD UNIT team with whom we have combined our efforts to bring you a publication of the highest quality. Fully Franked is dedicated to supporting the investors of tomorrow, whether you have no idea what investing is and would like to start, or if you are an experienced investor searching for further insight into the financial markets. The road to being a successful investor requires hard work and dedication, and UNIT hopes to be there to support and encourage you every step of the way. We hope with each issue, Fully Franked will become even better than the last and it will continue to educate, inform and inspire readers of today to become better investors of tomorrow. Enjoy! from Jesse Zhou & Michelle Cai



OUR CONTRIBUTORS from left to right: Derek Lau Wilson Wong Rodger Gu Michael Kong Jim Kong

UNIT PRESIDENTS Jason Wu (University of Sydney) Hansaka Pasindu Fernando (University of New South Wales)


We’d love to hear from you! Email your questions, compliments or complaints to:



INVESTING 101 Find out what makes a successful trader with Rodger Gu.

Trading is a zero-sum game; any losses incurred by you are happily pocketed by someone else. Newbie traders often come to the markets with hopes of being able to find financial freedom, yet very few make profits with the majority washing out. The market is a brutal place - it is set up for the majority to lose money, and a small group to make money, whatever your psychological flaws and insecurities; the market will seek them out and use them against you. However, mature traders have overcome their psychological handicaps of anxiety, greed, fear and anger. They are able to maintain their composure, and constantly scan for chinks in the crowd’s armour, ready to toss the market around at a moment’s notice. The concept of making money from trading is simple enough, buy low and sell high. If you trade well, you can make your own hours, live and work where you please and never have to answer to anybody but yourself – but being a good trader is no easy task. In addition to risk management, patience, ease with numbers and an active desire to learn from mistakes, successful trading requires the 3 M’s –Mind, Money and Method. Mind The first rule of being a good trader is keeping good records. Generally, good records consist of a spread sheet of all your trades, allowing you to keep track of entries, exits, slippage, commission and most importantly profit/loss. Not only are these records useful in accounting situations, but they also serve as great tools for learning. One essential record to keep as a constant reminder of your progress should be an equity curve. An equity curve is simply a graphical representation of the change in value of a trading account over a period of time – plotting the amount of equity against time. The angle of this curve should look something like this (right) – a steady uptrend, 8


dotted with shallow declines. If it isn’t, this may be a sign of impulsive trading, meaning you may wish to consider reducing the size of your trades. The third record you should keep is a trading diary. Whenever you make a trade, print out the charts, articles and reports that prompted you to buy or sell. Put them into a document and write some notes about why you entered the trade and do the same once you exit the trade. After exiting the trade, compare it to the notes you made when you entered the trade. Are they the same? Could anything have been improved? Money Behind the concept of money management lies two main goals: survival and prosperity. The first goal, as eloquently summarised by Warren Buffet, “Rule No. 1: Never lose money. Rule No.2: Never forget Rule No.1”. Only after you’re able to grind out small, steady gains should you start to consider shooting for the spectacular gains you dream of. The golden rule of successful money management is the “2% Rule”, which states you must not risk any more than 2% of your total account equity per trade. This would assume you have a stop-loss order in place, which is an order placed with a broker/online trading platform to sell a security when it reaches a certain position.

Method By now you should have a vague understanding of the importance of record keeping and money management, but what about making the actual trades? This is where analysis comes in. Technical analysis is an analysis discipline which is used to forecast the market prices of certain securities through the study of past market data, price and volume. It can be used in conjunction with fundamental analysis, through which an investor attempts to measure the intrinsic value of the security and makes trading decisions based on the perceived value of a security.

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What is Technical Analysis? Technical analysis is essentially the study of the movement of prices over time for financial instruments such as stocks and foreign exchange with the use of charts in order to forecast price trends into the future. Within financial markets, prices do not move in a linear fashion but rather enter trends and patterns over time such as uptrends, downtrends and reversals. It is the recognition of these patterns which allow traders to forecast the prices of a particular security with a sufficient degree of probability. Technical analysis differs from trading as the former identifies the setup for trading opportunities whilst the latter consists of the execution of a trade plan. How does it differ from Fundamental Analysis? Technical analysis ignores the fundamentals of a company as it does not measure its intrinsic value from factors such as the state of the industry it resides in and its financial data but rather evaluates a security based on its past price movement and volume. In essence, fundamental analysis is a study of the cause of price movement whereas technical analysis is a study of its effect. Although these two methods of analysis are distinctly different from each other, some traders have found success using both forms simultaneously which means that they are not necessarily mutually exclusive.



Key Assumptions of Technical Analysis 1. All financial data is already priced into the market. That is, the price movement of a security should reflect the underlying changes in supply and demand based on the fundamentals and psychology of the market. 2. Prices move in trends and a trend in motion has a higher probability of continuing its direction rather than reversing. 3. There are patterns in the price movement of securities which repeat themselves over time due to patterns in human psychology. Key Definitions Before we have a look at technical indicators, there are a few basic concepts that need to be understood. To briefly illustrate these concepts, we will use a daily chart of the AUD/USD foreign exchange rate over the past year.

Source: Spectrum Live platform

Support and Resistance: Prices tend to move in a series of troughs known as support and peaks which are referred to as resistance. Support represents the level of the market where buying pressure is just enough to overcome selling pressure whereas resistance is the level where selling pressure is sufficient to overcome buying pressure. Trend Lines: These are tools which form a straight line connecting 2 or more price points for the purposes of identifying whether there is an uptrend, downtrend or sideways trend (as seen in the chart above) and can also be used as a line of support or resistance.

Candlesticks: A method of displaying price data for chart analysis. Using the daily candlestick pattern to the right as an example, green bars show a positive price movement during the day whereas red bars show a negative price movement. The length of each candlestick shows the daily range of price movement which is equal to the highest price minus the lowest. Time scales: Charts are divided into their respective time scales which range from monthly, weekly, daily and hourly, down to 1 minute charts whereby each candlestick or bar represents 1 minute of price movement. Volume: This is the quantity of securities traded during each respective time period (usually daily) and Source: Spectrum Live platform is represented by a bar chart. Volumes are often used to confirm rises or falls in prices, with significantly larger volumes usually depicting a rally in prices. Below is a daily volume chart of BHP Billiton (BHP), one of the most actively traded stocks in the ASX:

Source: Lincoln Indicators Stock Doctor 7.6

Source: Spectrum Live platform

Technical Indicators The following is a daily chart of National Australia Bank (NAB) which will be used as an example:



Technical Analysis cont’d

Various types of indicators such as trend following, oscillators and volume are overlayed onto price charts for the purpose of forecasting future price movements. We will explore a trend following indicator called moving averages and an oscillator called ‘moving average convergence divergence’ (MACD). A word of advice is to be cautious when using different indicators simultaneously as they may conflict with each other. Moving Averages A simple moving average (MA) is a commonly used indicator which shows the average of a certain period of price data. The number of days chosen for each period depends on the preferred time horizon of the investor or trader; the above chart of NAB illustrates a short term average. The 5 day MA (black line) is an average of the last 5 day’s closing prices and similarly the 20 day MA (blue line) is an average of the last 20 day’s closing prices. These provide an indication of the underlying price trend and can be used in conjunction to generate buy and sell signals. This method is known as the ‘double crossover method’ and a common combination is to overlay the 5 day MA with the 20 day MA. As seen in the chart of NAB, a buy signal is generated whenever the 5 day MA crosses above the 20 day MA (marked in ‘A’ and ‘C’) and similarly a sell signal is produced when the 5 day MA moves below the 20 day MA (marked in ‘B’). MACD The MACD is a widely used oscillator which is a type of indicator that alerts users to overbought and oversold levels. It consists of 2 moving averages which are exponentially smoothed meaning that a greater weight is given on more recent prices. The primary use of MACD is to generate buy and sell signals similar to the double crossover method as seen in the chart of NAB whereby a buy signal is



produced when the faster line (black) crosses above the slower line (red) and a sell signal when the faster line moves below the slower line. The major difference is that the MACD also fluctuates in value below and above zero which indicates oversold and overbought conditions. A security is said to be oversold when the 2 MACD lines are significantly below zero and overbought when the lines are far above zero. Using this feature, the MACD can be used to signal bullish and bearish divergences in the prices of securities. A bullish divergence occurs in an oversold condition when the 2 MACD lines begin moving up whilst prices continue to trend downwards, which can signal a bottom of the market. On the other hand, a bearish divergence occurs when the market is overbought and the 2 lines begin to fall whilst prices continue an uptrend, which is a sign of a top of the market. How do i apply this knowledge in practice? This is a common question that both beginners and intermediate traders ask and my suggestion is to open up a free demo account with an online broker such as Spectrum Live which provides a client software package with access to technical analysis tools. This will allow you to familiarise yourself with the user interface and at the same time provide you with live experience in the markets as you practise analysing charts with the use of technical indicators.

* Terms and conditions apply. Volume of lots required for equity to be released Level 2, 19-21 Hunter Street, Sydney, NSW 2000 Tel: 1 300 302 190 FULLY FRANKED | ISSUE TWO


FUNDAMENTAL ANALYSIS A BASIS FOR YOUR INVESTING TECHNIQUE by Jesse Zhou Fundamental analysis looks at the intrinsic value of a company. An investor considers what the company is actually worth and compares it to the share price. If the share price is lower than the intrinsic value, then the company is undervalued, and there is an incentive for the investor to buy the company in the hope that the market will realise the true worth of the company, thereby raising the share price to its appropriate level in the future. The investment principles of fundamental investing, also known as “value investing” are derived from Benjamin Graham, whose ideas are propagated through the book “Security Analysis” written with David Dodd in 1934. Graham was also a lecturer and mentor to the famous investor multibillionaire Warren Buffet. Buffet is well known for seeking out undervalued companies and investing in them for long periods of time, reaping in huge profits through both capital gains and dividends. So how does one find these undervalued companies? There are a few factors that you could consider in narrowing down the number of companies listed on the ASX. This series will take you through some of these factors. Finding an industry A first step in finding an undervalued company to invest in could be to find an industry that you think has the potential to grow in the future. The industry could be one that is up-and-coming, or an industry that is experiencing some sort of fundamental change in its operations. As an example, you may think that the renewable energy sector presents a potential long term investing opportunity. However, even though renewable energies may be an industry with a lot of potential, it would be unwise to invest in a randomly chosen company in this industry. Even if you invest in the whole sector using an index fund, it could be detrimental rather 14


than lucrative. When motor cars were first being built, the motor industry showed huge potential and people thought it was foolproof to invest in motor vehicle companies. Nearly everyone owns a car now, so were they right? Here’s the catch though… there were thousands of motor companies! How many of these still exist today? Well not many, there are around 10-15 major motor vehicle companies across the globe. So if you invested in a basket of automotive companies, you would have gone broke. If you invest in a basket of renewable energy companies today, you would likely reach a similar outcome – only a handful of companies make it in the longterm. The key is selecting the right companies within the right industry. Selecting the right companies This is the hard bit. You’ve found an investment opportunity in an area that you believe has great potential in the future, and now you are faced with a list of companies. How will you narrow down your list to a handful of companies with the potential to succeed? You could consider a few of the following: • Market share. Perhaps this company already has a lead in the industry, but this is not always going to mean that in 10 years it will still maintain this lead. Nokia was the largest maker of mobile phones 10 years ago. Apple did not make mobile phones 10 years ago.

Now what? So you’ve found a company that you like. Its operations look solid, and you believe the company will be able to continuously innovate and remain competitive in its industry in the future. What now? Do you buy it straight away? The answer is probably not. You may be excited about the company but it would be unwise to buy it without further research. You will need to determine whether or not the company is worth purchasing at its current price. Remember that value investing is about buying “cheap” companies and they are only cheap if the price of the shares is below the intrinsic value.

• Management. Do you trust the CEO and the management team to bring this company into the future? • Strategy. Is the company focused on long term stability? Or are they focused on returning value for shareholders in the short term? There could be a trade-off… • Are its operations essential to society? Companies that offer services and products essential to daily life are more likely to succeed. • Innovation. Is this company delivering new ideas and new methods of production? Can the company continue to come up with new ideas to remain ahead of its competition? • Supply chains. Maybe this company owns the production facilities for the raw materials needed for its products. All of these factors may or may not lead to success, but essentially, we are looking for a company with competitive advantage. What does this company have that the others do not? How can this company get ahead of the others in a way such that the other companies can have no hope of catching up?

In my opinion, the next few steps will involve a lot of guesswork and a bit of luck. You don’t know what the future holds, and neither do any of your peers. To make it even harder, the companies that you are researching do not provide you with every bit of detail related to their operations and future prospects. Julia Lee, an Equity Analyst with Bell Direct, suggests a selection process involving the following metrics: P/E ratio of less than 13, ROE greater than 12%, D/E ratio less than 50% and market cap greater than 750mil - but it is up to you to figure out how profitable the company will be in the future and calculate an intrinsic value for the company. Investing is a difficult process. UNIT is here to help you every step of the way, from thinking of an investment opportunity to making that buy decision, so make sure you make use of all of the free resources we provide! The next few instalments of the Fundamental Analysis Series will hopefully bring to light some of the key methods in which you can determine which companies are the best value for your money.




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Carbon tax comes into force in Australia. Prime Minister Gillard says it is needed to meet climate change obligations. Opponents say it will cost jobs and raise prices.



THE JURY FOUND: - Samsung infringed Apple’s utility and design patents for multiple products. - Willful infringement on five of six patents. - No Apple infringement of Samsung utility patents.

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The Games of the XXX Olympiad begin in London. Costing billions of pounds in preparation, the games see London receive a huge surge of visitors, but effect no real increase in the UK’s struggling retail sector

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Shinzo Abe is re-elected, as the seventh Japanese prime minister to take power in six years. Abe has vowed to revive the world’s third largest economy.



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Shale oil ‘bonanza’ found in South Australia, with independent reports claiming there could be anywhere from 3.5 to 233 bn barrels, or $20 trillion, of oil at the resource site belonging to Linc Energy.



ExxonMobil overtakes Apple’s stock price as the world’s most valuable company.

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Vice-President of China’s 18th Communist Party and heir-apparent Xi Jinping receives the title of party chief. He is expected to assume the presidency in March 2013.


During the national elections, he also stated Japan would stand firm on its claim to the Senkaku/Diao Yu islands in the East China Sea, which are simultaneously being claimed by China.






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S&P cut Spanish debt rating from BBB+ to BBB-, one level above junk status, and warned of possible further downgrades.

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Jury of 9 sides with Apple on most of its patent infringement claims against Samsung Electronics. Apple is awarded over $1 bn in damages. Samsung, which asked for $421 million in its countersuit, receives nothing.



0 Felix Baumgartner jumped to Earth from the stratosphere. The live feed was broadcast in 50 countries and streamed by more than 130 digital outlets. The first picture of Mr Baumgartner’s safe landing (above) posted by Red Bull was shared on Facebook nearly 30,000 times in 30 minutes, and on Twitter the event generated over 3.1 million tweets.



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Hurricane Sandy, dubbed ‘Superstorm Sandy’, hits NYC. New York state and New Jersey need an estimated $71.3 bn to recover from the devastation wrought by the storm.



Windows 8 operating system by Microsoft is released to the public.



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Barack Obama reelected as the President of the US in favour of Republican Mitt Romney.

by michelle cai

WHAT THE HARVARD PHDs WON’T TELL YOU ABOUT ECONOMICS by Sukrit Sabhlok Sukrit Sabhlok graduated from Melbourne University with degrees in politics and law in December 2011. Since then he has worked as the chairman of the Liberty Australia Institute ( and has also completed

internships at Brimbank Melton Community Legal Centre and Taylor & Preston Lawyers. He is a widely published author who has written for Policy, IPA Review, The Big Issue, Indian Link and The Drum.’

Harvard University is widely considered the world’s leading institution of higher education, and is typically placed higher than other bastions of elitism such as Cambridge and Oxford in most rankings. The university is rigorous in its research output and its scholarly publications have global reach and influence. While it’s true that money and connections can often buy you a ticket into an Ivy League university, most people who get into a top ten institution are exceptionally hardworking and passionate about the area they want to study. But the mere act of studying at Harvard, or holding a research or teaching position there, doesn’t necessarily guarantee that the perspectives you hold are the right ones. Harvard scholars, or people who earned their degrees there, have come up with all kinds of hair-brained or destructive ideas. For example, a Harvard team of chemists was responsible for producing napalm, the substance that led to the deaths of so many innocents during the Vietnam War. It is Harvard University’s economics faculty however, that is the focus of the present article. Keynesianism or the Free Market? Martin Feldstein is a giant of mainstream economics who currently teaches at Harvard University and is drenched in professional honours. As a winner of the John Bates Clark Medal, former president of the American Economic Association, former Chairman of the Council of Economic Advisors and former member of the President’s Foreign Intelligence Advisory Board, there’s not much that 18


Feldstein hasn’t accomplished within the economics profession. Naturally, Feldstein has published in the leading journals of economics, such as The American Economic Review and The Journal of Political Economy. He has also written for newspapers like The Wall Street Journal, where on 24 December 2008 he published an article entitled ‘Defence Spending Would Be Great Stimulus’. In his article, Feldstein argues that ‘countering a deep economic recession requires an increase in government spending to offset the sharp decline in consumer outlays and business investment that is now under way. Without that rise in government spending, the economic downturn would be deeper and longer’. Feldstein makes the case for a particular type of government spending: military outlays. He writes, ‘A substantial shortterm rise in spending on defense and intelligence would both stimulate our economy and strengthen our nation’s security’. The belief that government spending is a stimulus to economic growth is also a standard view among many Australian economists. It is standard because the dominant school of economics taught at universities throughout the world is that of John Maynard Keynes, author of The General Theory of Employment, Interest and Money. What Keynes and his contemporary adherents neglect to convey to their students, however, is that Keynesianism is riddled with theoretical and empirical holes. Feldstein’s article will serve to illustrate the point. The argument

made by Feldstein that defence spending would differs from the mainstream is in its methodology: stimulate the economy neglects one important Austrians prefer to talk about the economy not in reality: government spending comes at the expense the form of abstract mathematical models based on of private sector spending. When governments unrealistic assumptions, but using verbal logic that extract taxpayer funds and spend it on projects utilizes deduction from axioms of human nature chosen by politicians and bureaucrats, the results (like the self-evident truth that ‘humans act’). They are unlikely to be as optimal as when ordinary also place a greater emphasis on the role of time and citizens spend their own money. As Milton uncertainty in human behavior and have a wellFriedman pointed out, nobody spends someone developed theory of the business cycle that pins the else’s money as efficiently as individuals spend their blame for booms and busts on central banking and own money - the incentives simply aren’t there for legal tender laws. governments to be frugal and wise. The best way to relate the differences In other words, by spending taxpayer between the two is to use a parable. The French money on defence rather than opting to return classical liberal Frederic Bastiat once told a story taxpayer money to them directly in the form of about a shopkeeper who has his window broken tax cuts, a particularly inefficient by a passerby who threw a “What Keynes and his allocation of resources is brought stone. For Keynesians and about. If Keynesians were serious contemporary adherents neglect many other mainstream about stimulating the economy, economists who tend to focus to convey to their students, they would immediately call for however, is that Keynesianism on the immediate effects of an the abolition of the income tax. is riddled with theoretical and action, the broken window is Does anyone seriously doubt that a great thing: it will stimulate empirical holes.” eliminating the income tax would the market for glaziers. But unleash a burst of investment and for Austrians, who take a long-run perspective, the reduce unemployment by easing the burden on sole short term economic stimulus is not as important traders, small businesses and other Australians? as the hidden costs of the broken window – namely, Ludwig von Mises, the famous economist and the opportunity cost to the shopkeeper who could philosopher whose protégé F.A. Hayek won the have spent the money repairing the window on Nobel (Memorial) Prize in Economics, once something else more productive like investing in wrote that ‘the issue is always the same: the his business. Bastiat labels this distinction ‘what is government or the market. There is no third seen, and what is not seen’. solution’. Unfortunately, as Feldstein’s mistaken Guided by this approach, Austrians have argument demonstrates, an affiliation with developed a unique perspective on money and Harvard doesn’t guarantee that one will choose banking, monopolies, capital and investment. the correct alternative for public policy problems. They propose doing away with agencies such as the Australian Competition and Consumer The Austrian Alternative Commission, the Reserve Bank of Australia, and One school of thought that is neglected not just at Consumer Affairs Victoria – preferring to rely Harvard but in most universities around the world on market competition or the courts to provide is the Austrian School. This school of economic currency, discourage cartels and protect consumers. thought is said to have originated in Austria since Many Austrians have gone further and studied the many of its leading proponents were born in that economics of anarchism, and have analysed stateless country, however it is now taught primarily in the societies and how they could work in practice. United States at institutions such as George Mason Until the Harvard PhD’s address alternative University and the Ludwig von Mises Institute. perspectives such as the Austrian School, and try Although the Austrian school has become more and learn from and integrate its insights wherever popular since the Global Financial Crisis, mostly possible, there will be something strangely because its adherents such as Ron Paul and Peter superficial about the economics they teach. Schiff are credited with foreseeing the crash, it still has a long way to go before it is placed on an equal playing field in the marketplace of ideas. One of the main ways that Austrian economics FULLY FRANKED | ISSUE TWO


Who caused the Global Financial Crisis: An Inconvenient Truth by Vinay Kolhatkar Vinay Kolhatkar is a Sydney-based writer and finance professional. He has a Masters in finance from UNSW, and served on the Corporate Finance Task Force with the Securities Institute of Australia. Formerly, he also served as Head of Private Capital with CBA, and as chief investment

officer with Rubicon Asset Management. He is the author of The Frankenstein Candidate: A Woman Awakens to a Web of Deceit, a political thriller available on Amazon, Kindle, Book Depository, Borders online, TheNile., and other online outlets.

You have heard this before, a million times in the past five years, that; 1. American banks knowingly sold unrepayable home loans to a gullible public; 2. Unregulated Wall Street greed resulted in poor investments being sold to retirement funds the world over; 3. Credit derivatives, CDOs, and credit default swaps, were those evil toxic securities which banks created and which led to a loss of wealth; 4. This house of cards collapsed, leading to corporate insolvencies, stock market crashes, real estate value declines, and increased unemployment; 5. If governments had not stepped in to rescue the banks and insurance companies, we would have had a depression that could have lasted decades; 6. It proves once and for all, that in a system of unregulated capitalism, the greedy and the corrupt will take advantage of the simple and the virtuous; 7. So we must now regulate the financial system even more to prevent this from ever occurring again, and rescue us, the people, from the current malaise via ‘economic stimulus’ that the government alone is an expert at providing. There are almost no major media outlets anywhere—newspapers, television, radio, maga20


zines, even Hollywood movies and television serials, that have not repeated a version of this mantra. Nevertheless, it is imperative that serious students of finance and investment maintain a critical, questioning, mind and look behind the scenes for what the true story may be. For example, students of investment theory know that derivative contracts are zero-sum games in which wealth is neither created nor destroyed. Explanations which merely lay the blame at the feet of ‘financial instruments’ and ‘greed’ are either incorrect, or at least missing something crucial. So what is the real story, and who has been voicing it? In recent times, some of the prominent voices of reason are—George Reisman; Thomas E Woods and other economists associated with the Ludwig Von Mises Institute; Ron Paul, a libertarian ex-congressman, and a candidate for the Republican nomination for president in 2008 and 2012; Governor Gary Johnson, an independent candidate for president in 2012; investment maven Peter Schiff; and the disciples of Ayn Rand. In times past, the real story was narrated several times by Ludwig Von Mises, Henry Hazlitt, and Friedrich Hayek— some of the greatest economists associated with the Austrian tradition of economics, and also by an outstanding exponent of free market capitalism—philosopher Ayn Rand. The principles of the free market have long

since been discovered. An Inquiry into The Nature tually there was glut of construction, and prices and Causes of The Wealth of Nations was written by collapsed. Even though banks were packaging the Adam Smith in 1776, and the principles were refined risk of price downturns and selling them in the in the 19th century. Those who follow the rules of form of securities, they did hold significant porlogic, and are objective in their judgment, have not tions of it themselves, and their solvency came into a shred of doubt as to the efficacy of the free market. question. In this thinly capitalised industry, it was Wherever there is a systemic economic not easy to tell which of the banks were solvent and problem—collapsing asset prices, widespread un- which were not, so banks grew wary of lending to employment, a cluster of insolvencies, inflation, each other. In their current state, financial markets depression, stagflation, cannot function easily withor recession—the source out financial intermediarof the problem is almost ies carrying large levels of always that elected ofrisk to each other, and the ficials have not allowed contagion of panic spread. the free market to work. Governments interfere So what were the Bushwith the market using era carrots? various devices such First, the Government creas subsidies, tax incenated or revitalized institutives & other legal distions that they owned to tortions, unwarranted give them an appearance The Bush Administration then added regulatory burdens, price of government-supported credit or volume controls, dictates carrots to the stick, and the financial risk. You may have heard of Fanparty morphed into an inferno. about which consumers are nie and Freddie. These instituto be served, or outright nations were granted over USD tionalisation. This is the generic form of the story. 2 billion in a line of credit by the Department of Treasury. Moreover, their quasi-government status The particulars of this story (the lessons helped them to raise money cheaply. These instituof history unlearnt) tions bought the worst of the risk, embedded in the More specific to this case, the Clinton Administra- form of securities, from the banks. tion revived legislation that was designed to ‘en- Further, Governments everywhere have alcourage’ banks to issue home loans to minorities. lowed themselves to create paper money out of thin Even though Asian Americans were getting more air—so that they can spend money on projects and home loans in percentage numbers than white on boosting government bond prices without ‘raisAmericans, an apparent lower rate of lending to ing taxes’, which is an electoral no-no. The exercise African Americans and Latino Americans was tak- also creates a temporary illusion of prosperity, the en as prima facie evidence of discrimination. The perfect device for getting re-elected when in power. stick of reputation-destroying discrimination law- In this case, it added fuel to the fire. The prospersuits became quite ominous as regulators began to ity illusion, however, begins to fade. More money collect data regularly from the banks. Later stud- needs to be printed to kick the can down the road ies found that there never had been any evidence again. Eventually the problem gets too big to avoid. of discrimination when the data was adjusted for From 2003, and leading up to the crisis in credit risk, but the media uproar drowned out the 2007, the stick & carrot regime created an irresistfollow-up studies. The American dream was being ible cycle of profit for the banks. The cycle began denied to some on account of their race, said the with unwarranted construction, followed by lendmedia. The market, already tied up in subsidies and ing to the undeserving, who would then buy homes regulation, was further nudged into an uneconom- to keep the construction going, followed by the ic direction. The fire ignited. banks selling major portions of the risk to the Fan The Bush Administration then added car- nies, the Freddies, and anyone else who would buy rots to the stick, and the financial party morphed it—and there were more of those when the illusion into an inferno. Far more capital was diverted into of prosperity was created, and finally, pocketing real estate construction than was justifiable. Even- structuring fees for the CDOs so issued. The FULLY FRANKED | ISSUE TWO


Who caused the global financial crisis, cont’d

cycle took about a year from end to end. But at any given time, many such profit cycles would overlap. Thus when the bubble burst, the banks were left holding a lot of the risk. Overinvestments in one sector of the economy must be painfully liquidated and the capital redeployed to restore equilibrium. The problem cannot be cured by simply looking the other way, or by propping up the sector overinvested in, with even more government handouts. In fact, the more the market is prevented from functioning normally, the longer it will take to cure the problem. The cure is never costless either. The longer it is postponed, the more it will cost. The unavoidable inference The Government, due to its desire to force its will on the market, was the primary culprit behind the large-scale mal-investment, and the consequential crisis that followed. Why is this obvious truth hidden from the public? As governments are in the business of getting re-elected, they and the economists in their lucrative employ, do not wish to acknowledge, sometimes even to themselves, their principal causative role in the boom and bust cycle. In 1936, a mathematics lecturer by the name of John Maynard Keynes, gave a vacuous scholarly credence to the notion that free markets do not work, and that governments, undoubtedly advised by utopian macroeconomists, must step in to ‘fix’ the market. This idea elevated the role of politicians, and opened the gates of fame and fortune to the macroeconomist government advisers. This socalled treatise was mired in obfuscations, incorrect assumptions, and bad logic, but came replete with elegant and opaque prose, and equally elegant but dense and diversionary mathematical equations. With the publication of The General Theory of Em22


ployment, Interest, and Money, a quack was elevated to the level of a superstar. Soon after, Keynes was duly anointed as the father of modern economics, and the science of money suffered so serious a setback that it has never recovered. With government control of curriculum in public and private education, hordes of future academics, newspaper columnists, elected officials, film & television producers, and even investment professionals and company presidents, have been trained to think in terms of the avarice myth (“markets left to themselves must necessarily reward avarice over conscientious work”), and the fixed pie myth (“wealth is never newly created, it is always taken by the powerful from the vulnerable”). In historic times, monarchs did dilute gold money to cheat their subjects but at least the classical economists (Adam Smith, David Ricardo, and John Stuart Mill) never pandered to the Kings by offering a scholarly cloak of respectability to this deceptive practice. Following the Keynesian era’s extraordinary intellectual regression however, finetuning the economy by printing money to stimulate the economy, and burning money to slow down the economy, has been converted into a pseudo-intellectual art form. But in practice, the cumulative action over a decade or more in almost any part of the world is a savage level of net printing, which results in an inflation tax that governments do not ever acknowledge as being entirely of their own making. Productivity has a natural tendency to get better and will rarely decline—thus prices should in general be reducing, yet endless inflation is now a world-wide phenomenon. Where to, next? Investment practitioners should not assume that market events are so unforeseeable that diversifi-

cation across asset classes is the only rational avenue to pursue in an increasingly volatile world. It is befitting to try and understand the macro causes of why asset prices and economies as a whole are volatile, and why markets appear to fail. Modern finance theory does not illuminate the practitioner in this regard. If classical and Austrian perspectives are correct, various world economies are headed for a severe downturn when the music stops for unrepayable levels of government debt. Keynesian solutions to print even more money and to recklessly divert capital to economically unprofitable election promises are dangerously in play in the US, the UK, Japan, China, Europe, and Australia. Regulation of the finance sector has increased. Meanwhile, subsidies to the finance sector abound in terms of increasing government bond prices—through money printing for which the banks are the first beneficiaries, and regulatory prop-ups of the banks’ severe illiquidity & outrageously low levels of capital. Yet these subsidies are not even reported in the press, let alone fought against. No, it is not some gigantic conspiracy theory. Vast numbers of politicians are untrained in Austrian or classical macroeconomics, and are illadvised, often by advisers who are themselves similarly untrained. Thus, many who carry the courage of their convictions, could be taking uninformed decisions, unaware of the longer-term effects of their policies.

Read, ponder, and decide for yourself. Here is a collection of readings that may help: 1. Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts by Hunter Lewis 2. Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E Woods 3. Capitalism: The Unknown Ideal by Ayn Rand 4. Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics by Henry Hazlitt 5. The Government Against the Economy by George Reisman 6. How an Economy Grows and Why It Crashes by Peter D Schiff and Andrew J Schiff 7. The Frankenstein Candidate: A Woman Awakens to a Web of Deceit by Vinay Kolhatkar

There is no substitute for thinking and a bit of quiet reflection. Do not just accept what Ross Gittins, Alan Jones, your lecturer, or this author for that matter, have to say on this issue.



What’s next for Google? by Marc Lerner In a recent interview with Wired.Com, Google CEO and cofounder Larry Page said that he finds focusing an entire company on just doing a very, very, small number of things to be unsatisfying. Whilst agreeing that incrementally improving a company’s existing products is important, Page says that “periodically, every n years, you should work on something new that you think is really amazing.” The history of Google itself was born out of a similar ‘moon shot’ – Page’s project, while a postgraduate at Stanford with fellow cofounder Sergey Brin, was to download the entire internet onto his computer. This was not as easy as first thought, but the pair kept trying, and in the process developed a new method of searching data on the internet by ranking websites according to the amount of links pointing towards them. They called this system PageRank. The importance of outsize ambition is not the only lesson that can be learned from the history of Google.



Another interesting fact about the company’s history is that at the very beginning, Page and Bergin tried to sell PageRank to several of the biggest internet players at the time – Yahoo, as well as AltaVista, which was then the biggest search engine. They were hoping to get a million dollars from AltaVista – but no one was interested. The two – who were initially more interested in finishing their PhDs – were practically forced into starting a company. If nothing else, the fact that the core of what is now a hundred-billion dollar company was rejected by the dominant players in the industry at the time has interesting implications for the efficient markets hypothesis. As it stands today, Google is essentially an advertising company, with 96% of the company’s revenue coming from advertising in 2011. Targeted ads accompany searches, and a network of advertisers purchase advertising on websites with Google serving as a middleman to simplify what would otherwise be a complicated search and contracting process. Most of the advertisers pay Google only on a per-click basis – that is, when someone clicks on the ad, rather than simply viewing the page with the ad. That the company is so profitable despite this goes some way towards showing that the ads do, in fact, benefit the companies paying for them. Moving these ads effectively to smaller screens – important given the increasing use of tablets and smartphones – is one area the company

is currently focusing on, and owning the Android operating system isn’t doing any damage in this regard. Longer-term, one risk in online advertising is that ad blocking programs come to be widely used. These already exist – in fact, you can download a free from the Chrome web store – but they aren’t very widely used, likely because most people don’t know about them or bother to install them. If, however, someone developed a browser that had one installed by default, and this came to be used extensively, it could prove to be quite expensive for a company like Google. Even within the realm of online advertising, the company is constantly innovating. For example, it recently introduced product listing ads that appear when someone searches for a product, with a picture of the product rather than plain text, and a link to a store that sells them. Reportedly, advertisers managing $4 billion in online ad campaigns are willing to spend 6 times more on these new ads than they did on the previous ones. Some are arguing this new move could help Google to take serious away traffic from Amazon, as people begin to not only use Google for searching for information about products, but for buying them as well. Google is also working on various nonadvertising projects that could be even more exciting than advertising revenue. As of December 2012, the company had $48 billion in cash and short term investments on its balance sheet, and Google, which does not pay a dividend, is putting the money towards all sorts of wild technology projects. It is developing a driverless car , as well as Google Glass , a wearable computer system. Both of these ideas seem almost like science fiction, but could also be immensely profitable in the near future. Some critics say that Google wastes too much money on these ideas, which may or may not end up being monetized. Page has an answer to this as well: “Investors always worry, “Oh, you guys are going to spend too much money on these crazy things.” But those are now the things they’re most excited about—YouTube, Chrome, Android. If you’re not doing some things that are crazy, then you’re doing the wrong things.”



UNIT: HOW TO NETWORKING SESSIONS It’s graduate recruitment season again and you’ve polished your shoes, dry cleaned your suit and you finally have a chance to wear those shiny cufflinks that have been sitting in your cupboard for the past year. However, with firms laying off workers and with the economy still not what it used to be, it’s becoming more and more difficult to land that dream job you’ve always wanted. One of the often overlooked opportunities that students have is on-campus recruitment events. An information session or networking event is when representatives from a company come to your campus during recruitment seasons and hold presentations about what they do and the specific processes for their firm. Students have the freedom to attend a multitude of information sessions and networking events, and yet these events are seldom used to their full potential.

With the relatively low barriers to entry for these events, the sheer number of people that attend these mean that your chances of getting any benefit from these are slim - unless you have a strategy for how to go about it. In our opinion, there are three types of people that go to these events: 1. Those that go for the free food; 2. Those that speak to a couple of people and get nothing in return, thereby wasting hours of their life; and 3. Students that go in with a plan and leave with a number of contacts that they can leverage to improve their chances during the recruitment process. In the hopes of helping you get into the third category, here are a few tips to help you get the most out of your next networking event: If you have ever been to any of these networking events, the first thing you will realise is that there are often large numbers of students that come along, meaning that representatives from the firms will meet countless eager students. To ensure that you will be remembered, the first thing to consider is WHO to approach. 26


At the early stage of an information session, it is inevitable that students will be crowding around the big brand name firms. So what do you do? Look around the room to see who isn’t busy and approach them. That will significantly improve your chances of having a good chat with the representative, being remembered, and it will allow you to warm up without 10 other students waiting to cut you off and steal the lime light. After a few minutes you can scan the room again and hopefully move on to someone who may have been busy earlier. Now you might say, that’s all well and good but what if some firms are always surrounded by students? Well in that case, if it’s a firm that you really want to talk to, go ahead and join in on the fray... but this is where what you say becomes very important! Imagine you’re an employee, forced to come to these sessions by HR and are constantly facing the typical questions: “What’s it like being a management consultant?”; “What work do you do as an Investment banker?”; “Do you like working at firm XYZ?”. You are more than likely going to get bored, and will almost definitely stop paying attention. However, when a student comes along asking a different and interesting question, you’re more likely to chat and remember them. The trick to asking a good question is to ask open-ended questions and avoid standard work topics. You might ask them what their hobbies are, or what their favourite work travel destination was and (if you’re brave) you might even want to crack a joke! It’s really up to you, but you want to be that guy or girl that they remember having an intriguing conversation with. However, the sad fact is that even if you do connect during the event, you might still not gain any benefit from attending. Most of all students forget the most crucial step: to ASK FOR A BUSINESS CARD. It’s mind-boggling how many people forget this. Without getting their business card or their details, you’ll have no way to contact them, and to them you will be just another student. Some representatives will offer their card, but if they haven’t by the end of the conversation, shake hands with them and ask then! And now for the final step: Send a follow-up email the next day. It’s like dating – email them too soon, and they’ll be a little surprised. Take too long to email them, and they’ll forget who you are. Your email should: • Thank them for their time, • Mention one or two topics you discussed (this is where your interesting questions come in handy), • Ask them if they’re free to catch up and suggest a time/date, • Include your full name and contact information in the signature. You might end up learning more about the recruitment process, find a mentor or even make a new friend. But from here on it’s really up to you. You can think about these networking events as speed dating. You won’t develop real relationships with everyone you meet – but there’s always the chance that you’ll meet someone you connect with and, in this case, help you with your career. FULLY FRANKED | ISSUE TWO


Matthew Fitzpatrick: the Founder of UNIT

Matthew is the founder of the Young Traders Society, rebranded as the University Network for Investing and Trading (UNIT) in 2008. UNIT Publications had the chance to ask him a few questions.

What are current trends in the financial markets that interest you the most? Why? I think the movement away from “bigger is better” towards more flexible and adaptable companies. I find this interesting since it brings with it great shifts in corporate thinking. It is a great opportunity for young people, who have been brought up in a digitally connected world, to recognise the businesses that are adapting and those that are “dinosaurs”. What are your current endeavours?

Matthew, describe yourself in 3 words. Creative. Entrepreneurial. Driven. What motivated you to establish the Young Traders Society, now known as UNIT, back in 2007? I was interested in joining a society that provided education about investing. However, it didn’t seem to exist at the time. After convincing a couple of my friends to help, we set up the Young Traders Society and ran events about personal investment. Funnily enough, I learned more about setting up a business than investing! What vision did you have for the Society? My vision was to set up chapters across different universities, to connect students from many different backgrounds (not just from the Commerce disciplines), who have a common desire to learn about personal investing. The more diversity amongst the members, the better! How would you best describe your investing strategy? To be honest, this has changed as I have learned more. It used to be “just buy banks - they’re safe” and now it’s more akin to what people call “value investing”. That is, I would look to derive a value on a (good quality) company and compare it to the current market value. If I am confident that the market value is less than the value I place on the company, then it’s worth buying. The tricky part is trying to figure out what to do if I’m wrong, or what to do if the market never sees the value I placed in the company. That’s why I’m still learning!



I’m working full-time at Westpac (WIB Risk Analytics) as a Quantitative Analyst, whilst studying towards a PhD. in Statistics part-time at USYD. I am also running a charitable managed fund called Investing for Charity. For those who are unfamiliar, what is Investing For Charity? Investing for Charity is a social business that uses the business model of a managed fund to invest for charities. We are operating a Public Ancillary Fund, where we raise donations from the public (and they receive a tax deduction), we invest those funds in Australian equity, and we pass on 5% of all funds each year to nominated charities (ultimately all funds are donated to charities). I founded this organisation about 2 years ago with some of my UNIT friends and we’re managing roughly $50,000. All of the analysts in our fund are volunteers and are a mix of students and young professionals. I encourage those who are interested to check out our website, www., and get involved! What are your goals for the future? In my professional career, I would like to eventually run an Analytics department within a large company (like Westpac) or run an Analytics business myself. In my academic career, I want to (finally) finish my PhD. and actively take part in the statistics research community. In my non-profit career, I would like to expand the idea of Investing for Charity to other places around the world and work hard to connect communities, businesses and governments to change the world for good!

Events @ UNIT: SEM I 2013 Here’s what we have planned for you guys in Semester 1. Join UNIT on Facebook for updated information on all events.

O-Week Stall Join UNIT in celebrating O-Week! Meet fellow students and grab some freebies!

UNSW Meet and Greet Meet UNSW UNIT Directors and Executives, ask questions and network!

Bell Direct Seminar Equity Analyst and media personality Julia Lee will be presenting at USYD UNIT. How do you analyse the perfect stock?

Capital Advisory Seminar Join Kevin Roche, formerly of Goldman Sachs, current Partner at Greenstone, for a discussion on capital advisory with UNSW UNIT.

Bloomberg Training Event Register now for a free training event at the Bloomberg head office on March 12th. Learn how to use a Bloomberg Terminal!

Technical Analysis Workshop Join UNSW UNIT members as we run through an introduction to Technical Analysis.

Excel Workshop Join UNSW UNIT members in brushing up your excel skills.

Stock Pitch Workshop Learn how to pitch a stock with Citibank analysts in preparation for UNIT’s very own stock pitching competition.

Stock Pitch Competition Research, analyse and present your ideas to industry experts in UNIT’s very first stock pitching competition for a chance to win prize money and internship opportunities with our industry sponsors, Citibank and other major investment banks!

Eurozone Issues Seminar Satyajit Das, Finance industry veteran, speaks to UNIT members about eurozone issues. (at UNSW)

YouTrade FX Seminar Sebastian Moreno presents the basics of trading, beginners trading strategy and introduces the YouTrade Demo Account. (at USyd)



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Fully Franked - Issue 2  

Special O-Week Edition!

Fully Franked - Issue 2  

Special O-Week Edition!