damodaran - investment fables; exposing the myths of can't miss investment strategies (2004)

[...]... Introduction 1 The Power of the Story 1 Categorizing Investment Stories 2 Stories for the Risk Averse 2 Stories for the Risk Seeker 4 Stories for the Greedy 6 Stories for the Hopeful 8 Deconstructing an Investment Story 9 I Theoretical Roots: Isolating the Kernel of Truth 10 II Looking at the Evidence: Getting the Full Picture 11 III Crunching the Numbers: Developing a Frame of Reference 13 IV More to the Story:... 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 Ratios 100 Looking at the Evidence 103 Evidence from the United States 103 Evidence from Outside the United States 106 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... Chapter 8 The Worst Is Behind You: The Contrarian Story 233 The Core of the Story 234 Theoretical Roots: The Contrarian Story 235 Information and Price 235 The Random-Walk World 238 The Basis for Contrarian Investing 239 Looking at the Evidence 240 Serial Correlation 241 Loser Stocks 244 Crunching the Numbers 247 Across the Market 247 The Sector Effect 249 A Portfolio of Losers 250 More to the Story... exploration of the appeal of these stories, why so many investors fall for them and fail with them, and what it may take to win with each of them As you will see, with each story, there is a kernel of truth that makes it believable and a base in financial theory that allows proponents to claim to have a solid rationale Each chapter begins with an examination of the basis for each investment story and the theory... that there is a kernel of truth to each one of these stories but none of them is foolproof You will examine these and other investment sales pitches in this book, consider the potential downside with each, and study how you might be able to modify each one to reduce downside risk The Power of the Story Human beings are much more likely to be swayed by good stories than they are by graphs and numbers The. .. advantage of them 1 2 Investment Fables I Good investment stories are also backed up by the evidence, at least as presented by the storyteller As you will see in this book, though, the evidence may only tell part of the story and much of what is presented as incontrovertible proof of the efficacy of an investment strategy falls apart on closer examination In each chapter that follows, you will see the rationale... that sell the best to these investors emphasize low-risk strategies while promising much Chapter 1 • Introduction 3 higher returns than they are making currently on their safe investments High Dividend Stocks Risk-averse investors generally prefer the safety of government or high-grade corporate bonds to the riskiness of stocks They feel more secure with bonds, knowing that they can count on these bonds... adoption Why bother with the theory? Not only xxv xxvi Investment Fables: Tall Tales about Stocks will it give you perspective on what makes each story work, but it will also allow you to identify potential weaknesses with the story If you have been on the receiving end of one of these investment stories, you probably have also been told of studies that back them up and you are offered evidence of their potency... paper All too often, you end up with buyer’s remorse, poorer for the experience and promising yourselves that you will not fall for the allure of these stories again All too often, you forget the lessons of past mistakes and are easy prey for the next big stock story While there are literally hundreds of schemes to beat the market in circulation, they are all variants of about a dozen basic themes that... in the form of coupons while they hold them and that the principal invested in these bonds is intact To attract these investors to stocks, you have to try to offer them comparable income and safety, while also providing them a premium for taking the additional risk Stocks that pay high dividends are attractive to risk-averse investors because they resemble bonds in terms of generating income, with the . visit us at www.ft-ph.com fm01.qxd 1/29/04 08:12 AM Page iv Investment Fables Exposing the Myths of “Can’t Miss Investment Strategies Aswath Damodaran www .damodaran. com An imprint of PEARSON Education London. the Evidence 103 Evidence from the United States 103 Evidence from Outside the United States 106 Crunching the Numbers 107 Distribution of Price-to-Book Ratios Across the Market 107 Price-to-Book. 229 Chapter 8 The Worst Is Behind You: The Contrarian Story 233 The Core of the Story 234 Theoretical Roots: The Contrarian Story 235 Information and Price 235 The Random-Walk World 238 The Basis