Investment Philosophies: Successful Strategies and the Investors Who Made Them Work / Edition 1by Aswath Damodaran
Pub. Date: 01/20/2003
Since the inception of the financial markets, investors have been bombarded with sales pitches from experts claiming to have found the secret formula or the magic model that guarantees investment success. In one corner, you have seasoned veterans telling you to buy businesses with solid cash flows and liquid assets because that's what worked for Warren Buffett. In
Since the inception of the financial markets, investors have been bombarded with sales pitches from experts claiming to have found the secret formula or the magic model that guarantees investment success. In one corner, you have seasoned veterans telling you to buy businesses with solid cash flows and liquid assets because that's what worked for Warren Buffett. In another, you have financial professionals advising that in the new world of technology, you have to bet on companies with solid growth prospects. And still others recommend passive index investment as the way to outperform most active investors, or nontraditional investment strategies that have worked for a select group of successful hedge funds. The only thing this barrage of claims and counterclaims has created is investor confusion.
To successfully implement any investment strategy, you must first adopt an investment philosophy that is consistent at its core and which matches not only the markets you choose to invest in, but your personal preferences (risk tolerance, time horizons, etc.). In Investment Philosophies: Successful Strategies and the Investors Who Made Them Work, Aswath Damodaran will help you do this by going beyond the simple explanations of traditional and alternative investment strategies, to discuss the individual underlying philosophies that support these techniques.
Investment Philosophies explores many of the time-tested investment philosophies that investors have used over the years-from value investing and growth investing to technical analysis and market timing-and discusses some of the investors who made these philosophies work. This unique book will expose you to a wide range of investment philosophies to give you a sense of what drives investors in each philosophy, how they attempt to put these philosophies into practice, and what determines ultimate success. Damodaran offers an unbiased forum for the presentation of different investment philosophies, while supplying you with the tools-the definition and measurement of risk, the notion of market efficiency and how to test for inefficiencies, the components and determinants of trading costs-and the empirical evidence to make your own judgments on the investment philosophy that fits your specific investment goals and views of how markets work.
Filled with valuable insights, useful formulas, and comprehensive charts, this book provides you with the tools to pick an investment philosophy that is right for you. With Investment Philosophies as your guide you can be more confident in the way you or your fund managers invest.
Table of Contents
CHAPTER 1: Introduction.
What Is an Investment Philosophy?
Why Do You Need an Investment Philosophy?
The Big Picture of Investing.
Categorizing Investment Philosophies.
Developing an Investment Philosophy: The Step.
CHAPTER 2: Upside, Downside: Understanding Risk.
What Is Risk?
Equity Risk and Expected Return.
A Comparative Analysis of Risk and Return Models.
Models of Default Risk.
CHAPTER 3: Numbers Do Not Lie—or Do They?.
The Basic Accounting Statements.
Asset Measurement and Valuation.
Measuring Financing Mix.
Measuring Earnings and Profitability.
Differences in Accounting Standards and Practices.
CHAPTER 4: Show Me the Money: The Basics of Valuation.
Valuing an Asset with Contingent Cash Flows (Options).
CHAPTER 5: Many a Slip: Trading, Execution, and Taxes.
The Trading Cost Drag.
The Components of Trading Costs: Traded Financial Assets.
Trading Costs with Non-Traded Assets.
The Management of Trading Costs.
CHAPTER 6: Too Good to Be True? Testing Investment Strategies.
Market Efficiency and Investment Philosophies.
Market Efficiency: Definition and Implications.
CHAPTER 7: Smoke and Mirrors? Charting and Technical Analysis.
Random Walks and Price Patterns.
The Foundations of Technical Analysis.
Technical Indicators and Charting Patterns.
CHAPTER 8: Graham’s Disciples: Value Investing.
Who Is a Value Investor?
The Passive Screener.
The Contrarian Value Investor.
Activist Value Investing.
CHAPTER 9: The Allure of Growth: Small Cap and Growth Investing.
Who Is a Growth Investor?
Passive Growth Investing.
Activist Growth Investing.
CHAPTER 10: Information Pays: Trading on News.
Information and Prices.
Trading on Private Information.
Trading on Public Information.
Implementing an Information-Based Investment Strategy.
CHAPTER 11: A Sure Profit: The Essence of Arbitrage.
Long Short Strategies—Hedge Funds.
CHAPTER 12: The Impossible Dream? Timing the Market.
Market Timing: Payoff and Costs.
Market Timing Approaches.
The Evidence for Market Timing.
Market Timing Strategies.
Connecting Market Timing to Security Selection.
CHAPTER 13: Ready to Give Up? The Allure of Indexing.
The Mechanics of Indexing.
A History of Indexing.
The Case for Indexing.
Why Do Active Investors not Perform Better?
Alternative Paths to Indexing.
CHAPTER 14: A Road Map to Choosing an Investment Philosophy.
Finding an Investment Philosophy.
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¿Just a spoonful of color would have made the investment philosophies go down, in the most delightful way.¿ To paraphrase nanny Mary Poppins¿ advice to add honey to nasty-tasting medicine, you may wish that this informative tome was more colorfully written, but you could not wish for a more solid dose of information. Aswath Damodaran backs up his explanations of investing philosophies with ample studies, detailed graphics and a website, even if you need to absorb the dense, detailed data in 15 minute chunks. This well-researched, solid book will be useful to individual investors, investment managers and anyone who wonders why various investment philosophies succeed and how (and at what risk) portfolio gains are made. The index investing chapter and the final summary are required reading for investors wondering how huge portfolios crashed after U.S. equities collapsed. We recommend this soup-to-nuts introduction to sophisticated investing. Your financial security could hinge on a good grasp of the issues it covers.