On Campus with Gary McCaleb, Monday
night's guest is Bill Perry, dean of
the College of Business.
You and now here's
Gary McCaleb.
On campus today, we're pleased to welcome
the dean of the College of Business at
Abilene Christian University, Dr. Bill
Petit. Thanks for being with us, Bill.
Very glad to be with you.
Dr. Petit has is one
of the coauthors of this book, Basic
Financial Management, which is now in its
second edition.
He and three others
work together on the first edition.
Apparently, it was so successful.
It's now a second edition.
And I understand you're working currently
on the third edition of the book.
When did you begin the work on the
first edition?
I was approximately six years ago.
And so that book was out and was being
used as a textbook for financial
management classes for,
what, two or three years?
Usually they do them on a three year
cycle, so
they roll it over every three years, new
editions come out. So
we really have in place.
I guess it's all relative to your
expectations, but it's
been adopted in approximately 200
universities across the across
the nation.
So we're just well, I would think the
very fact that it it makes it to a second
edition has to be a point in its credit,
because obviously, if a publisher
doesn't find a book to do well in the
first edition, they're not interested in
coming back to another edition
of that book again and then for it to go
ahead and make no
plans for a third edition must mean that
you're having a good number of teachers
who have adopted this book and continue
to use it year after year.
What what would you say?
Uh, is there anything particularly that
is distinct or differentiate your
approach in this book on financial
management from what other
books that are used as text and financial
management may do?
We really just tried to concentrate on
readability, readability and readability,
just making certain
we were at the students level, making
certain that it flowed
so often. It's very easy to skip steps,
you know, in a logical process.
And so we just had it reviewed and
reviewed and reviewed to try to make
sure we weren't skipping those logical
steps.
Plus the book originated.
We really did not seek out Prentice
Hall to publish it.
You know, they came to us.
They had done a survey in
terms of what author or what
professors wanted in their books
and a fairly extensive survey.
And so they came to us and it's kind of
like a managed textbook.
Here's what the market says that they
won't.
What? You guys do it for us.
We had done a book earlier with them
Casebook and.
Done relatively well with that, and
so they were nice enough to come back.
I really had never intended to write a
textbook and just kind of fell
in our lap and we debated about whether
even to do it or not and finally decided
to do and it's it's been
enjoyable. And, you know, it helps
in terms of teaching to make you
conscious of how
do I get the message to the state.
The readability is is the main thing.
It has to be a challenge to expect
that you can write a textbook that's
going to make students want to read
it, because I guess one of the age
old problems and any kind of
class for the teacher has been
the frustration of feeling that students
aren't really reading the assignments in
the textbook.
Let me ask you, have you discovered any
particular keys
to being able to be more
successful with that?
The only key, I think, is just good
examples. You know, I students,
we do to you know, you remember
stories.
You know what we teach.
I remember stories.
I know you do. I do.
I remember the stories that teachers told
me and I may have remembered what
they taught. I don't relate to them.
And so just good examples throughout the
text tends to help.
And I don't think we've quite done as
good as we could there.
To what extent do you expect
a textbook to stand on its own, in other
words, that you feel like if we write
this book and a student reads it, they'll
know all that they need to know about
financial management without a teacher?
Or do you feel there's a certain
percentage or dependency that
the book will only go so far and then
it's up to the teacher to complete the
explanation and the teaching
process?
That's a good question.
I suppose I've always viewed
it as there are certain parts
of it that a student could read and
would need no help from a teacher
whatsoever.
There are parts of it that they seem to
have difficulty working through
and just kind of reinforcing what
the textbooks say is coming at it from a
different angle,
trying to.
You know, kind of bumbling fumble at
times, you know, and not be smooth,
but kind of bring students into it
and I think
they had to, you know, try to simplify,
simplify and build back with a textbook.
Is the approach
you take in this book is really the
approach of the corporation
or the business to
effective financial management?
Is that correct? Yes, of course.
Financial management could also be looked
at on an individual level
or a family level.
But I think it'd be helpful if we talk
about it from the corporate level for a
minute and then maybe a little later see
if there are some applications to
the basic principles of a business or a
corporation in financial management
that may also fit the home or the family.
What are the key?
Do you have any set of key rules
or key principles that you would
if a, uh.
A CEO of a major company came to you
and said, Bill, give me the two
or three basic things
that I need to know or that
I need to be sure we're doing in my
company if we're being effective
financial managers, what kinds
of things would you respond with?
Of course, the whole premise of it all
lies a phone trying to maximize
the position of your stockholders.
So the book begins by saying what
should be the objective of the firm?
You frequently hear profit maximization
your market share.
So you hear all these different goals.
But the key premise that we believe
in is presented in the text book is
you're trying to maximize the wealth
of that shareholder.
So then we develop that is the principal
concept. So to me as CEO and I
know a lot of CEOs who we've had
here on campus really believe that's
a strong principle, that a lot of
firms have gotten away from, particularly
large firms, managers in there
who are not owners, and they lose sight
of that position.
So the interest of the stockholders
is our number one beyond
that. And you can pretty well partition
things out into
managing of working capital.
There are some basic rules there where
you're trying to synchronize the cash
inflows and cash outflows.
And, for example, small firms
have a lot of difficulty in finding
long term financing.
And so they have to finance with short
term money and make long term
investments and that indebtedness
is rolling over on them and it gets them
in trouble a lot of times.
So synchronizing the cash
flows, inflows and outflows,
allowing for contingency planning,
the tendency is here's what I think
is going to happen. And this is
particularly problematic for an
entrepreneur who they just
they believe they know what's going to
happen and they only allow for
one outcome.
And so the ability to think through.
But what if.
And here of light,
and it's really been nice, the computer,
the personal computers, the
microcomputers, the computer
spreadsheets, and they are allowing
people to do some financial
planning, contingency planning
without a lot of expertize, just
some basic type of forecasting,
cash, cash, budgeting,
forecasting sales, forecasting expenses.
So I really think the ability to forecast
and which is really coming online is
really giving us all of our kids
will have that ability whenever they
get through this course.
Then you move on to long term
investments.
At the priority there, of course, is to
try to make certain that the present
value of those future flows be
what you're putting into the project up
front.
And of course, the key of it all is
analyzing risk.
It's not difficult to put the numbers
down, but the difficulty
is analyzing the risk.
Let's go back and touch on two or three
of the things you mentioned there. For
example, you began with the objective
saying the objective needs to be
maximizing the
return on investment or at least the
interest of the
stockholder of the shareholder.
What would you
if that is the correct go?
What is the incorrect goal that some
people mistakenly begin to pursue
instead of going for that one?
You said some profit maximization.
So, for example, there is a
the market works on a risk return
relationship.
So if you want to have higher expected
returns, assume more risk,
you know, just pure and simple.
And so the tendency would be is
to invest in higher risk projects
in order to maximize your expected
profits.
Well, that may not be in the investors
best interest.
That may be too far off
taking too much risk, and
it's not in their best interest.
So maximizing the shareholder price,
the price of the stock,
those investors, they recognize those
tradeoffs.
If you get to taking too much risk, they
start selling at the price of the stock
goes down.
And so they're looking at that risk
return trade off. It's kind of like a
report card is really what it is.
That share price is a report card
for large firms, particularly.
The market is very efficient,
extremely efficient.
Are you saying that they need to
perhaps not take as great a risk as
they might otherwise do and yet.
Generally, isn't it a rule of thumb that
the greater the risk, the greater the
reward, it would come back,
but there's also the greater the risk,
the greater.
Yeah, you know, it tends
almost at times, we think because risk is
good, risk is not good, risk
is bad. And if you get blown out of the
term, risk is bad.
Reward is good reward.
Yeah. You got to have risk takers.
And that's one of the things we're
encouraging our students.
We'd like to have more risk takers.
You know, we don't want people going in
and working the eight to five.
We'd like to have some people out there
who are saying, hey, I recognize risk is
bad, but I know the rewards are there
and I'm willing to take it now and
we'll take those chances.
So risk is bad, but
we encourage it.
So it's not it's
just balancing is keeping that balance.
That's really the key.
How do you deal with the the situation
of knowing that you're trying if you
truly have the right goal, which you've
talked about and really trying to
maximize what's best
for your shareholder?
And yet, it seems to me there's the
pressure of of wanting the immediate
return, which accentuates
the short term, which may not necessarily
always be in the best interest of the
company.
That's right.
Particularly in the 70s, maximizing
earnings per share became the overriding
goal of firms, and it was something
that they could they could quantify.
The 70s was a particularly terrible,
terrible time on stocks.
They did not perform with future
investments.
Of all the different kinds of investments
that you can make in the 70s,
common stock would be down,
you know, at the bottom of the returns
there in the 70s were just terrible.
So here you have a company
management that are saying we want
to do a good job, but every time we make
a good decision, our stock of our price
goes down.
What was the overall market that was
going down? Not there.
So so the tendency was,
hey, forget stock price, let's maximize
earnings per share and then we'll hope,
you know, the price comes along.
Is it possible that.
A shareholder might might not
be getting the immediate return that he
would like to be getting, and yet the
company is looking out for his best
interests, but you're either in
a dip of some kind or
are there looking at at a greater return,
say, a year or two years down the road
that still is going to, they think, going
to be in the best interest of that
shareholder. But the shareholders are
saying, but I'm not getting any kind of
immediate response
unless, you know, that that is
a problem.
And yet it may not be as big a problem is
they tend to think that it
is know go back to this.
There have been a tremendous amount of
studies about how efficient is the market
in the marketplace for stock is defined
it all available information
is reflected in that price
and that there's no information yet
that's not contained in that price.
And from practically every study
that's been made, the stock markets
are highly efficient.
So, you know, managers tend
to think, well, our stock price is
too low. It's not being reflected.
What we're doing is not being reflected,
but usually usually is one way.
We need to take a break.
We'll be back and continue to visit with
Dr. Bill Petit.
Abilene Christian University is a place
where people really matter, a concept
held since the school's beginning in
1986.
Well, today, more than 4500 students
from across the nation enroll in ACU
in the middle of west Texas because they
know it's where people really matter.
The university's academic program
reflects people orientation and
preparation on both the undergraduate and
graduate levels.
If you agree that people really matter,
you'll love Abilene Christian University.
We're back on campus and continue to
visit with Dr. Bill Petit,
who we're talking about the
the responsibility, I say,
that the company has toward the
shareholder as a shareholder
begins to look for the
places that would be the best
for him to invest money.
And there's a lot of different options
out there.
Are there any general rules of thumb
that he can go for other than looking
just at, you know, the performance
over the last few months or
something like that?
There are. And of course, it will vary by
the individual. Everybody has their own
little rules.
I have mine that that I use.
Somebody else has. There's
you know, there's no way to prove it,
man, or any better than or worse than
someone else's.
I guess the thing that I would strongly
encourage someone who would be interested
in stock and making
investments is to gain a broad
perspective, you know, to really
make good investments.
You need to be a fairly well read
individual that helps a lot.
But then you need to gain perspective in
terms of history.
You know, if you don't know the history,
you're prone to repeat those mistakes
that have been made in the past.
And they're there.
You know, there's naive
people, naive investors
who fall for deals.
And it just constantly happens.
You know, it it started back
in earlier centuries, the 16th
and 17th century, and where
they had a tulip craze, where
everybody was invested in investing in
tulip bulbs and they would sell their
homes and they would mortgage things
and sell everything they own to invest in
tulips. And of course, the crash finally
came, you know, and so you think, how
absurd.
But the same similar things have happened
in the United States.
You know, the nineteen twenty nine crash
preceding that, prices were
being run up, you know, so fast.
And so you need to look back
and get a historical perspective.
Secondly, you need not to trust
the professionals.
And we kind of went through a bunch of
problems in the 30s and
learned their lessons.
And then the 70s came along.
And it was if people thought the
professionals were above
subjective emotionalism,
you know, they're just like anybody else,
you know, they fall into the same traps.
And then they did and they had it's
easy to speculate on blue chip stocks,
too. It's not just limited to
speculative stocks.
You know, I can speculate on blue chips.
And so a person needs
to say, I want to be well read.
I would like to gain that perspective,
a book that I have all my students read
and I think is one of the best books and
it's talking about interesting and
telling stories and bringing in life
to give you that perspective.
There's a book called Random Walk Down
Wall Street by Mark
Burton Malkiel.
And he just it just opens things up
and says, here's where we've been and
here's where we are today, and
here are the things to watch out for.
And I really would advise an investor to
do that.
Do you find any kind of general
apprehension on the part of just the
average person as far as a hesitancy
to take that first step
or plunge into the stock market
just because of the uncertainty perhaps,
or just because they've never been in it
before, but they have heard all of these
bad stories about people
losing money or the bottom falling
out or things like that.
Some people are certainly has, I guess I
see more often people who
hear a tip, you know, a friend
says, hey, here's the deal that can't
last.
And usually their first investment is
a bad investment, you know, because they
were eager and they didn't do the
things you were just talking about.
They didn't they didn't really research
it and they didn't really know what was
going on.
And so, yeah, so, so often
they're the first one is they're eager to
get in. And then after that, the second
time, they're very slow to get it.
And so they kind of have to to learn
and get beat up a little bit.
I guess I would suggest read a lot,
get this perspective from this book that
I mentioned or any other book.
Get some basic books on investing
in stocks here, just some basic
principles that they can
follow and go along with,
you know, but don't trust the experts.
Feel good about what you're doing.
In other words, once you make a decision,
make sure it's your own decision.
You've decided this is why you're not
just somebody else's.
Professionals make just as many stakes
mistakes as you do.
And I know a lot more.
But I still make the mistakes.
The stocks, the stock market's not the
only possibility for a person to
invest when a person has a lot of money
and he's just holding it in a savings
account and
someone says, you know, you ought to be
doing something else with that money, you
could be getting a better return
on that.
What are the various alternatives
that he should consider and perhaps some
of the advantages and disadvantages of
those different alternatives?
Because the one investment
that has been talked about the most here
in the last decade is real estate,
because it's done so well and it's just
meat stocks and financial
markets, securities all over the place.
You know, that's 10 of the plane off
and now it's kind of gone into the
background somewhat.
And the financial
supposedly the nineteen eighties is
going to be the period for financial type
securities as opposed to real estate.
You know, within that, you know, the
hair of light, you know, particularly in
the earlier 80s, having cash
was very wise before,
you know, you didn't want cash because of
inflation.
You know, you try to keep everything tied
up, tied up in real estate, long term
investments.
The people who have done well lately are
the people who had the cash to buy
these seeds, to buy
some investment opportunities that had
higher rates.
You know, the municipal if you're in a
reasonably high tax bracket, the
municipal securities, you have been
earning 10 to 12 percent,
which means that would be equivalent of
18 percent for someone on the
30 to 40 percent tax bracket.
And they're not one time you had to have
large sums to invest
in these cash, you know, short
term, the long term securities.
And you don't have to anymore.
You know, they'll say, well,
let's invest in smaller amounts
because in other areas, the mutual funds.
And that's been popular
for people who don't have the time to
manage.
Now, the this
misconception that they've had is,
is that kind of we've been betting on a
jockey. You know, they try to find the
funds then the best in the management
that's been the best and invest
in that management.
What experience has shown he is just
because you did good this year does not
mean you'll do well next year.
There's not a consistency across time
for fund managers.
The advantage of a fund to a private
investor or small investor
is the diversification.
It does not increase the expected return,
but it does decrease the risk.
So for an investor, that's
not going to invest the time
to manage and look
and read, the funds
will do just as well.
They won't do better.
Not going to do better on average
over the long haul, but they will reduce
your risk.
So the mutual funds are a nice
investment, but that's really only fair
to expect that, I guess, because, as you
said, if you're not going to do your own
reading, if you're not going to research
and things, then you shouldn't expect to
get the kind of returns.
If you're just going to hand it over to
somebody and try to be safe
and not go for a great
risk, but get some kind of return,
that's what you would expect.
And what they've tried to sell
themselves, you would expect if you were
a professional manager.
And that's all you do, you
think, hey, I can beat the average return
in the marketplace? You know, just your
ego would tell you, OK, to do that.
You know, what experience says is
even though you're a pro, even though you
spend all your time at it, you'll do OK.
But time, year after year,
you will not the market.
Just so apparently what that really says
is that there is
no guaranteed,
foolproof, ironclad
investment that you can always count on.
The last thing there is, you know,
you want to get rich slowly.
You know, if you look at compound
view tables and you think if I just
invest in the IRA two thousand
dollars a year, I just do that for
20 years, you know what a laugh
is? Just to get rich slowly concept.
Don't take those heavy risks that you
don't have business taken.
And that's really the
basic concept from let's
go back to the corporate situation for a
minute, because I guess some
of the problems are the same, except
they're only just on a grander scale
and you're looking at a lot more money.
But in financial management,
they're.
How do you advise
as far as going with a mix
of various kinds of things
to involve yourself in
rather than a concentration
in one particular thing or one particular
industry or one particular
kind of investment
because it comes back to balance?
For so many years, you know, in the 19th,
early 1970s, the conglomerate was
the late 60s, early 70s, the conglomerate
was the big thing and it was felt that
if you were a good manager in one area,
you were a good manager in another area
and that you could you could just handle
all that.
But you can take diversification too far
if you're getting into areas you don't
know and competing in those areas
can be tough and you can make some
mistakes that if someone
who just studies that area and that's
their focal point that they won't
make.
So a firm
is to diversify to some
extent because they don't want to,
you know, get wiped out.
But, yeah, I really would encourage firms
not to overdo it
because the diversification to point
you're a stockholder can diversify.
If a stockholder wants some
diversification, you specialize
in your business.
How about some of your stock, how some
of the stock in some other areas and I
can accomplish diversification, so your
diversification really is doing me very
little good, but it does tend
to smooth out some returns to avoid
some of the risk.
So you want some balance diversification,
but keep it balanced.
How much does government, governmental
policy and political
elections affect
a good financial manager?
You know, they.
Well, that's a good question.
They.
To me, I get the feeling that.
It's perceived as being a greater impact
than I think it is, you know,
the elections is or becomes
if my candidate doesn't win, everything
is going to go down the tubes.
And time and time again, it just doesn't
seem to happen.
Uh, we tend to get into the
moderate role and
we tend to follow that.
So I just don't know.
The government interaction with business
is key. There's no question about that.
But in terms of who is there,
and I certainly have my favorite
candidates and I feel strongly about it,
just I get that same feeling that
my candidate does not win.
You know, it's going to be hard on the
economy and maybe it will be.
But I just don't see that it's made that
much difference.
Is there is there a new dimension coming
into play, a more international
perspective of financial management
rather than just national?
Yeah, absolutely.
We're.
Colleges of business across the United
States have an accrediting board.
It's kind of the point now where they're
saying, if you're not doing the
international, we will not accredit
you, that I just think it's
the world is becoming one market place
and you just you just
need that dimension. So international
finance, international marketing,
you know, knowing what goes on in those
areas is very important.
In fact, one of our Deanne's meetings had
a whole theme on the international
scene and they were pretty well
concentrating on the Pacific
Bay Area, saying
that that's where it's going to happen.
You know, we've always wanted to trade
with Europe. That's where our heritage
is. That's not where the future
is going to be international.
It's going to be in the Pacific.
It's a fascinating area.
I'm sorry we are out of time because
there's many other implications that we
can discuss.
You've been visiting today with Dr. Bill
Petit, dean of the College of Business,
that Abilene Christian University.
You're back with us again on campus.