CONTENTS investment fables: tall tales about stocks xxv 1introduction i the power of the story 1 categorizing investment stories 2 Stories for the Risk Averse 2 Stories for me Risk Seeker 4 Stories for the Greedy 6 Stories for me Hopeful 8 deconstructing an investment story 9 I. Theoretical Roots: Isolating the Kernel of Truth10 II. Looking at the Evidence: Getting the Full Picture11 III. Crunching me Numbers: Developing a Frame of Reference13 IV. More to the Story: Probing for Weaknesses14 V. Lessons for Investors 15 conclusion 1 6 2 high dividend stocks: bonds with price appreciation? 1 7 core or the story 1S xiii Theoretical roots: dividends and value 19 Dividends Do Not Matter: The Miller-Modigliani Theorem20 Dividends' Are Bad: The Tax Argument 21 Dividends Are Good: The Clientele and Signaling Stories 22 Looking at the evidence 23 Do Higher Yield Stock Earn Higher Returns? 24 The Dividend Dogs 26 Dividend Increases 29 crunching the numbers 30 Dividend Yields: Across Companies and Over Time 30 Sector Differences in Dividend Policy 33 A Portfolio of High Dividend Stocks35 The rest of the story 35 Unsustainable Dividends 38 Low Growth 44 Taxes47 lessons for investors 50 Conclusion 51 3 This stock Is So cheap The Law price-earnings story 57 core of the story 58 Theoretical roots: determinants of PE ratio 59 What Is the PE Ratio?60 A Primer on Accounting Earnings 61 Determinants of PE Ratios 63 looking at the evidence 66 Ben Graham and Value Screening 66 Low PE Stocks versus the Rest of the Market 67 crunching the numbers 7O PE Ratios Across the Market 70 PE Ratios Across Sectors 73 PE Ratio Across Time 75 A Low PE Portfolio77 More to the story 77 Risk and PE Ratios 81 Low Growth and PE Ratios 84 Earnings Quality and PE Ratios 87 lessons for investors 88 conclusion 91 Endnotes 9 1 4 less than book value? what a bargain! 95 the core or the story 96 theoretical roots theory: price to book ratios and fundamentals 97 Defining the Price-to-Book Ratio 97 How Accountants Measure Book Value 98 Determinants of PBV Ratios100 looking at the evidence 103 evidence from the united states 1O3 Evidence from Outside the United States106 crunching the numbers 107 Distribution of Price-to-Book Ratios Across the Market 107 Price-to-Book Ratios by Sector 108 A Low Price-to-Book Portfolio109 more to the story 11 2 High-Risk Stocks 112 Low-Priced Stocks115 Poor Projects: Low Return on Equity117 lessons for investors 121 conclusion 122 5 stable earnings, better investment? 127 core of the stdry 128 measurement of earnings stability 129 Theoretical roots: earnings stability and value 131 Diversification and Risk 131 Stable Earnings, Risk and Value132 looking at the evidence 133 Stable Businesses with No Competition 134 Diversified Business Mix: The Allure of Conglomerates 135 Global Diversification137 The Risk Hedgers 138 The Earnings Smoothers 141 crunching the numbers 145 Earnings Volatility Across the Market 146 A Portfolio of Stable Earnings Companies148 more to the story 1 51 Stable Earnings, Risky Investment? 151 Giving Up on Growth Opportunities 153 Priced Right? 155 Earnings Quality 156 lessons for investors 158 conclusion 159 6 in search of excellence: are good companies good investments? 163 core of the story 164 what Is a good company? 165 Financial Performance165 Corporate Governance167 Social Responsibility 169 the theory: building quality into value 17O Inputs in a OCF Valuation 171 EVA and Excess Return Models 172 LOOKING AT THE EVIDENCE 174 Project Quality and Stock Returns 174 The Payoff to Corporate Governance175 The Payoff to Social Responsibility176 Broader Definitions of Good Companies177 crunching the numbers 1 SO Across the Market 180 A Superior Company List 182 MORE TO THE STORY1 B7 Failing the Expectations Game187 Revering to the Norm188 lessons for investors 190 conclusion 192 Endnotes 193 7 Grow, baby, Grow!: the growth story 1 97 the core of the story 1 98 the theory: growth and value 199 Growth in a Discounted Cash Flow Valuation 200 The Value of Growth in a Relative Valuation 203 looking at the evidence 204 High PE Strategy 204 Growth at a Reasonable Price (GARP) Strategies208 crunching the numbers 212 Across the Market 212 The Value of Growth214 A High Growth Portfolio216 more to the story 219 Identifying Growth Companies219 Screening for Risk223 Poor-Quality Growth 225 lessons for investors 225 conclusion229 8 The worst Is behind You: the contrarian story 233 the core df the story 234 theoretical roots: the contrarian story 235 Information and Price235 The Random-Walk World 238 The Basis for Contrarian Investing239 looking at the evidence 240 Serial Correlation 241 Loser Stocks244 crunching the numbers 247 Across the Market 247 The Sector Effect 249 A Portfolio of Losers 250 more to the story 251 Transactions Costs 251 Volatility and Default Risk 256 Catalysts for Improvement 257 lessons for investors 25S conclusion 259 Endnotes 260 9 the next big thing: new businesses and young companies 263 core of the story 264 Theoretical roots: risk and potential growth 265 Additional Risk 266 Potential for Excess Return268 looking at the evidence 27O Small Companies270 Initial Public Offerings 275 Private Companies 279 crunching the numbers 283 Market Capitalization 283 Initial Public Offerings 286 Private Equity Investments 290 A Portfolio of Small Cap, Lightly Followed Stocks 291 more to the story 292 Small and Lightly Followed Stocks 295 Initial Public Offerings 300 Private Companies303 lessons for investors 3O4 conclusion 307 Endnotes 308 appendix: small-cap companies that are lightly followed: january 2DD3 310 10 mergers and returns: the acquisitive company 311 core of the story 312 theoretical roots: acquisitions and value 315 Acquisitions and Value Creation315 Acquisitions and Value Division 319 looking at the evidence 321 Acquisition Date 321 From Announcement to Action325 After the Acquisition327 crunching the numbers 328 Acquiring and Acquired Firms 328 Creating Portfolios 332 more to the story 336 Investing in Acquiring Firms 336 Investing in Target Firms341 lessons for investors 344 conclusion 346 Endnotes 347 appendix: potential takeover targets among US companies-march 2003 350 11 A Sure th ing: No risk and sure profits 353 core of the story 354 theoretical roots of arbitrage 355 Pure Arbitrage 356 Near Arbitrage 361 Pseudo or Speculative Arbitrage 363 looking at the evidence 363 Pure Arbitrage 364 Near Arbitrage 366 Pseudo or Speculative Arbitrage 371 crunching the numbers 373 Futures and Options Arbitrage 373 Depository Receipts 376 Closed-End Funds 378 more to the story 379 Pure Arbitrage 380 Near Arbitrage 380 Speculative Arbitrage 382 lessons for investors 385 conclusion 387 Endnotes 3BS 12 it's all upside: the momentum story 391 the core of the story 392 theoretical roots of momentum investing 393 Measures Used by Momentum Investors 393 Models for Momentum 395 looking for the evidence 397 Serial Correlation in Stock Price Drifts 398 Information Announcements 400 The Confounding Effect of Trading Volume 405 Momentum in Mutual Funds 406 crunching the numbers 4O9 Momentum Measures 409 Constructing a Momentum Portfolio 415 more to the story 42 1 Risk421 Momentum Shifts (When Do You Sell?) 424 Execution Costs 426 lessons for investors 426 conclusion 429 endnotes 43Q contents 13 follow the experts 435 the core of the story 436 Theoretical roots: the value of expert opinion 437 looking at the evidence 439 Insiders 440 Analysts 445 Investment Advisors and Other Experts 453 crunching the numbers 455 Insider Trading 455 Analyst Recommendations and Revisions 457 Portfolio of Expert Stocks 461 more to the story 463 Following Insiders: Timing Is Everything 463 Earnings Revisions 465 Analyst Recommendations 465 lessons for investors 467 conclusion 469 Ctiapter 4 in the long term.. myths about markets 475 Chapter 15 core of the story 476 theoretical roots: market timing 477 Market Timing Trumps Stock Selection 477 Market Timing Works 478 looking at the evidence 479 Do Stocks Always Win in the Long Term? 480 Market Timing Indicators 484 Market Timers 499 more to the story 5O5 Stocks Are Not Riskless in the Long Term 506 Market Timing Works Only Infrequently509 lessons for investors 513 conclusion 515 Chapter 15 ten lessons for investors 519 lesson 1 : the more things change. the more they stay the same. 519 lesson 2: if you want guarantees. don't invest in stocks. 520 lesson 3: No pain, no gain. 520 lesson 4: remember the fundamentals. 52O lesson 5: most stocks that look cheap are cheap for a reason. 521 lesson 6: everything has a price. 521 lesson 7: numbers can se deceptive. 522 lesson 8: respect the market. 523 lesson 9: know yourself. 523 lesson 10: luck overwhelms skill (at least in the short term). 524 conclusion 525 index 527