Category Archives: Bücher
Book review: The missing risk premium – Eric Falkenstein
Eric Falkenstein might be well know through his Falkenblog. Hi is an outspoken critic of “classical” finance theory, especially the CAPM and its derivatives.
His main thesis is that there is no risk premium for riskier investments.
In his new, self published book (I have read the Kindle version), he starts with the history of the CAPM (MArkowitz &Co).
He the summarizes most of the well known anomalies, which clearly contradict the efficient market /CAPM paradigm such. For me the most interesting anomalies were:
– the highest beta stocks have significantly lower than average returns
– distressed stocks (measured by Rating) have the lowest returns
In “traditional” academic theory, many of those anomalies are often related to behavioural biases, such as lottery tickets etc.
However he goes further, formulating his own theory why a risk premium does not exist. I have to admit that I read quite quickly over that one, but the issue according to him is that one should use relative utility functions instead of absolute utility functions.
At the end, he briefly discusses how one can outperform the market easily with low volatility stocks. One possibility would be minimum variance portfolios (MVP), the other a subset of an Index with stocks which have a beta of around 1.
Additionally he makes a very good point that typical pension fund asset allocation (i.e. allocating into hedgefunds to generate higher long term returns) will most likely not yield the expected results.
Summary:
+ the book is a good summary of all the current available studies which contradict the CAPM
+ he makes a good case for investing in low volatility assets, although I didn’t fully understand his theory
– what he misses in my opinion is the fact, that all this is common knowledge among value investors.
Value investing doesn’t assume efficient markets and it also ignores stock price volatility as one is concentrating on fundamentals only. So a typical value investor clearly is indifferent about stock price volatility and does not believe that more volatile stocks produce higher returns. Maybe as an academic you need a complicated formula to prove this, as a value practitioner one simply knows that “safe & cheap” stocks will outperform over time.
Overall I would say for a typical value investor, you might not need to read the book. If you are more interested in general financial theory and want to have a good update of the current empirical status then it might be a good investment. The kindle version is actually quite cheap at 8 EUR or so.
For me personally, it somehow validates the result of my “boss” model. The Boss model identifies stocks with low fundamental volatility. Low fundamental volatility very often transforms into low beta, cheap valuation and high potential returns.
Book review: David Dreman – Contrarian Investment Strategies – The Classic Edition
David Dreman is quite famous as one of the original “contrarian” investors using a formula approach. Similar to other “formula” investors, he dismisses all kind of active forecasting, fundamental analysis, chart reading etc.
Book Review: O’Shaughnessy – What works on Wall Street (4th edition)
A first remark: I haven’t read the previous editions and I am a maybe biased active value investor 😉
For many years, O’Shaughnessy’s book “What works on Wall Street” has been the Bible of many quantitative value investors who wanted to avoid analysing single companies and prefer an automated startegy to select stocks.
The book starts with some chapters loosely summarizing current behavioural finance knowledge which implies that human selection is inferior to automated systems.
For the large quatitative part of the book which follows, he seems to have used a new data set on US equities which wasn’t available before which is going back to 1926. He clearly lays out the methodology, with the major features being
– avoiding illiquid small caps
– equal weighting of stocks in the portfolio (we’ll come to that one later !!!)
– reinvesting dividends
– enhanced rebalancing (not only on July 1st per year but the average of 12 annually rebalanced portfolios starting each month of the year)
– no transaction costs assumed
He then uses his data to run many different strategies. Some of the most interesting results for me were:
– small caps outperform large caps and indices pretty consistently by 1-2% p.a.
– low P/E stocks (cheapest decile) outperform by almost 5% p.a., interestingly with a lower beta
– low EV/EBITDA works even better as single factor model (5,5% p.a. out-performance)
– low Price/Cash Flow works, but “only” around 3.5% p.a. out-performance. Price to free cashflow and Price to operating cashflow work slightly better but not as good as EV/EBITDA
– the “old favourite” price to sales does not really work well (only 1.5% p.a.)
– Price to book: DOES NOT WORK for the cheapest decile !!!!
– Dividend yield DOES NOT WORK
– however stock buy back yield works with ~3% p.a. excess return
– Stock buy back yield and dividend yield work better, 3.3% p.a.excess return
– certain accounting ratios work also well, such as low accruals (2.8%), Asset to Equity, asset turnover etc.
– composite accounting ratios (4 factors) work even better, close to 5% p.a.
– composite ratio with only the 25 best stocks scores even better (7% p.a. out performance)
– composite Value factor (P/B, P/E, P/S, EBITDA/EV, P/CF) with 5.8% p.a. out-performance
– Earnings changes, profit margins and ROE DO NOT WORK
– Price momentum (6 and 12 months) works, with 2-3% p.a.
– combining value and price momentum works best, some strategies yielding 10% p.a. excess returns or more
Comments:
I don’t want to sound arrogant, but from earlier discussions I knew that O’S favoured the P/S ratio in the prior editions. I always thought that this doesn’t make any sense because then you end up with a portfolio of supermarket stocks and wholesale companies.
It is also not surprising that P/B doesn’t work if you don’t adjust for debt. So no wonder, EV/EBITDA does a much better job. But this is something many active value investors know without having to go through 90 years of data.
For any active investor it is also no surprise that it is better to look a various factors as single factors can always be influenced by certain special effects. So welcome to the club, Mr. O’S !!!
Maybe in his 5th edition, O’S then starts to look at the historical developments, who knows ?
For me, the relevance of price momentum is still difficult to really understand but I am willing to learn !!!!
Conceptual issue: Equal weighted performance
I have one big conceptual issue with the whole book: as described in the beginning, O’S just briefly notices that he uses equal weighted portfolios. He doesn’t test if this alone has an impact on the performance of the strategies.
Some recent papers indicate that equal weighted portfolios themselves create significant out-performance vs. market cap weighted indices.
So we do not know for sure, how much of the out-performance of O’S strategies is due to his equal weight assumption as he benchmarks against a market cap index and not against an equal weight index.
Summary
O’S book is of course a interesting read. Many of the newer combined strategies make intuitive more sense than some of the older strategies. He also correctly states that strategies work only long term and you have to avoid market timing at all costs !!!
Many investors will underestimate what it means to invest in a mechanical strategy which underperforms for 3 or more consecutive years.
Unfortunately, the conceptual issue with the equal weighted portfolio takes away a lot of my personal “trust” into those mechanical strategies.
For me the key take aways are:
1. Any more or less fully invested value startegy with some basic analysis will perform quite well against the general market
2. Also the most famous mechanical models can become outdated
3. DO NOT TRY TO TIME THE MARKET
4. Price momentum should not be ignored
Book review: How to Make Money in Value Stocks (Stockopedia)
Dave from Stockopedia sent me a free copy of a new E-Book called ” How to Make Money in Value Stocks”
It is only 70 pages “short” and tries to introduce and summarize all relevant “schools” of value investing.
The book in my opinion is very well written. I liked especially the very “fluid” language, the very clear and easy to read layout and the many links they have at the end of each chapter.
I think its the perfect short book for anyone who wants to get a short well written overview on general value investing principles.
Quibbles:
– it looks like that you get it for free if you register on their website. Then it’s great value. However I would not pay 14.99 GBPs what is announced to be the retail price for the book
EDIT: Dave from stockopedia just contacted me that there will be a Kindle Ebook edition for 4.99 GBP which seems to be a very reasonable price.
– the book in my opinion emphasizes a little too much what I would call “formula investing” as the best tool. However, they seem to offer value screens as a paid subscription service, so this makes sense from their perspective.
– They leave out the priciples and techniques of intrinsic valuation. This again is understandable from their perspective, however for anyone seriously interested in Value investing, I would definitely recommend to read for exapmle Prof. Greenwald’s books first.
Book review: Dark Genius of Wallstreet
Easter time is a good time for a “historical” book review:
The book is about the life of Jay Gould, one of the most notorious “Robber barrons” in the 19th Century in the US.
The so called “robber barons” were a group of several “arch capitalists” who made their money in the 19th century through means which nowerdays would be punished with prison.
However in those days, there was no such things as “insider training”, people were even considered stupid if they traded stocks without insider information.
The first part of the book covers Jay Gould’s childhood which I found personally a little bit boring. It gets more interesting around page 50 or so when Jay Gould’s first real business venture, leather manufacturing is described where he starts as a junior partner.
It is fascinating to see how quickly he realizes that the production part of the value chain is the most capital consuming and risky part wheras the traders need a lot less capital and make more or less the same amount of profit. Naturally he started to speculate early in leather futures.
The “spirit” of those times is already clearly shown in the fight over a leather production site with the heirs of his former partners. “Unfriendly takeovers” in those times were a lot more unfriendly than today, not only involving lawyers but also armed men and gun fights.
Some how naturally he finds his way to Wall Street, where he starts as a so called “curb trader”, traders who literally stood outside the stock exchange and making bets because they had no license to trade directly.
After trading a lot, Gould started pretty early to actually taking over a small railroad company a and operate it on a day today basis. To day one would call this a public-to-private equit deal. This lead directly to the famous battle for Erie Railroad between Gould, Vanderbild, Drew and Fisk one of the most intensively fought battles in corporate history. Anfd fighting again in those times meant armed men etc etc
More or less in parallel, Jay Gould tried with James Fisk tried to corner the Gold market, resulting in the “Black friday” of 1869.
At the peak of his career, he even managed to control Western Union additionally to a combination of several important railroad lines.
Summary:
I think it is a great read for everyone interested in the history of capital markets. The book also shows that nothing is really new in capital markets, neither market volatility nor crashes etc. It is also interesting to gain some insight into those “dark ages” of insider based capital markets, maybe a good training if someone wants to invest in China or India…..
Buchbesprechung – Nicolas Schmidlin “Unternehmensbewertung & Kennzahlenanalyse”
Vorbemerkung: Ich habe ein Exemplar vom Verfasser zugesandt bekommen und wurde um eine Besprechung gebeten. Ich hoffe und denke, dass es sich dennoch um eine unvoreingenommene Besprechung handelt.
Gute Deutschsprachige Literatur zum Thema Bilanzanalyse und Value Investing ist eher selten. Umso erfreulicher ist die Tatsache, dass sich jemand die Mühe macht, sein Wissen und Kenntnisse über Bilanzanalyse, Kennzahlen Berechnung und Unternehmensbewertung in Buchform zu veröffentlichen.
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Book Review: Joel Greenblatt -You can be a stock market genius
This is one of the books I always wanted to read but never managed to:
When Joel Greenblatt published this book in 1997,he had a tremendous run as manager of Gotham capital.
The book is aimed towards the “average” investor and makes the case for investing in special situations.
The best special situation he recommends are spinoffs, when a usually large company is spinning off a part of its business in the form of stocks which are simply distributed to the owner of the large company. As the owner of the large company don’t really want this stock, this creates an investing opportunity, especially if the management of the spin off is incentivised correctly.
He touches a couple of other special situations (merger securities, recaps, reorganisations, companies emerging from bankruptcy), which should be well known to people having read “Margin of safety” or other value oriented books.
The case studies in the book are good, it is interesting to see that Greenblatt invests even in highly indebted companies if they are “special”.
For a European investor in our time howver, the book contains only partly directly actionable advise, as spinoffs are avery rare breed today. However it is still a very good books which shows that “special situation” investing can lead to great investment results.
Summary: I think the book is a good start for anyone who wants to have an “easy to read” entry into the world of special situation investing, although the focus of the book might not be easily applicable in current times.
New page: Recommended Reading
For those who haven’t noticed yet: There is a new page available: “Recommended Reading”
I tried to put the most interesting books into the categories
– Value Investing
– Fundamental Analysis
– Finance history
– Scandals & Crisis
By the way, if you find any book particularily interesting, please let me know.
Book Review: The Match King
Those who read my blog more often know that I like to read “historical” Finance books especially when there is high volitility in the markets. For me this is maybe some sort of “therapy” in order to control my “Buy and sell” finger better…..
Anyway, when I read my last historical book, the “Lords of finance”, a historical financier named Ivar Kreuger popped up a couple of times.
Coincidently, I found out there is a recent book avaliable from the author Frank Partnoy who also wrote “FIASCO”, a wall street classic.
Back to “the Match King”:
It is the story of Ivan Kreuger, a self-made Swede who made his first money in construction and then moved on and tried to monopolise the international match production in the 1920ies and early 30ies.
He soon became one of the most famous business men in the world, having shares of his companies listed on the New York stock exchange and dining with US President Hoover and other head of states. He was a master in taking advantage of the problems after WWI by offering loans to Governments in return for monopolies for match production and imports.
As some side activities, he also owned Ericsson, the Swedish telephone company as well as gold mines and other assets.
However from his early beginnings he was an absolute master in 2 disciplins: issueing complicated securities including many “derivatives” and creative accounting and transactions between his numerous official and unofficial companies.
After the big crash of 1929 he had to do more and more aggresive transactions in order to stabilize his empire before he was finally caught out and shot himself in Paris in 1932.
Besides being a really good read, the book clearly shows that nothing is really new in finance. One could even think that the CFOs of companies like Enron or several Chinese Reverse Mergers have used the “Match empire” as a case study.
The story of a brilliant guy, impressing everyone but doing one deal too many seems to be one of the constant themes of financial history. Indirectly it is also a lesson not to believe too much in Management, no matter how brilliant it seems, but stick to the hard numbers and facts (Groupon anyone ?).
I really liked the book and can recommend it to anyone who is interested in historical finance and large financial scandals.
value and opportunity 