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Investment Fables: Exposing the Myths of "Can't Miss" Investment Strategies

Book Description

A hard-nosed, objective evaluation of today's most widely-touted investment strategies.

  • Examines 14 common investment strategies and presents exactly what works--and what doesn't.

  • Beyond anecdotes: run the numbers with one of the world's leading investment researchers and top-ranked business school professors

  • Guidance on understanding the real opportunities and not-so-obvious risks associated with each strategy--and instruction on how to mitigate the risks.

  • Table of Contents

    1. Copyright
      1. Dedication
    2. Praise for Investment Fables
    3. FT Prentice Hall Financial Times
    4. Financial Times Prentice Hall Books
    5. Investment Fables: Tall Tales about Stocks
    6. 1. Introduction
      1. The Power of the Story
      2. Categorizing Investment Stories
        1. Stories for the Risk Averse
          1. High Dividend Stocks
          2. Stocks with Low Price-Earnings Ratios
          3. Stocks That Trade at Less Than Book Value
          4. Stable Earnings Companies
        2. Stories for the Risk Seeker
          1. Great Companies
          2. Growth Stocks
          3. Loser Stocks
          4. Hidden Bargains
        3. Stories for the Greedy
          1. Get on the Fast Track
          2. No Money Down, No Risk, Big Profits
          3. Go with the Flow: Momentum Strategies
        4. Stories for the Hopeful
          1. Just Follow the Experts
          2. Stocks Always Win in the Long Term
      3. Deconstructing an Investment Story
        1. I. Theoretical Roots: Isolating the Kernel of Truth
        2. II. Looking at the Evidence: Getting the Full Picture
        3. III. Crunching the Numbers: Developing a Frame of Reference
        4. IV. More to the Story: Probing for Weaknesses
        5. V. Lessons for Investors
      4. Conclusion
      5. Endnotes
    7. 2. High Dividend Stocks: Bonds with Price Appreciation?
      1. Core of the Story
      2. Theoretical Roots: Dividends and Value
        1. Dividends Do Not Matter: The Miller-Modigliani Theorem
        2. Dividends Are Bad: The Tax Argument
        3. Dividends Are Good: The Clientele and Signaling Stories
      3. Looking at the Evidence
        1. Do Higher Yield Stocks Earn Higher Returns?
        2. The Dividend Dogs
        3. Dividend Increases
      4. Crunching the Numbers
        1. Dividend Yields: Across Companies and Over Time
        2. Sector Differences in Dividend Policy
        3. A Portfolio of High Dividend Stocks
      5. More to the Story
        1. Unsustainable Dividends
          1. Comparisons to Actual or Normalized Earnings
          2. Comparisons to Potential Dividends
        2. Low Growth
        3. Taxes
      6. Lessons for Investors
      7. Conclusion
      8. Appendix: Firms That Pass the Dividend Screens: October 2002
      9. Endnotes
    8. 3. This Stock Is So Cheap! the Low Price-Earnings Story
      1. Core of the Story
      2. Theoretical Roots: Determinants of PE Ratio
        1. What Is the PE Ratio?
        2. A Primer on Accounting Earnings
        3. Determinants of PE Ratios
      3. Looking at the Evidence
        1. Ben Graham and Value Screening
        2. Low PE Stocks versus the Rest of the Market
      4. Crunching the Numbers
        1. PE Ratios Across the Market
        2. PE Ratios Across Sectors
        3. PE Ratio Across Time
        4. A Low PE Portfolio
      5. More to the Story
        1. Risk and PE Ratios
        2. Low Growth and PE Ratios
        3. Earnings Quality and PE Ratios
      6. Lessons for Investors
      7. Conclusion
      8. Appendix: Companies That Pass PE Tests in the United States: October 2002
      9. Endnotes
    9. 4. Less Than Book Value? What A Bargain!
      1. Core of the Story
      2. Theoretical Roots: Price to Book Ratios and Fundamentals
        1. Defining the Price-to-Book Ratio
        2. How Accountants Measure Book Value
        3. Determinants of PBV Ratios
      3. Looking at the Evidence
        1. Evidence from the United States
        2. Evidence from Outside the United States
      4. Crunching the Numbers
        1. Distribution of Price-to-Book Ratios Across the Market
        2. Price-to-Book Ratios by Sector
        3. A Low Price-to-Book Portfolio
      5. More to the Story
        1. High-Risk Stocks
        2. Low-Priced Stocks
        3. Poor Projects: Low Return on Equity
      6. Lessons for Investors
      7. Conclusion
      8. Appendix: Undervalued Stocks with Price-to-Book Screens
      9. Endnotes
    10. 5. Stable Earnings, Better Investment?
      1. Core of the Story
      2. Measurement of Earnings Stability
      3. Theoretical Roots: Earnings Stability and Value
        1. Diversification and Risk
        2. Stable Earnings, Risk and Value
      4. Looking at the Evidence
        1. Stable Businesses with No Competition
        2. Diversified Business Mix: The Allure of Conglomerates
        3. Global Diversification
        4. Risk Hedgers
          1. Should Project Risk Be Managed?
          2. How Do You Manage Project Risk?
          3. The Payoff to Risk Management
        5. Earnings Smoothers
          1. The Phenomenon of Managed Earnings
          2. Techniques for Managing Earnings
          3. Is There a Payoff to Managing Earnings?
      5. Crunching the Numbers
        1. Earnings Volatility Across the Market
        2. A Portfolio of Stable Earnings Companies
      6. More to the Story
        1. Stable Earnings, Risky Investment?
        2. Giving Up on Growth Opportunities
        3. Priced Right?
        4. Earnings Quality
      7. Lessons for Investors
      8. Conclusion
      9. Appendix: Stable Earnings, Growth Potential and Low Risk
      10. Endnotes
    11. 6. In Search of Excellence: Are Good Companies Good Investments?
      1. Core of the Story
      2. What Is a Good Company?
        1. Financial Performance
        2. Corporate Governance
        3. Social Responsibility
      3. Theoretical Roots: Building Quality into Value
        1. Inputs in a DCF Valuation
        2. EVA and Excess Return Models
      4. Looking at the Evidence
        1. Project Quality and Stock Returns
        2. The Payoff to Corporate Governance
        3. The Payoff to Social Responsibility
        4. Broader Definitions of Good Companies
          1. Investing in Excellent Companies
          2. S&P Stock Ratings
          3. Fortune Rankings
      5. Crunching the Numbers
        1. Across the Market
        2. A Superior Company List
      6. More to the Story
        1. Failing the Expectations Game
        2. Reverting to the “Norm”
      7. Lessons for Investors
      8. Conclusion
      9. Appendix: Good Companies with Reasonable Pricing
      10. Endnotes
    12. 7. Grow, Baby, Grow!: The Growth Story
      1. Core of the Story
      2. The Theory: Growth and Value
        1. Growth in a Discounted Cash Flow Valuation
          1. Determinants of Growth
          2. The Value of Growth in a Discounted Cash Flow Model
        2. The Value of Growth in a Relative Valuation
      3. Looking at the Evidence
        1. High PE Strategy
          1. The Overall Evidence
          2. The Growth Investors' Case
        2. Growth at a Reasonable Price (GARP) Strategies
          1. PE Less Than Growth Rate
          2. PEG Ratios
            1. Defining the PEG Ratio
          3. Using the PEG Ratio
      4. Crunching the Numbers
        1. Across the Market
        2. The Value of Growth
        3. A High Growth Portfolio
      5. More to the Story
        1. Identifying Growth Companies
          1. Past and Future Growth in Earnings
          2. Analyst Estimates of Growth
        2. Screening for Risk
        3. Poor-Quality Growth
      6. Lessons for Investors
      7. Conclusion
      8. Appendix: High Growth Companies with Sustainable, High-Quality Growth, Low Risk and Low Pricing
      9. Endnotes
    13. 8. The Worst is Behind You: The Contrarian Story
      1. Core of the Story
      2. Theoretical Roots: The Contrarian Story
        1. Information and Price
        2. The Random-Walk World
        3. The Basis for Contrarian Investing
      3. Looking at the Evidence
        1. Serial Correlation
        2. Loser Stocks
      4. Crunching the Numbers
        1. Across the Market
        2. The Sector Effect
        3. A Portfolio of Losers
      5. More to the Story
        1. Transactions Costs
        2. Volatility and Default Risk
        3. Catalysts for Improvement
      6. Lessons for Investors
      7. Conclusion
      8. Appendix: Loser Stocks Trading at More Than $5 and with Limited Exposure to Risk and Default
      9. Endnotes
    14. 9. The Next Big Thing: New Businesses and Young Companies
      1. Core of the Story
      2. Theoretical Roots: Risk and Potential Growth
        1. Additional Risk
          1. Information Risk
          2. Growth Risk
          3. Marketability and Liquidity
        2. Potential for Excess Return
      3. Looking at the Evidence
        1. Small Companies
        2. Initial Public Offerings
          1. Process of an Initial Public Offering
          2. Initial Public Offerings: Pricing and Investment Strategies
        3. Private Companies
          1. Market for Private Equity and Venture Capital
          2. Payoff to Venture Capital and Private Equity Investing
      4. Crunching the Numbers
        1. Market Capitalization
        2. Initial Public Offerings
        3. Private Equity Investments
        4. A Portfolio of Small-Cap, Lightly Followed Stocks
      5. More to the Story
        1. Small and Lightly Followed Stocks
          1. Costs of Transactions
          2. Failure to Consider Liquidity and Estimation Risk
          3. Exposure to Information Risk
        2. Initial Public Offerings
          1. Allotment Process
          2. The IPO Cycle
        3. Private Companies
      6. Lessons for Investors
      7. Conclusion
      8. Appendix: Small-Cap Companies That Are Lightly Followed: January 2003
      9. Endnotes
    15. 10. Mergers and Returns: The Acquisitive Company
      1. Core of the Story
      2. Theoretical Roots: Acquisitions and Value
        1. Acquisitions and Value Creation
          1. Acquire Undervalued Firms
          2. Create Operating or Financial Synergy
          3. Take Over Poorly Managed Firms and Change Management
        2. Acquisitions and Value Division
      3. Looking at the Evidence
        1. Acquisition Date
          1. Target Firms
          2. Bidding Firms
          3. Does the Market Value Synergy?
        2. From Announcement to Action
          1. Multiple Bidders
          2. Failed Bids
          3. Merger or Risk Arbitrage
        3. After the Acquisition
      4. Crunching the Numbers
        1. Acquiring and Acquired Firms
          1. Acquiring Firms
          2. Target Firms
        2. Creating Portfolios
          1. Portfolio of Acquiring Firms
          2. Portfolio of Potential Targets
      5. More to the Story
        1. Investing in Acquiring Firms
          1. Overpaying on Acquisitions
          2. Accounting Complexity
          3. Debt and Dilution
          4. Lack of Focus
        2. Investing in Target Firms
          1. Entrenched Management
          2. Market Mood
          3. Risk
      6. Lessons for Investors
      7. Conclusion
      8. Appendix: Potential Takeover Targets Among U.S. Companies: March 2003
      9. Endnotes
    16. 11. A Sure Thing: No Risk and Sure Profits
      1. Core of the Story
      2. Theoretical Roots of Arbitrage
        1. Pure Arbitrage
          1. Futures Arbitrage
          2. Options Arbitrage
        2. Near Arbitrage
        3. Pseudo or Speculative Arbitrage
      3. Looking at the Evidence
        1. Pure Arbitrage
          1. Futures and Option Markets
          2. Fixed Income Arbitrage
        2. Near Arbitrage
          1. Same Security, Multiple Markets
          2. Closed-End Funds
          3. Convertible Arbitrage
        3. Pseudo or Speculative Arbitrage
      4. Crunching the Numbers
        1. Futures and Options Arbitrage
        2. Depository Receipts
        3. Closed-End Funds
      5. More to the Story
        1. Pure Arbitrage
        2. Near Arbitrage
          1. Not Perfectly Identical Assets
          2. Absence of Convergence Mechanisms
        3. Speculative Arbitrage
          1. Too Much Leverage (Borrowing)
          2. Price Impact
          3. Small Upside, Big Downside
          4. The Long Term Capital Management Saga
      6. Lessons for Investors
      7. Conclusion
      8. Endnotes
    17. 12. It's All Upside: The Momentum Story
      1. Core of the Story
      2. Theoretical Roots of Momentum Investing
        1. Measures Used by Momentum Investors
        2. Models for Momentum
          1. Information-Based Model
          2. Trading-Volume Model
      3. Looking for the Evidence
        1. Serial Correlation in Stock Price Drifts
        2. Information Announcements
          1. Earnings Announcements
          2. Stock Splits
          3. Dividend Changes
        3. The Confounding Effect of Trading Volume
        4. Momentum in Mutual Funds
      4. Crunching the Numbers
        1. Momentum Measures
          1. Price Momentum
          2. Trading Volume
          3. Earnings Surprises
        2. Constructing a Momentum Portfolio
          1. Price/Volume Momentum
          2. Information Momentum
      5. More to the Story
        1. Risk
        2. Momentum Shifts (When Do You Sell?)
        3. Execution Costs
      6. Lessons for Investors
      7. Conclusion
      8. Appendix 1: Stocks with Price and Volume Momentum, Low risk and Low PE
      9. Appendix 2: Stocks with Positive Earnings Surprises and Consensus on Expected Earnings
      10. Endnotes
    18. 13. Follow the Experts
      1. Core of the Story
      2. Theoretical Roots: The Value of Expert Opinion
      3. Looking at the Evidence
        1. Insiders
          1. Insider Trading and Stock Prices
          2. Illegal Insider Trading
          3. Using Insider Trading in Investment Decisions
        2. Analysts
          1. Earnings Forecasts
            1. Information in Analyst Forecasts
            2. Quality of Earnings Forecasts[9]
            3. Market Reaction to Revisions of Earnings Forecast
          2. Analyst Recommendations
            1. The Recommendation Game
            2. Market Reaction to Recommendations
        3. Investment Advisors and Other Experts
      4. Crunching the Numbers
        1. Insider Trading
        2. Analyst Recommendations and Revisions
          1. What Firms Do Analysts Follow?
          2. Bias in Analyst Recommendations
          3. Analyst Earnings Estimates
        3. Portfolio of “Expert” Stocks
      5. More to the Story
        1. Following Insiders: Timing Is Everything
        2. Earnings Revisions
        3. Analyst Recommendations
      6. Lessons for Investors
      7. Conclusion
      8. Endnotes
    19. 14. In the Long Term … Myths about Markets
      1. Core of the Story
        1. Stocks Always Win in the Long Term
      2. Theoretical Roots: Market Timing
        1. Market Timing Trumps Stock Selection
        2. Market Timing Works
      3. Looking at the Evidence
        1. Do Stocks Always Win in the Long Term?
        2. Market Timing Indicators
          1. Nonfinancial Indicators
            1. Spurious Indicators
            2. Feel-Good Indicators
            3. Hype Indicators
          2. Technical Indicators
            1. Past Prices
            2. Trading Volume
            3. Volatility
            4. Other Technical Indicators
          3. Normal Ranges (Mean Reversion)
          4. Market Fundamentals as Indicators
            1. Short-Term Interest Rates
            2. Long-Term Interest Rates
            3. Business Cycles
        3. Market Timers
          1. Mutual Fund Managers
          2. Tactical Asset Allocation Funds and Other Market-Timing Funds.
          3. Investment Newsletters
          4. Market Strategists
      4. More to the Story
        1. Stocks Are Not Riskless in the Long Term
          1. Survivor Market Bias
          2. How Long Term Is Long Term?
        2. Market Timing Works Only Infrequently
          1. Hindsight Bias
          2. Timing of Information
          3. Noise in Forecast
          4. Lack of Consistency
          5. Costs in Transactions, Opportunities, and Taxes
      5. Lessons for Investors
      6. Conclusion
      7. Endnotes
    20. 15. Ten Lessons for Investors
      1. Lesson 1: The more things change, the more they stay the same
      2. Lesson 2: If you want guarantees, don't invest in stocks
      3. Lesson 3: No pain, no gain
      4. Lesson 4: Remember the fundamentals
      5. Lesson 5: Most stocks that look cheap are cheap for a reason
      6. Lesson 6: Everything has a price
      7. Lesson 7: Numbers can be deceptive
      8. Lesson 8: Respect the market
      9. Lesson 9: Know yourself
      10. Lesson 10: Luck overwhelms skill (at least in the short term)
      11. Conclusion