Quantitative Value, + Web Site

WESLEY R. GRAY, PHD, is the founder and executive managing member of Empiritrage, LLC, an SEC-registered investment advisor; and Turnkey Analyst, LLC, a firm dedicated to educating and sharing quantitative investment techniques to the general public. He is also an assistant professor of finance at Drexel University’s LeBow College of Business, where his research focus is on value investing and behavioral finance. Professor Gray teaches graduate-level investment management and a seminar on hedge fund strategies and operations. His professional and leadership experiences include over fourteen years building systematic trading systems, trading special situations, and service as a U.S. Marine Corps intelligence officer (Captain) in Iraq and various posts in Asia. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago Booth School of Business. He graduated magna cum laude with a BS in economics from the Wharton School, University of Pennsylvania.TOBIAS E. CARLISLE, LLB, is the founder and managing member of Eyquem Investment Management LLC, portfolio manager of the Eyquem Fund LP, and the author of the award-winning website greenbackd.com, which covers deep value, contrarian, and activist investment strategies. He has extensive experience in activist investment, company valuation, public company corporate governance, and mergers and acquisitions law. Prior to founding Eyquem, Carlisle was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions, he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam, ranging in value from $50 million to $2.5 billion. He is a graduate of the University of Queensland in Australia with degrees in law and business (management).

• Preface xiAcknowledgments xiiiPART ONE The Foundation of Quantitative Value 1CHAPTER 1 The Paradox of Dumb Money 3Value Strategies Beat the Market 9How Quantitative Investing Protects against Behavioral Errors 23The Power of Quantitative Value Investing 30Notes 32CHAPTER 2 A Blueprint to a Better Quantitative Value Strategy 35Greenblatt’s Magic Formula 36It’s All Academic: Improving Quality and Price 45Strategy Implementation: Investors Behaving Badly 54Notes 59PART TWO Margin of Safety—How to Avoid a Permanent Loss of Capital 61CHAPTER 3 Hornswoggled! Eliminating Earnings Manipulators and Outright Frauds 63Accruals and the Art of Earnings Manipulation 64Predicting PROBMs 72Notes 79CHAPTER 4 Measuring the Risk of Financial Distress: How to Avoid the Sick Men of the Stock Market 81A Brief History of Bankruptcy Prediction 83Improving Bankruptcy Prediction 85How We Calculate the Risk of Financial Distress 86Scrubbing the Universe 89Notes 91PART THREE Quality—How to Find a Wonderful Business 93CHAPTER 5 Franchises—The Archetype of High Quality 95The Chairman’s Secret Recipe 96How to Find a Franchise 99Notes 112CHAPTER 6 Financial Strength: Foundations Built on Rock 113The Piotroski Fundamentals Score (F_SCORE) 114Our Financial Strength Score (FS_SCORE) 119Comparing the Performance of Piotroski’s F_SCORE and OurFS_SCORE 122Case Study: Lubrizol Corporation 123Notes 126PART FOUR The Secret to Finding Bargain Prices 127CHAPTER 7 Price Ratios: A Horse Race 129The Horses in the Race 130Rules of the Race 133The Race Call 134A Price Ratio for All Seasons 141The Offi cial Winner 142Notes 143CHAPTER 8 Alternative Price Measures—Normalized Earning Power and Composite Ratios 145Normalized Earning Power 147Compound Price Ratios: Is the Whole Greater thanthe Sum of Its Parts? 150Notes 163PART FIVE Corroborative Signals 165CHAPTER 9 Blue Horseshoe Loves Anacott Steel: Follow the Signals from the Smart Money 167Stock Buybacks, Issuance, and Announcements 169Insider Traders Beat the Market 173Activism and Cloning 176Short Money Is Smart Money 179Notes 182PART SIX Building and Testing the Model 185CHAPTER 10 Bangladeshi Butter Production Predicts the S&P 500 Close 187Sustainable Alpha: A Framework for Assessing Past Results 189What’s the Big Idea? 191Rigorously Test the Big Idea 196The Parameters of the Universe 206Notes 208CHAPTER 11 Problems with the Magic Formula 211Glamour Is Always a Bad Bet 216Improving the Structure of a Quantitative Value Strategy 218Our Final Quantitative Value Checklist 222Notes 228CHAPTER 12 Quantitative Value Beats the Market 229Risk and Return 231Robustness 239A Peek Inside the Black Box 249Man versus Machine 257Beating the Market with Quantitative Value 262Notes 264Appendix: Analysis Legend 265About the Authors 267About the Companion Website 269Index 271

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