Investment Philosophies : Successful Strategies and the Investors Who Made Them Work

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  • Edition: 2nd
  • Format: Hardcover
  • Copyright: 2012-07-31
  • Publisher: Wiley
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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

Introductionp. 1
What Is an Investment Philosophy?p. 2
Why Do You Need an Investment Philosophy?p. 3
The Big Picture of Investingp. 4
Categorizing Investment Philosophiesp. 7
Developing an Investment Philosophyp. 10
Conclusionp. 12
Exercisesp. 13
Upside, Downside: Understanding Riskp. 15
What Is Risk?p. 16
Equity Risk: Theory-Based Modelsp. 16
Assessing Conventional Risk and Return Modelsp. 32
Equity Risk: Alternative Measuresp. 34
Equity Risk: Assessing the Fieldp. 45
Default Riskp. 46
Conclusionp. 50
Exercisesp. 51
Numbers Don't Lie-Or Do They?p. 53
The Basic Accounting Statementsp. 53
Asset Measurement and Valuationp. 55
Measuring Financing Mixp. 62
Measuring Earnings and Profitabilityp. 69
Measuring Riskp. 75
Differences in Accounting Standards and Practicesp. 82
Conclusionp. 82
Exercisesp. 85
Show Me the Money: The Basics of Valuationp. 87
Intrinsic Valuep. 87
Relative Valuationp. 110
Valuing an Asset with Contingent Cash Flows (Options)p. 119
Conclusionp. 121
Exercisesp. 122
Many a Slip: Trading, Execution, and Taxesp. 125
The Trading Cost Dragp. 125
The Components of Trading Costs: Traded Financial Assetsp. 127
Trading Costs with Nontraded Assetsp. 146
Management of Trading Costsp. 148
Taxesp. 150
Conclusionp. 159
Exercisesp. 160
Too Good to Be True? Testing Investment Strategiesp. 163
Why Does Market Efficiency Matter?p. 163
Efficient Markets: Definition and Implicationsp. 164
Behavioral Finance: The Challenge to Efficient Marketsp. 170
A Skeptic's Guide to Investment Strategiesp. 204
Conclusionp. 206
Exercisesp. 207
Smoke and Mirrors? Price Patterns, Volume Charts, and Technical Analysisp. 209
Random Walks and Price Patternsp. 209
Empirical Evidencep. 211
The Foundations of Technical Analysisp. 239
Technical Indicators and Charting Patternsp. 240
Conclusionp. 255
Exercisesp. 256
Graham's Disciples: Value Investingp. 259
Who Is a Value Investor?p. 259
The Passive Screenerp. 260
The Contrarian Value Investorp. 284
Activist Value Investingp. 293
Conclusionp. 326
Exercisesp. 326
The Allure of Growth: Small Cap and Growth Investingp. 329
Who Is a Growth Investor?p. 329
Passive Growth Investingp. 330
Activist Growth Investingp. 365
Conclusionp. 372
Exercisesp. 373
Information Pays: Trading on Newsp. 375
Information and Pricesp. 376
Trading on Private Informationp. 378
Trading on Public Informationp. 398
Implementing an Information-Based Investment Strategyp. 421
Conclusionp. 422
Exercisesp. 423
A Sure Profit: The Essence of Arbitragep. 425
Pure Arbitragep. 425
Near Arbitragep. 450
Speculative Arbitragep. 460
Long/Short Strategies-Hedge Fundsp. 465
Conclusionp. 469
Exercisesp. 470
The Impossible Dream? Timing the Marketp. 473
Market Timing: Payoffs and Costsp. 473
Market Timing Approachesp. 477
The Evidence on Market Timingp. 506
Market Timing Strategiesp. 514
Market Timing Instrumentsp. 518
Connecting Market Timing to Security Selectionp. 521
Conclusionp. 521
Exercisesp. 522
Ready to Give Up? The Allure of Indexingp. 525
The Mechanics of Indexingp. 525
A History of Indexingp. 527
The Case for Indexingp. 530
Why Do Active Investors Not Perform Better?p. 554
Alternative Paths to Indexingp. 562
Conclusionp. 571
Exercisesp. 572
A Road Map to Choosing an Investment Philosophyp. 575
A Self-Assessmentp. 575
Finding an Investment Philosophyp. 579
The Right Investment Philosophyp. 581
Conclusionp. 583
Exercisesp. 584
Indexp. 585
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