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Investment Fables

Investment Fables

Exposing the Myths of "Can't Miss" Investment Strategies

Aswath Damodaran

Apr 2004, Hardback, 576 pages
ISBN13: 9780131403123
ISBN10: 0131403125
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The truth about 13 of today's most widely touted investment strategies.

  • 10 powerful lessons for every investor
  • Overcoming the enduring myths about markets
  • High dividend stocks: better and safer than bonds--or not?
  • Cheap stocks: cheap for a reason?
  • Should you invest in quality? Momentum? The next big thing? Or what?

You've heard 'em. (Maybe even from your broker!) They're the "can't lose" investment stories that promise you a no-risk path to profits …

  • "Buy companies trading below book value."
  • "Follow the momentum."
  • "Buy stocks with low P/Es."
  • "Stick with quality."
  • "Buy after bad news."
  • "Buy after good news."
  • "Follow the insiders."
  • "Do whatever Warren Buffett's doing."

And on, and on, and on …

They sound good. But do they really work? You're about to find out.

In Investment Fables, one of the world's leading investment researchers runs the numbers on 13 of today's most widely touted strategies, objectively answering the questions your broker can't answer. Has it worked over the long term? Over the short term? If it made sense once, does it still make sense? Are the promised benefits a statistical mirage? Could it work, as one part of your investment strategy? What are the downsides–and how can you mitigate them?

If you want to make smarter investment decisions, you'll find this book utterly indispensable.



Investment Fables: Tall Tales about Stocks.


1. Introduction.
The Power of the Story. Categorizing Investment Stories. Stories for the Risk Averse. Stories for the Risk Seeker. Stories for the Greedy. Stories for the Hopeful. Deconstructing an Investment Story. I. Theoretical Roots: Isolating the Kernel of Truth. II. Looking at the Evidence: Getting the Full Picture. III. Crunching the Numbers: Developing a Frame of Reference. IV. More to the Story: Probing for Weaknesses. V. Lessons for Investors. Conclusion.

2. High Dividend Stocks: Bonds with Price Appreciation?
Core of the Story. Theoretical Roots: Dividends and Value. Dividends Do Not Matter: The Miller-Modigliani Theorem. Dividends Are Bad: The Tax Argument. Dividends Are Good: The Clientele and Signaling Stories. Looking at the Evidence. Do Higher Yield Stocks Earn Higher Returns? The Dividend Dogs. Dividend Increases. Crunching the Numbers. Dividend Yields: Across Companies and Over Time. Sector Differences in Dividend Policy. A Portfolio of High Dividend Stocks. The Rest of the Story. Unsustainable Dividends. Low Growth. Taxes. Lessons for Investors. Conclusion.

3. This Stock Is So Cheap! The Low Price Earnings Story.
Core of the Story. Theoretical Roots: Determinants of PE Ratio. What Is the PE Ratio? A Primer on Accounting Earnings. Determinants of PE Ratios. Looking at the Evidence. Ben Graham and Value Screening. Low PE Stocks versus the Rest of the Market. Crunching the Numbers. PE Ratios Across the Market. PE Ratios Across Sectors. PE Ratio Across Time. A Low PE Portfolio. More to the Story. Risk and PE Ratios. Low Growth and PE Ratios. Earnings Quality and PE Ratios. Lessons for Investors. Conclusion. Endnotes.

4. Less than Book Value: What a Bargain?
The Core of the Story. Theoretical Roots Theory: Price to Book Ratios and Fundamentals. Defining the Price-to-Book Ratio. How Accountants Measure Book Value. Determinants of PBV Ratios. Looking at the Evidence. Evidence from the United States. Evidence from Outside the United States. Crunching the Numbers. Distribution of Price-to-Book Ratios Across the Market. Price-to-Book Ratios by Sector. A Low Price-to-Book Portfolio. More to the Story. High-Risk Stocks. Low-Priced Stocks. Poor Projects: Low Return on Equity. Lessons for Investors. Conclusion.

5. Stable Earnings, Better Investment?
Core of the Story. Measurement of Earnings Stability. Theoretical Roots: Earnings Stability and Value. Diversification and Risk. Stable Earnings, Risk and Value. Looking at the Evidence. Stable Businesses with No Competition. Diversified Business Mix: The Allure of Conglomerates. Global Diversification. The Risk Hedgers. The Earnings Smoothers. Crunching the Numbers. Earnings Volatility Across the Market. A Portfolio of Stable Earnings Companies. More to the Story. Stable Earnings, Risky Investment? Giving Up on Growth Opportunities. Priced Right? Earnings Quality. Lessons for Investors. Conclusion.

6. In Search of Excellence: Are Good Companies Good Investments?
Core of the Story. What Is a Good Company? Financial Performance. Corporate Governance. Social Responsibility. The Theory: Building Quality into Value. Inputs in a DCF Valuation. EVA and Excess Return Models. Looking at the Evidence. Project Quality and Stock Returns. The Payoff to Corporate Governance. The Payoff to Social Responsibility. Broader Definitions of Good Companies. Crunching the Numbers. Across the Market. A Superior Company List. More to the Story. Failing the Expectations Game. Revering to the "Norm". Lessons for Investors. Conclusion. Endnotes.

7. Grow, Baby, Grow!: The Growth Story.
The Core of the Story. The Theory: Growth and Value. Growth in a Discounted Cash Flow Valuation. The Value of Growth in a Relative Valuation. Looking at the Evidence. High PE Strategy. Growth at a Reasonable Price (GARP) Strategies. Crunching the Numbers. Across the Market. The Value of Growth. A High Growth Portfolio. More to the Story. Identifying Growth Companies. Screening for Risk. Poor-Quality Growth. Lessons for Investors. Conclusion.

8. The Worst Is Behind You: The Contrarian Story.
The Core of the Story. Theoretical Roots: The Contrarian Story. Information and Price. The Random-Walk World. The Basis for Contrarian Investing. Looking at the Evidence. Serial Correlation. Loser Stocks. Crunching the Numbers. Across the Market. The Sector Effect. A Portfolio of Losers. More to the Story. Transactions Costs. Volatility and Default Risk. Catalysts for Improvement. Lessons for Investors. Conclusion. Endnotes.

9. The Next Big Thing: New Businesses and Young Companies.
Core of the Story. Theoretical Roots: Risk and Potential Growth. Additional Risk. Potential for Excess Return. Looking at the Evidence. Small Companies. Initial Public Offerings. Private Companies. Crunching the Numbers. Market Capitalization. Initial Public Offerings. Private Equity Investments. A Portfolio of Small Cap, Lightly Followed Stocks. More to the Story. Small and Lightly Followed Stocks. Initial Public Offerings. Private Companies. Lessons for Investors. Conclusion. Endnotes. Appendix: Small-Cap Companies That Are Lightly Followed: January 2003.

10. Mergers and Returns: The Acquisitive Company.
Core of the Story. Theoretical Roots: Acquisitions and Value. Acquisitions and Value Creation. Acquisitions and Value Division. Looking at the Evidence. Acquisition Date. From Announcement to Action. After the Acquisition. Crunching the Numbers. Acquiring and Acquired Firms. Creating Portfolios. More to the Story. Investing in Acquiring Firms. Investing in Target Firms. Lessons for Investors. Conclusion. Endnotes. Appendix: Potential Takeover Targets Among US Companies-March 2003.

11. A Sure Thing: No Risk and Sure Profits.
Core of the Story. Theoretical Roots of Arbitrage. Pure Arbitrage. Near Arbitrage. Pseudo or Speculative Arbitrage. Looking at the Evidence. Pure Arbitrage. Near Arbitrage. Pseudo or Speculative Arbitrage. Crunching the Numbers. Futures and Options Arbitrage. Depository Receipts. Closed-End Funds. More to the Story. Pure Arbitrage. Near Arbitrage. Speculative Arbitrage. Lessons for Investors. Conclusion. Endnotes.

12. It's All Upside: The Momentum Story.
The Core of the Story. Theoretical Roots of Momentum Investing. Measures Used by Momentum Investors. Models for Momentum. Looking for the Evidence. Serial Correlation in Stock Price Drifts. Information Announcements. The Confounding Effect of Trading Volume. Momentum in Mutual Funds. Crunching the Numbers. Momentum Measures. Constructing a Momentum Portfolio. More to the Story. Risk. Momentum Shifts (When Do You Sell?). Execution Costs. Lessons for Investors. Conclusion. Endnotes.

13. Follow the Experts.
The Core of the Story. Theoretical Roots: The Value of Expert Opinion. Looking at the Evidence. Insiders. Analysts. Investment Advisors and Other Experts. Crunching the Numbers. Insider Trading. Analyst Recommendations and Revisions. Portfolio of "Expert" Stocks. More to the Story. Following Insiders: Timing Is Everything. Earnings Revisions. Analyst Recommendations. Lessons for Investors. Conclusion.

14. In the Long Term... Myths about Markets.
Core of the Story. Theoretical Roots: Market Timing. Market Timing Trumps Stock Selection. Market Timing Works. Looking at the Evidence. Do Stocks Always Win in the Long Term? Market Timing Indicators. Market Timers. More to the Story. Stocks Are Not Riskless in the Long Term. Market Timing Works Only Infrequently. Lessons for Investors. Conclusion.

15. Ten Lessons for Investors.
Lesson 1: The more things change, the more they stay the same. Lesson 2: If you want guarantees, don't invest in stocks. Lesson 3: No pain, no gain. Lesson 4: Remember the fundamentals. Lesson 5: Most stocks that look cheap are cheap for a reason. Lesson 6: Everything has a price. Lesson 7: Numbers can be deceptive. Lesson 8: Respect the market. Lesson 9: Know yourself. Lesson 10: Luck overwhelms skill (at least in the short term). Conclusion. Index.

  • Examines 14 common investment strategies and presents exactly what works--and what doesn't.
  • Beyond anecdotes: run the numbers with one of the world's leading investment researchers and top-ranked business school professors
  • Guidance on understanding the real opportunities and not-so-obvious risks associated with each strategy--and instruction on how to mitigate the risks.
  • Aswath Damodaran is Professor of Finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation in the MBA program.

    He has published widely in the field, for leading journals such as The Journal of Financial and Quantitative Analysis, The Journal of Finance, The Journal of Financial Economics, and The Review of Financial Studies.

    He has also authored several books, including The Dark Side of Valuation (Financial Times Prentice Hall) and two books on corporate finance. With Peter Bernstein, he co-authored Investment Management.

    He received the Stern School of Business Excellence in Teaching Award in 1988, 1991, 1992, 1999, and 2001. In 1994, he was profiled in Business Week as one of the top 12 U.S. business school professors.