Investment Philosophies

ASWATH DAMODARAN is a Professor of Finance at New York University’s Leonard N. Stern School of Business. He has received numerous awards for outstanding teaching, including the NYU university-wide Distinguished Teaching Award, was named one of the nation’s top business teachers by BusinessWeek in 1994, and teaches training courses in corporate finance and valuation at many leading investment banks.

• CHAPTER 1Introduction 1What Is an Investment Philosophy? 2Why Do You Need an Investment Philosophy? 3The Big Picture of Investing 4Categorizing Investment Philosophies 7Developing an Investment Philosophy 10CHAPTER 2Upside and Downside—Understanding Risk 15What Is Risk? 16Risk Aversion: Measurement and Consequences 16Equity Risk: Theory-based Models 17Assessing Conventional Risk-and-return Models 33Equity Risk: Alternative Measures 35Equity Risk: Assessing the Field 46Default Risk 48CHAPTER 3Numbers Don't Lie—or Do They? 55The Basic Accounting Statements 56Asset Measurement and Valuation 56Measuring Financing Mix 65Measuring Earnings and Profitability 73Measuring Risk 81Differences in Accounting Standards and Practices 88CHAPTER 4Show Me the Money: The Basics of Valuation and Pricing 93Intrinsic Value 94Pricing or Relative Valuation 119Valuing an Asset with Contingent Cash Flows (Options) 129CHAPTER 5Many a Slip: Trading, Execution, and Taxes 135The Trading Cost Drag 135The Components of Trading Costs: Traded Financial Assets 137Trading Costs with Nontraded Assets 156Management of Trading Costs 158Taxes 161CHAPTER 6Too Good to Be True? Testing Investment Strategies 173Why Does Market Efficiency Matter? 173Efficient Markets: Definition and Implications 174Behavioral Finance: The Challenge to Efficient Markets 181A Skeptic's Guide to Investment Strategies 214CHAPTER 7Smoke and Mirrors? Price Patterns, Volume Charts, and Technical Analysis 219Random Walks and Price Patterns 219Empirical Evidence on Pricing Patterns 221The Foundations of Technical Analysis 250Technical Indicators and Charting Patterns 252Social Media and Markets 265Determinants of Success at Charting and Technical Analysis 269CHAPTER 8From Graham to Private Equity: Value Investing 273Who Is a Value Investor? 273The Passive Screener 275The Contrarian Value Investor 304Activist Value Investing 312CHAPTER 9The Allure of Growth: Small Cap and Growth Investing 337Who Is a Growth Investor? 337Proxy Growth Investing 338Passive Growth Investing 358Activist Growth Investing 379CHAPTER 10Information Pays: Trading on News 395Information and Prices 396Trading on Private Information 398Trading on Public Information 418Implementing an Information-based Investment Strategy 440CHAPTER 11A Sure Profit: The Essence of Arbitrage 445The Essence of Arbitrage 445Pure Arbitrage 447Near Arbitrage 471Speculative Arbitrage 485Long/short Strategies—Hedge Funds 490CHAPTER 12The Impossible Dream? Timing the Market 499Market Timing: Payoff and Costs 499Market timing Approaches 503The Evidence on Market Timing 533Market-timing Strategies 542Market-timing Instruments 546Connecting Market Timing to Security Selection 549CHAPTER 13The Allure of Indexing 553The Mechanics of Indexing 553A History of Indexing 557The Case for Indexing 560Why Do Active Investors Not Perform Better? 584Enhanced Index Funds 591CHAPTER 14Investing in Alternatives 603The Alternative Investment Universe 603The Sales Pitch for Alternatives 607Price and Value with Alternative Investments 611Real Estate: The Underfollowed Investment Class 613Collectibles 620The Rise of Alternative Investing 648Alternative Investment Philosophies 655CHAPTER 15A Road Map to Choosing an Investment Philosophy 661A Self-assessment 659Finding an Investment Philosophy 665The Right Investment Philosophy (Philosophies) 667Conclusion 674Exercises 675Index 677