Description
Book SynopsisA stock's share price is often traded not for what it is worth but for what investors think it is worth. Institutional investors are increasingly looking at the rapidly expanding area of behavioural finance before making an investment decision. This book links the theory of behavioural finance with applications in financial products.
Trade Review"...The finding is surprising, as the City is notoriously full of arrogant young men betting on financial markets…Mr Montier has unearthed bizarre facts which suggest stock markets are frequently driven by entirely irrational factors..." (The Daily Telegraph 25 November 2002)
"...In a new book, James Montier…outlines practical methods for exploiting the anomalies thrown up by behavioural finance..." (Financial Times, 25 November 2002)
"…a good introduction to this subject…." (Professional Investor, March 2003)
Table of ContentsPreface.
Introduction.
1. Psychological Foundations.
Introduction.
Biases of Judgement or Perception is Reality.
Errors of Preference or There is No Such Thing as Context-free Decision Making.
Conclusions.
2. Imperfect Markets and Limited Arbitrage.
Introduction.
Ketchup Economics.
Efficiency and LOOP.
Stock Market.
Other Markets.
Imperfect Substitutes.
Limited Arbitrage.
Positive Feedback Trading.
Risk Management and Limited Arbitrage.
On the Survival of Noise Traders.
Informational Imperfections.
Conclusions.
3. Style Investing.
Introduction.
The Data.
The History.
Potential Gains to Style Rotation.
Life Cycle of an Investment Style.
Value vs. Growth: Risk or Behavioural?
Style Rotation.
Quantitative Screens.
Timing the Switch.
Conclusions.
4. Stock Valuation.
Introduction.
Keynes' Beauty Competition.
The (Ir)relevance of Fundamentals.
Valuation and Behavioural Biases.
Cost of Capital.
Factors from Limited Arbitrage.
An Analyst's Guide.
5. Portfolio Construction and Risk Management.
Introduction.
Covariances.
Correlations.
Distribution of Returns.
Fat Tails or Outliers?
6. Asset Allocation.
Introduction.
Markets and Fundamentals.
Dividend Yield, Spreads and Ratios.
Earnings Yield, Spreads and Ratios.
Payout Ratio.
The Equity Risk Premium.
Should Corporate Financiers be Running TAA?
Market Liquidity.
Crashes as Critical Points.
7. Corporate Finance.
Introduction.
Irrational Managers/Rational Markets.
Rational Managers/Irrational Markets.
Conclusions.
8. The Indicators.
Introduction.
Liquidity Measures.
Sentiment Measures.
Asset Allocation Measures.
Earnings Measures.
Technical Measures.
Others.
Final Thoughts.
Bibliography.
Index.
