Investment Philosophies

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.

• Chapter 1 Introduction 1What Is an Investment Philosophy? 2Why Do You Need an Investment Philosophy? 3The Big Picture of Investing 4Categorizing Investment Philosophies 7Developing an Investment Philosophy 10Conclusion 12Exercises 13Chapter 2 Upside, Downside: Understanding Risk 15What Is Risk? 16Equity Risk: Theory-Based Models 16Assessing Conventional Risk and Return Models 32Equity Risk: Alternative Measures 34Equity Risk: Assessing the Field 45Default Risk 46Conclusion 50Exercises 51Chapter 3 Numbers Don’t Lie—Or Do They? 53The Basic Accounting Statements 53Asset Measurement and Valuation 55Measuring Financing mix 62Measuring Earnings and Profitability 69Measuring Risk 75Differences in Accounting Standards and Practices 82Conclusion 82Exercises 85Chapter 4 Show Me the Money: The Basics of Valuation 87Intrinsic Value 87Relative Valuation 110Valuing an Asset with Contingent Cash Flows (Options) 119Conclusion 121Exercises 122Chapter 5 Many a Slip: Trading, Execution, and Taxes 125The Trading Cost Drag 125The Components of Trading Costs: Traded Financial Assets 127Trading Costs with Nontraded Assets 146Management of Trading Costs 148Taxes 150Conclusion 159Exercises 160Chapter 6 Too Good to Be True? Testing Investment Strategies 163Why Does Market Efficiency Matter? 163Efficient Markets: Definition and Implications 164Behavioral Finance: The Challenge to Efficient Markets 170A Skeptic’s Guide to Investment Strategies 204Conclusion 206Exercises 207Chapter 7 Smoke and Mirrors? Price Patterns, Volume Charts, and Technical Analysis 209Random Walks and Price Patterns 209Empirical Evidence 211The Foundations of Technical Analysis 239Technical Indicators and Charting Patterns 240Conclusion 255Exercises 256Chapter 8 Graham’s Disciples: Value Investing 259Who Is a Value Investor? 259The Passive Screener 260The Contrarian Value Investor 284Activist Value Investing 293Conclusion 326Exercises 326Chapter 9 The Allure of Growth: Small Cap and Growth Investing 329Who Is a Growth Investor? 329Passive Growth Investing 330Activist Growth Investing 365Conclusion 372Exercises 373Chapter 10 Information Pays: Trading on News 375Information and Prices 376Trading on Private Information 378Trading on Public Information 398Implementing an Information-Based Investment Strategy 421Conclusion 422Exercises 423Chapter 11 A Sure Profit: The Essence of Arbitrage 425Pure Arbitrage 425Near Arbitrage 450Speculative Arbitrage 460Long/Short Strategies—Hedge Funds 465Conclusion 469Exercises 470Chapter 12 The Impossible Dream? Timing the Market 473Market Timing: Payoffs and Costs 473Market Timing Approaches 477The Evidence on Market Timing 506Market Timing Strategies 514Market Timing Instruments 518Connecting Market Timing to Security Selection 521Conclusion 521Exercises 522Chapter 13 Ready to Give Up? The Allure of Indexing 525The Mechanics of Indexing 525A History of Indexing 527The Case for Indexing 530Why Do Active Investors Not Perform Better? 554Alternative Paths to Indexing 562Conclusion 571Exercises 572Chapter 14 A Road Map to Choosing an Investment Philosophy 575A Self-Assessment 575Finding an Investment Philosophy 579The Right Investment Philosophy 581Conclusion 583Exercises 584Index 585