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WESLEY R. GRAY, PhD, is the founder and executive managing member of Empiritrage, LLC, an SEC-registered investment advisor; and Turnkey Analyst, LLC, a firm dedicated to educating and sharing quantitative investment techniques to the general public. He is also an assistant professor of finance at Drexel University's LeBow College of Business, where his research focus is on value investing and behavioral finance. Professor Gray teaches graduate-level investment management and a seminar on hedge fund strategies and operations. His professional and leadership experiences include over fourteen years building systematic trading systems, trading special situations, and service as a U.S. Marine Corps intelligence officer (Captain) in Iraq and various posts in Asia. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago Booth School of Business. He graduated magna cum laude with a BS in economics from the Wharton School, University of Pennsylvania.
TOBIAS E. CARLISLE, LLB, is the founder and managing member of Eyquem Investment Management LLC, portfolio manager of the Eyquem Fund LP, and the author of the award-winning website greenbackd.com, which covers deep value, contrarian, and activist investment strategies. He has extensive experience in activist investment, company valuation, public company corporate governance, and mergers and acquisitions law. Prior to founding Eyquem, Carlisle was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions, he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam, ranging in value from $50 million to $2.5 billion. He is a graduate of the University of Queensland in Australia with degrees in law and business (management).
Foreword
Preface
Acknowledgments
Part One: The Foundation of Quantitative Value
Chapter 1: The Paradox of Dumb Money
Value Strategies Beat the Market
How Quantitative Investing Protects Against Behavioral Errors
The Power of Quantitative Value Investing
Notes
Chapter 2: A Blueprint to a Better Quantitative Value Strategy
Greenblatt’s Magic Formula
It’s All Academic: Improving Quality and Price
Strategy Implementation: Investors Behaving Badly
Notes
Part Two: Margin of Safety – How to Avoid a Permanent Loss of Capital
Chapter 3: Hornswoggled! Eliminating Earnings Manipulators and Outright Frauds
Accruals and the Art of Earnings Manipulation
Predicting PROBMs
Notes
Chapter 4: Measuring the Risk of Financial Distress: How to Avoid the Sick Men of the Stock Market
A Brief History of Bankruptcy Prediction
Improving Bankruptcy Prediction
How We Calculate the Risk of Financial Distress
Scrubbing the Universe
Notes
Part Three: Quality – How to Find a Wonderful Business
Chapter 5: Franchises – The Archetype of High Quality
The Chairman’s Secret Recipe
How to Find a Franchise
Notes
Chapter 6: Financial Strength: Foundations Built on Rock
The Piotroski Fundamentals Score (F_SCORE)
Our Financial Strength Score (FS_SCORE)
Comparing the Performance of Piotroski’s F_SCORE and Our FS_SCORE
Case Study: Lubrizol Corporation
Notes
Part Four: The Secret to Finding Bargain Prices
Chapter 7: Price Ratios: A Horse Race
The Horses in the Race
Rules of the Race
The Race Call
A Price Ratio for All Seasons
The Official Winner
Notes
Chapter 8: Alternative Price Measures - Normalized Earning Power and Composite Ratios
Normalized Earning Power
Compound Price Ratios: Is the Whole Greater than the Sum of its Parts?
Notes
Part Five: Corroborative Signals
Chapter 9: Blue Horseshoe Loves Anacott Steel: Follow the Signals from the Smart Money
Stock Buybacks, Issuance and Announcements
Insider Traders Beat the Market
Activism and Cloning
Short Money is Smart Money
Notes
Part Six: Building and Testing the Model
Chapter 10: Bangladeshi Butter Production Predicts the S&P500 Close
Sustainable Alpha: A Framework for Assessing Past Results
What’s the Big Idea?
Rigorously Test the Big Idea
The Parameters of the Universe
Notes
Chapter 11: Problems with the Magic Formula
Glamour is Always a Bad Bet
Improving the Structure of a Quantitative Value Strategy
Our Final Quantitative Value Checklist
Notes
Chapter 12: Quantitative Value Beats the Market
Risk and Return
Robustness
A Peek Inside the Black Box
Man versus Machine
Beating the Market with Quantitative Value
Notes
Appendix: Analysis Legend
About the Authors
About the Companion Website
Index
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