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Finance 2.0


Ross M. Miller
Miller Risk Advisors
August 8, 2011

This month I will begin the eighth year of my second incarnation as a finance professor, the first being from 1979 to 1989. I have become the Gilligan of finance, what started as a one-year appointment taking over the acting dean's teaching slots has now lasted much longer than the Minnow's prime-time run. For the past five years I have almost exclusively taught introductory graduate finance to a broad array of students, including many from outside the business school.

I have known many practitioners who claimed that they had learned absolutely nothing from their graduate finance classes, so I tried to make finance more useful than the usual stuff found in textbooks. Finance is so complicated that it is impossible in a single course (or even in several years of university study) to have students learn everything that matters in finance, especially because real-world experience often trumps anything that can be offered in the classroom. Nonetheless, it is possible to cover enough in a semester to give students a good push into the world of finance, certainly enough for them to make sense of much of what is on CNBC (at least those parts that do make sense).

The key to my approach is to focus on the investment topics to the virtual exclusion of traditional topics in corporate finance, such as how to create spreadsheets that can make any project appear to be profitable. This seems to have worked thus far because no one ever complains about not learning that you may have to assume that your resort hotel will have an 112% occupancy rate in order to secure funding from a Kuwaiti syndicate, which is an only slightly disguised version of something I once witnessed the now-defunct commercial real estate unit at a major brokerage house do during my first incarnation as a finance professor.

One of my projects this summer has been to overhaul my finance course, something I had been meaning to do during the last three summers but something else always came up. One problem with the old version of the course was that it was based around financial instruments and worked its way up from less complex to more complex financial instruments over the course of the semester. Unfortunately, less complex instruments, such as T-bills, are boring, and common stocks did not make the scene until the seventh week of the course (and for the first few years I taught the course they did not appear until the eighth week). While I personally appreciated the nice logical progression of the course, I doubt any of my students did. In the new version of the course, stocks are there from Day One and are the sole focus on the course for the first five weeks. Moreover, while I used to have a single "pet stock" for the entire class--Google, Green Mountain Coffee Roasters, Bank of America, and Tesla Motors were the pets over the seven years--now there are four pet stocks: LinkedIn, Johnson & Johnson, Netflix, and Bank of America. Other pets will follow, including pet ETFs, currencies, and mutual funds. Pets are useful for making the course real-time, rather than use canned examples from a textbook or case study; most examples involve the appropriate pet and its current situation. While textbook examples are based on showing how financial theory works, my pets often demonstrate when happens when it does not.

Having been an academic for too much of my life, I tend to make things more complicated than they have to be. Up until now I divided the course content in "Weeks" and in the fall I had to cover an entire "Week" in a single three-hour evening class. My guiding principle for the course material this time around is "more and shorter." The course is still divided by weeks to make it easier to arrange the PowerPoint slides, readings, spreadsheets, etc., but now each week is further divided into five or six shorter modules. Each module addressed a specific point, such as the value of diversification, and is designed to be as self-contained as possible. I started with a list of 72 potential modules and then winnowed them down to 60 modules. Even with this reduced list I am able to dedicate several modules to futures and options, topics that had received short shrift in the past. Only once I had all modules figured out did I collect them into logical weekly bundles. Although it may take a year or two for each module to evolve into its final form, I envision them each as being like an 18-minute TED talk about finance, but with audience participation. If I get really ambitious, I may YouTubefy some of these modules, but I do not see that happening until next academic year at the earliest.

One thing that will not change is that the course will be dynamic. Seven years ago there was not a word in the class about credit default swaps, now it is a major topic complete with frightening slides from the CMA division of the CME Group. Over time, new modules will enter the course and old, obsolete ones will exit it.

Textbooks have always been a minor part of my finance courses because none of them are very good. At best, they serve as a security blanket so that students have somewhere to go to see something worked out in more detail than I have time for in class. For the last six years I have used a "custom textbook" from McGraw-Hill that provides students with around ten key chapters from their top textbooks for about a third of the $200+ price of a standard finance textbook. This semester I am going with a textbook that it not only free online, but also has many chapters available in PDF form so that I can insert sticky notes providing my editorial remarks about the textbook. Even though some of the finance textbooks are written by the top minds in the field, the brilliance of these authors does not shine through the pages of the textbook. Finance textbooks are designed so that a fresh Ph.D. can teach from them without having too many students complain to his or her department chair or write particularly snarky things on course evaluations.

There is one major change to the course that I decided against after playing around with it for a few weeks. That was making Wolfram's Mathematica a central part of the course. Mathematica has direct access to financial data built into the program, which means you can do some amazing stuff with it; however, the learning curve for what I wanted to do with it is so steep that I would have caused my students (and ultimately myself) endless grief. Even something as simple as printing out a document in the same format as it appears on the scene is a major undertaking. (To save paper, but default Mathematica prints everything really tiny and overriding the defaults is a tedious affair akin to customizing Firefox.) Using Mathematica as inspiration, however, I am doing a lot more with spreadsheets than I had in the past, but I am still not using them to push questionable real estate on unsuspecting investors.

The financial world is falling apart (again) as I write this. Unless I have something amazing to write about in September, my next commentary will appear in October on a topic to be determined.

Copyright 2011 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to