Berkeley-Haas Distinguished Professor on a Crusade to Democratize Financial Knowledge

Todd Johnson | San Francisco Business Times

The BRB Bottomline: With almost two decades of finance and accounting expertise, Panos N. Patatoukas is transforming UC Berkeley into a social and technological platform to bring Financial Information Analysis (FIA) back to the people!

Original publishing date – May 14th 2018

What’s all the hoopla about? While periods lacking proper FIA have caused catastrophic marketwide value destruction, we must first convince ourselves that FIA exists in and of itself as the mechanism that regulates financial markets.

Subscribers to the Efficient Market Hypothesis—the idea that markets assign prices to assets correctly, on average, according to all publicly-available information—question the need for a general FIA curriculum because they assume prices are already assigned correctly. Instead, they say that investors shouldn’t be bothered to do FIA. The idea is that investors’ time would be better spent finding cheaper methods of participating in the general appreciation of financial assets, such as stocks, bonds, and real estate. This has led to the enormous rush into passive index funds, which has had its merits and demerits considering the mathematical underperformance (due to high advisor fees) that active managers charge compared to what passive managers charge. Watch Aswath Damodaran’s video on passive vs. active investing or read The Clash of the Cultures: Investment vs. Speculation  by John Bogle for more details.

But, herein lies a paradox. If prices are correct on average, market participants have no incentive to gather financial information or challenge management’s decisions on business fundamentals. Because market participants have no incentive to conduct FIA, values and prices will diverge until the spread becomes too enticing for market participants not to conduct FIA. When prices and values diverge sufficiently, we have to assume that sufficient opportunities exist for financial information arbitrageurs to act on the mispricing evident from the companies’ financial statements and/or business performance trends. This shows the inherent need for a general FIA curriculum both in overvalued markets (bubbles) and undervalued markets (corrections) so that individual investors have the understanding and flexibility to steer their financial futures.

Building the FIA Framework

With the advent of video-delivered content, online education and globalization, financial information educators are utilizing YouTube and fintech to democratize access to financial information analysis and big data.

Beyond bringing a Greek flair to his teaching methods, Berkeley-Haas Professor Panos N. Patatoukas is trying to put a newer, younger spin on the rigid financial models of yesteryear. His dual mandate on democratizing financial information analysis and keeping investing fun resonates with his students. This is corroborated by him receiving the 2018 Berkeley Distinguished Teaching Award—the highest teaching award a professor can receive at Berkeley and a near impossible accomplishment for someone so young.

Professor Patatoukas makes valuation fun with his real-time analysis on individual stocks. His analyses aren’t so much about where stocks should be trading given his assumptions about growth and profitability but rather about what the current stock price says about investors’ expectations about growth and profitability. This strategy demystifies the valuation process and gives students the power to tweak their assumptions based on professional expectations.

If you think this sound radical, you’d be right.

The videos on his YouTube channel, FIA to the People (more coming soon), reveal just exactly how he thinks about financial information analysis, which databases he uses to find that data, and how you can get access to financial information yourself. This is the nitty-gritty behind FIA that most professors teaching valuation are reluctant to release.

In the past, individual investors didn’t have access to complicated financial models or industry data. They lacked—perhaps continue to lack—the “first step” guidance to propel them in their FIA careers. This is categorical problem of access inequality to financial analysis, but it’s also because of the pall that academics and financiers would rather have over the general public’s eyes. Did somebody say career risk? 

But, this isn’t naivety. This is a mission. You might think that information is everything in financial markets (and academia), and you’d be right. But, Professor Patatoukas believes even stronger in solving the problem of access inequality to financial information between Wall Street and Main Street so that humankind can leverage the intellectual arbitrage of the widest constituency.

To quote Professor Patatoukas, “The driving force of my teaching is to mitigate the problem of access inequality, promote individual investor protection, and improve the allocation of capital in society.”

FIA Across the Country

While Professor Patatoukas is pioneering FIA from California, professors from East Coast peer schools, Professor Aswath Damodaran at NYU Stern and Professor Robert Shiller at Yale, have also created free, online resources to help disseminate the financial information analysis tools they teach in the classroom to people around the globe. Each professor has their specialties. Together, they have created an amazing, free online library for the layperson (and professional) who is interested in learning more about data sourcing, valuation techniques, and financial markets.

Aswath Damodaran

Professor Damodaran is the most prolific content producer of the three. His blog, Musings on Markets, is updated two or three times a week with independent analyses on hot stocks, IPOs, and market fads. I really enjoyed his recent post about valuing Netflix and Spotify. Moreover, Professor Damodaran has a highly informative, completely-free, twenty five video YouTube playlist called Valuation where he talks about the intuitive steps and tools you need to value any security on your mind. It’s a must-take for any aspiring investor.

Robert Shiller

Professor Damodaran is to individual stocks as Yale Professor Robert Shiller is to financial markets. Professor Robert Shiller won the Nobel Prize in Economics for asset pricing in 2013, which shows that he’s an expert in asset pricing, financial markets, and economic history. But, you don’t go to Yale. No problem! Professor Shiller has posted his most popular course that he teaches at Yale online, on YouTube, for free.

Take Home Points

Resources abound for students—regardless of their age, socioeconomic status, or access to information—who are interested in learning about financial markets and valuation. While access to large swaths of financial information has been available to the public through government regulator and company websites, people lack the financial literacy and analytical framework to decipher this treasure trove. Financial information inequality is one of the greatest issues we face today. This issue is increasingly relevant with the widening gap between institutional and individual investors Misconceptions about financial markets, asset pricing and economics in general have led to and will continue to create new dot-com bubbles and global financial crises in the future; however, a few professors are trying to alter that “inevitable” course. In the pursuits of both reducing access inequality to data and disbursing an FIA framework to nonprofessionals, Professors Panos N. Patatoukas, Aswath Damodaran, and Robert Shiller are not only revealing the financial information tools and analytical acumen that they teach in their classes but also trying to make learning about finance and financial markets fun for everybody.

1 Comment

Leave a Reply to Genna Jaquins Cancel reply

Your email address will not be published. Required fields are marked *