Playing It Smart with Money

Playing It Smart with Money

BC Law's Cunningham is a voice of caution in volatile financial world

By Mark Sullivan
Staff Writer

As Wall Street rides a roller coaster, and IPO hype gives way to headlines of burst dot-com bubbles and corporate accounting scandals, Prof. Lawrence Cunningham (Law) sounds a Kipling-esque refrain: Keep your head when all about you are losing theirs, and you'll be an investor, a sound and successful one.

Prof. Lawrence Cunningham (Law).
(Photo by Gary Gilbert)
In a new book, Outsmarting the Smart Money, Cunningham, a best-selling financial author, counsels against stock speculation based on hype, in favor of investment in proven companies that actually generate products and promise long-term returns.

"This is a manifesto for long-term value-oriented investing and a rebuke of day-trading and margin-trading," said Cunningham, who teaches courses in accounting, mergers-and-acquisitions and corporate finance.
Cunningham's arrival at BC Law from Cardozo Law School this past year has given the University a prominent and widely respected commentator on the financial scene.

Critical praise comes from colleagues such as James D. Cox, Brainerd Currie Professor of Law at Duke Law School, who praises Cunningham as possessing "a rare talent to reduce the most arcane and complex financial or accounting matter to Tom Clancy-like clarity and excitement."

Cunningham's books include an internationally-acclaimed collection of Warren Buffett's letters to Berkshire Hathaway shareholders, The Essays of Warren Buffett: Lessons for Corporate America, which has been translated into eight languages, and the best-selling How To Think Like Benjamin Graham and Invest Like Warren Buffett, also translated into numerous languages.

He has been featured in Forbes and Money and on CNN, CNBC, and the syndicated "Motley Fool Radio Show." He has been a guest on "The News Hour with Jim Lehrer" and has appeared on or been quoted in scores of other broadcast and print media.

"Professor Cunningham's professional scholarship provides a rare and much needed link between the financial and legal communities," said Dale Oesterle, Monfort Professor of Commercial Law at the University of Colorado School of Law. "Lawyers too often do not understand the financial goals of their clients. Cunningham is a very effective teacher of finance and accounting to lawyers, a rare and valuable resource. Moreover, he uses his knowledge of finance to advocate sensible law reform.

"His success is measured by the high regard of the profession for his work and his rapport with some of the top business leaders of our era, [including] Warren Buffett and others," Oesterle said. "His edit of Warren Buffett's annual reports is a classic read, providing educated views on a variety of issues from one of the most successful players in the investment community. It was a tremendous coup."

Duke's James Cox said, "Simply stated, we could well have avoided the terrific meltdown of the US capital markets and their allied scandals if Professor Cunningham's book had been published in 1997, not 2002, and lay investors had read it."

University of California at Davis School of Law Professor Robert W. Hillman calls Cunningham "the law school world's answer to Warren Buffet."

Cunningham says handicapping the market on a daily basis has spawned an industry of prognosticating tipsters but is an unwise way to approach investment decisions.

"One of the chronic ailments of US capital markets is an excessive focus on daily price fluctuations that produces 'short-termism' and investor myopia," he said.

"The prescription in my book is that we would be better off in society if investors focused not on daily price fluctuations in the market, but instead on the underlying 'business values' of particular corporations."

A central theme of Cunningham's latest book is what he describes as the difference between price and value of stocks.

He said standard theory today is to equate the value of a stock with its price, so the value of a share of Coca Cola, for example, is regarded as the price for which it sells on the stock market on a given day.

Cunningham does not take this view. The price on a given day of a share in Coca Cola, which has been turning out sodas and profits for years and will continue to do so for the foreseeable future, he said, is not ultimately the gauge of value.

"The price of a share of Coke today is not the same thing as the value of a share of Coke today," he said. "'Business value' is the present value of cash flow that an asset will spin off from now until doomsday."

"Take Coke: They sell so much syrup, and they will each year. There is an amount of cash flow to pay the owners. You can chart future cash flow to estimate what their actual dollars will be. This exercise of allocating 'business value' can tell you what a share of stock is worth more accurately than the price on the market on a given day, which is a product of various events, including psychological factors.

"There's an awful lot of trading that stems from hunches rather than seasoned analysis," he said.

Cunningham cited the ballyhoo in recent years over initial public offerings, or IPOs, of shares in dot-com companies that in many cases dissolved before living up to the hype. "Virtually all IPOs are disasters," he said.

He said a share of Microsoft sold for 15 cents at an initial public offering in 1986. Three years later that share had increased six times in value, but still sold for under a dollar. But a share bought then, three years after the IPO, would increase in value 80-fold within the following decade.

"The idea you're going to find the next Microsoft or Intel is a bit misleading," he said. "You don't need to be the first person in a stock. It's much better to wait and see if a firm establishes a track record, and has competitive advantages that promise good cash flow over the long term."


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