Investment Philosophies Successful Strategies and the Investors Who Made Them Work

by Damodaran, Aswath

• ISBN13: 9781118011515
• ISBN10: 1118011511
• Edition: 2nd
• Format: Hardcover
• Copyright: 2012-07-31
• Publisher: Wiley

Summary

Few investors beat the market consistently. Those who do are held in high esteem. In truth, there seem to be few common denominators, at least on the surface, among successful investors. They use very different investment strategies and subscribe to very different and, at times, contradictory views of how markets work and what leads to investment success. This revised and fully updated edition of Investment Philosophies covers different investment philosophies with the intent of finding the beliefs that underlie each one, the evidence on whether the strategies that emanate from the philosophy work and what an investor will need to bring to the table to make the philosophy work. It covers indexing, passive and activist value investing, growth investing, chart/technical analysis, market timing, arbitrage, and many more investment philosophies. The problem is that most investors have already chosen a philosophy and are uninterested in reading the details about the others. This book breaks the philosophies down, and provides investors with helpful online resources and tools to fully investigate each investment philosophy and assess whether it is a philosophy that makes sense for them.

Author Biography

ASWATH DAMODARAN is Professor of Finance at New York University's Leonard N. Stern School of Business. He has been the recipient of numerous awards for outstanding teaching, including the NYU university-wide Distinguished Teaching Award, and was named one of the nation's top business school teachers by BusinessWeek in 1994. In addition, Damodaran teaches training courses in corporate finance and valuation at many leading investment banks. His publications include Investment Valuation (now in its third edition), Damodaran on Valuation: Security Analysis for Investment and Corporate Finance; Corporate Finance; Investment Management; and Applied Corporate Finance, all published by Wiley, and The Dark Side of Valuation.

Table of Contents

Introduction	p. 1
What Is an Investment Philosophy?	p. 2
Why Do You Need an Investment Philosophy?	p. 3
The Big Picture of Investing	p. 4
Categorizing Investment Philosophies	p. 7
Developing an Investment Philosophy	p. 10
Conclusion	p. 12
Exercises	p. 13
Upside, Downside: Understanding Risk	p. 15
What Is Risk?	p. 16
Equity Risk: Theory-Based Models	p. 16
Assessing Conventional Risk and Return Models	p. 32
Equity Risk: Alternative Measures	p. 34
Equity Risk: Assessing the Field	p. 45
Default Risk	p. 46
Conclusion	p. 50
Exercises	p. 51
Numbers Don't Lie-Or Do They?	p. 53
The Basic Accounting Statements	p. 53
Asset Measurement and Valuation	p. 55
Measuring Financing Mix	p. 62
Measuring Earnings and Profitability	p. 69
Measuring Risk	p. 75
Differences in Accounting Standards and Practices	p. 82
Conclusion	p. 82
Exercises	p. 85
Show Me the Money: The Basics of Valuation	p. 87
Intrinsic Value	p. 87
Relative Valuation	p. 110
Valuing an Asset with Contingent Cash Flows (Options)	p. 119
Conclusion	p. 121
Exercises	p. 122
Many a Slip: Trading, Execution, and Taxes	p. 125
The Trading Cost Drag	p. 125
The Components of Trading Costs: Traded Financial Assets	p. 127
Trading Costs with Nontraded Assets	p. 146
Management of Trading Costs	p. 148
Taxes	p. 150
Conclusion	p. 159
Exercises	p. 160
Too Good to Be True? Testing Investment Strategies	p. 163
Why Does Market Efficiency Matter?	p. 163
Efficient Markets: Definition and Implications	p. 164
Behavioral Finance: The Challenge to Efficient Markets	p. 170
A Skeptic's Guide to Investment Strategies	p. 204
Conclusion	p. 206
Exercises	p. 207
Smoke and Mirrors? Price Patterns, Volume Charts, and Technical Analysis	p. 209
Random Walks and Price Patterns	p. 209
Empirical Evidence	p. 211
The Foundations of Technical Analysis	p. 239
Technical Indicators and Charting Patterns	p. 240
Conclusion	p. 255
Exercises	p. 256
Graham's Disciples: Value Investing	p. 259
Who Is a Value Investor?	p. 259
The Passive Screener	p. 260
The Contrarian Value Investor	p. 284
Activist Value Investing	p. 293
Conclusion	p. 326
Exercises	p. 326
The Allure of Growth: Small Cap and Growth Investing	p. 329
Who Is a Growth Investor?	p. 329
Passive Growth Investing	p. 330
Activist Growth Investing	p. 365
Conclusion	p. 372
Exercises	p. 373
Information Pays: Trading on News	p. 375
Information and Prices	p. 376
Trading on Private Information	p. 378
Trading on Public Information	p. 398
Implementing an Information-Based Investment Strategy	p. 421
Conclusion	p. 422
Exercises	p. 423
A Sure Profit: The Essence of Arbitrage	p. 425
Pure Arbitrage	p. 425
Near Arbitrage	p. 450
Speculative Arbitrage	p. 460
Long/Short Strategies-Hedge Funds	p. 465
Conclusion	p. 469
Exercises	p. 470
The Impossible Dream? Timing the Market	p. 473
Market Timing: Payoffs and Costs	p. 473
Market Timing Approaches	p. 477
The Evidence on Market Timing	p. 506
Market Timing Strategies	p. 514
Market Timing Instruments	p. 518
Connecting Market Timing to Security Selection	p. 521
Conclusion	p. 521
Exercises	p. 522
Ready to Give Up? The Allure of Indexing	p. 525
The Mechanics of Indexing	p. 525
A History of Indexing	p. 527
The Case for Indexing	p. 530
Why Do Active Investors Not Perform Better?	p. 554
Alternative Paths to Indexing	p. 562
Conclusion	p. 571
Exercises	p. 572
A Road Map to Choosing an Investment Philosophy	p. 575
A Self-Assessment	p. 575
Finding an Investment Philosophy	p. 579
The Right Investment Philosophy	p. 581
Conclusion	p. 583
Exercises	p. 584
Index	p. 585
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