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Non-Financial Indicators

*Remember correlation does not equal causation -feel good indicators: measure how happy investors are feeling (tend to be lagging indicators, however) -Hype Indicators: attempt to measure whether there is a stock bubble

Criticisms of Value Investing

-A great deal of value investing strategies require too much faith in accounting measures such as book value -They overstate how inefficient markets are -They are inflexible in the types of companies that are analyzed for investment (i.e., avoiding entire sectors, such as technology)

Acquisitions

-Biggest price movement is on the acquisition announcement -significant excess returns can be made in the weeks leading up to the announcement

Structural Tilts

-Duration -Yield Curve Positioning -Roll Down -Sector Allocation and Individual Credit Selection -Carry -Out-of-BNCH Positions -Technical Factors

Growth Screening Criteria

-PE ratios (avoid the stocks with excessively high ones) -PEG ratios -Revenue multiples -Dividend Yields

Examples of Growth Industries

-Semiconductors -Biotechnology -E-commerce -Social Media -Software-as-a-Service -Health Care -Cloud Computing -Streaming

13F Issues

-They do not disclose short positions, foreign equities, or fixed income exposure -not necessarily reliable bc no one at the SEC analyzes the content for accuracy -they are backward looking and can be filed up to 45 days after the end of the quarter -most investors submit them as late as possible

Explanations for the small-cap premium

-Transactions costs of investing in small stocks is significantly higher than the transactions costs of investing in larger stocks -Estimation risk - the CAPM may not be the right model for risk, and betas under estimate the true risk of small stocks (failure of beta to capture risk) -less information -illiquidity

Downfalls of Market Timing

-being wrong -time out of the market -increased transaction costs -tax implications

Lynch Favorable Company Characteristics

-company name, product, or service is boring -company does something disagreeable or depressing, or there are rumors of something bad about the company -company is a spin-off -a fast growing company in a no-growth industry -company is a niche firm controlling a market segment or that would be difficult for a competitor to enter -companies that produce a product that is purchased regardless of economic cycle -low institutional holdings (not loved by Wall Street) -companies conducting stock buybacks

Potential Fixed Income active management advantages

-complexity and size of bond market -index construction issues -noneconomic investors -new issue concession -structural tilts -various financial derivatives available

Dangers in growth investing

-difficulty in accurately forecasting future growth -cost of growth (how much the company pays (in investments) to get that growth -scaling factor -momentum can cause the pricing to become disconnected from fundamentals over time

Index Construction Issues

-frequent changes in composition of bond indices -increased turnover (average for Bloomberg Barclays US aggregate is 40% per year) leads to increased trading costs -bond indices rebalance monthly -new securities make up about 20% of bond market cap annually

Determinants of success in small-cap investing

-have long time horizon -the importance of discipline and diversification become even greater -must conduct due diligence

Lynch Unfavorable Characteristics

-hot stocks in hot industries -companies with big plans that have not yet been proven -diworseification -companies in which one customer accounts for 25-50% of their sales

Market Timing Strategies

-non financial indicators -technical indicators -mean reversion indicators -rebalancing -refusal to timing (Dollar Cost Averaging)

Fixed income fund strategies

-passive or indexed -unconstrained or absolute return -total return -core IG -core plus -high yield (junk bonds) -duration target -global (EM or DM) -Domestic tax-exempt (munis) -distressed debt

Emerging Alternative Data

-satellite imagery -geolocation -social media -natural language generation -POS and credit card transactions -website scraping

Hedge funds

-some funds hedge risk, while others increase risk with the use of leverage -most strategies are vastly different from traditional long only mutual funds Common characteristics -target positive absolute returns (opposed to relative return against a benchmark) -accredited investors or institutions -can utilize a wide range of investment tools and instruments -can go short or long -can use leverage

Characteristics of successful growth investors

-superior judgments on growth prospects (obtaining better estimates of expected growth) -long time horizon -emphasis on diversification due to higher levels of volatility -market timing skills

Global Macro

-these funds employ a top-down approach -concentrate on major market trends rather than on individual security opportunities -can go long or short -can invest in any asset class or derivatives -the most flexible mandate among major hedge fund styles

Edwards & Magee Technical Analysis of Stock Trends

1. Stock prices tend to move in trends 2. Volume goes with the trends 3. A trend, once established, tends to continue in force

Assumptions of Technical Analysis

1. price is determined solely by the interaction of supply & demand 2. Supply and demand are governed by numerous factors both rational and irrational 3. Disregarding minor fluctuations in the market, stock prices tend to move in trends which persist for an appreciable length of time 4. Changes in trend are caused by shifts in demand and supply

Average initial IPO return

15.8%

Pairs Trading

A strategy where an investor matches a long position in one stock with a short position in another stock, usually in the same sector

Fibonacci Retracements

A type of support and resistance lines; theory of percentage retracements is based on the observation that after a period of market movement in one direction, prices tend to retrace a portion of the previous trend before resuming the move in the original direction

Financial Derivatives

A wide range of derivate are available to active managers -CDS -IRS -Cross Currency Swaps -Futures

First hedge fund

A.W. Jones & Co in 1949

The Value Investors' Tools for Success

Accounting checks (average earnings over a period of time; or focus on cash flows) The Moat Margin of Safety

Determinants of Technical Analysis Success

Back testing, timely trading, and control trading costs

Bollinger Bands

Bands that are two standard deviations above and below a 20 day simple moving average. Interpretation is the price of an asset should remain within the bands about 95% of the time Tries to identify periods of high and low volatility as well as periods when prices are at extreme and possibly unstable levels

Traditional Value Industries

Banks Insurance Utilities Oil & Gas Consumer Staples Telecommunications

Mean Reversion Measures

Based upon the assumption that assets have a normal range that they trade at and any deviation from the normal range is an indication that assets are mispriced Stocks: normal range is defined in terms of PE ratios Bonds: the normal range is defined in terms of interest rates

Contrarian indicators: shift in supply & demand

Breadth of the market, support & resistance lines, moving averages, volume shifts

Prime brokers

Brokers that provide services including custody, administration, lending, short borrowing, and trading

Mutual fund cash positions

Buy when the mutual fund cash position is high, sell when low

Big Takeaway with Fixed Income

Different in equity market because not as much alpha seeking investors as equity investors; can create more inefficiencies

Long/Short funds

Employ both long and short equity positions Fund's objective is not to be market neutral, but rather to switch back and forth between an overall net long or net short portfolio, depending on the market conditions and opportunities where a manager sees differences between a security's value and market price

Statistical Arbitrage

Equity Market Neutral investment style that attempts to take advantage of pricing discrepancies in the equity markets; funds will utilize mathematical models or calculations to evaluate a portfolio of stocks and attempt to profit from variations of current prices compared to similar stocks

Bill Miller's favorite screen

FCF yield of 10% or better

U.S. Insurance IO

Focus on book yield rather than total return due to accounting measures. Desire predictable income (3)

Time Out of the Market

From 1989-2008, 6 out of the 10 best days in the market over the last 20 years occurred within 2 weeks of the 10 worst days

Equity Market Neutral

Funds that attempt to identify both overvalued and undervalued stocks while neutralizing the fund's exposure to market risk by combining long and short positions -structured to be market, industry, sector, and dollar neutral

Long Bias

Funds will invest primarily in long positions in securities expected to appreciate in value while supplementing that with short positions of securities expected to fall in value

Odd Lot Trading

Gives us an indication of what the man on the street thinks about the stock; based on the assumption that the small individual investor is always wrong

Complexity and size of the bond market

Global bond market exceeds $100 Trillion; Stock market at $64 Trillion US Bond Market is twice the size of the U.S. Equity Market

P/S concerns

High leverage: low price to sales ratios could identify highly levered firms Low margins: firms that operate in businesses with little pricing power and poor profit margins will trade at low multiples of revenues

Support & resistance lines

If either is broken, the market is poised for a major move

Can bad companies be good investments?

If the market is exaggerating the value of the firm, this strategy can lead to poor returns even if the firm delivers its expected growth

Central banks IO

Implement monetary policy, stabilize exchange rates and inflation and full employment (2)

Activist Investing

Invest in companies with a value and/or pricing gap and provide the catalysts for closing the gaps -change management -board seats -improve how the company utilizes existing assets -drive investments for optimal future growth

Short Bias funds

Invest in short positions and derivatives in order to profit from stocks that drop in price; also called a bear market fund

Contrarian investors

Investors who invest in companies that others have given up on bc they've done badly in the past or their future prospects look bleak

Activist Value Investors

Investors who invest in poorly managed and poorly run firms but then they try to change the way the companies are run

Value investing

Investors who typically want to buy a business only if it trades at less than the value of the assets in place

Value stock characteristics

Lower multiples (PE, PB, PS) than the broader market and industry comps; companies that pay dividends, companies that are out of favor

The Moat

Measure of a company's competitive advantages

Relative Strength Index (RSI)

Measures the velocity of a security's price movement to identify overbought and oversold conditions; used to recognize potential turning points to help make entry/exit decisions High ___ means overbought; security moved too high too quickly Low ___ indicates oversold; security has moved too low too quickly

Switch Investment Styles

Moving money based on expected market performance (value to growth, vice versa)

U.S. Banks IO

Need to meet regulatory capital requirements (4)

Global Banks and Insurance

Need to meet regulatory requirements and receive predictable income (1)

Noneconomic investors

Non-indexed or alpha seeking investors make up roughly 47% of the $102 Trillion global bond market

Markets overreact: contrarian indicators

Odd-lot trading, mutual fund cash positions, investment advisory opinion

Small caps

One of the most widely used passive growth strategies is the strategy of investing in small-cap companies

PEG ratio

PE/forecasted 12 month growth; higher the number, the more you're paying for growth A P/E ratio that is half the growth rate is very positive. and one that's twice the growth rate is very negative

Types of Value Investing

Passive screeners, contrarian investors, activist value investors

Elliot Wave Theory

Predict price movements by observing and identifying repetitive wave patterns that provide a subjective view of the future direction in the market

Variant on Earnings Multiples: EV/EBITDA

Proponents of EV/EBITDA argue that it is better than PE bc it is less impacted by financial leverage and focused on a cash flow measure, rather than earnings

13F

Quarterly report that is filed by institutional investment managers with $100 million or more in equity AUM -only require funds to report their long positions in addition to their put and call options, ADRs, and convertible notes -firms required to file this include mutual funds, hedge funds, pension funds, and insurance companies

Asset Allocation Rebalancing

Regularly adjust weights to reestablish optimal asset allocation Strategic plan to make sure you are continuously buying low and selling high

Market slow learners: momentum indicators

Relative strength, trend lines

Quantitative funds

Select securities based on quantitative analysis Typically rely on proprietary computer based models to determine if an investment is worth investing in

Moving averages

Smooths out fluctuations and enables the chartist to see trends in the stock price

Volume shifts

Some technical analysts believe there is information about future price changes in trading volume shifts

Market speculation

Speculate on market direction, using either leverage or derivatives to magnify profits

Revenue Multiples Screens

Studies seem to indicate that low revenue multiple portfolios outperform the market but do not outperform low PE or low PBV ratio portfolios

Investment advisory opinion

The ratio of advisory services that are bearish; when this ratio reaches the threshold (i.e. 60%) the contrarian starts buying

Merger Arbitrage

The stock price of a target company jumps on the announcement of a takeover. A merger arbitrageur looks at the risk that the merger deal will not close on time, or at all

CAPE Ratio

This is a valuation measure that uses real earnings per share over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle. The ratio generally applied to broad equity indices to assess whether the market is undervalued or overvalued. While this ratio is a popular and widely-followed measure, several leading industry practitioners have called into question as a predictor of future stock market returns. It is also known as the Shiller P/E ratio

Moving Average Convergence Divergence

Trend-following momentum indicator that combines a moving average crossovers with the elements of overbought/oversold metrics

Growth stock characteristics

Typically characterized by: -higher multiples than the broader market -companies that reinvest cash flows back into the business to fuel strong growth -higher levels of volatility

Activist Growth Investing

Unlike activist value investing, which is usually directed at mature companies, late in the business cycle, activist growth investing has to happen earlier in the cycle -VC providing capital to young, start up companies Tend to beat growth indices more often than active value investors beat value indices

Charts

Visualization of the human mind and emotions as expressed in the financial markets

Trend lines

You look past the day-to-day movements in stock prices at the underlying long-term trends. The simplest measure of trend is a trend line

Passive screeners

You screen for stocks that have characteristics that you believe identify under valued stocks. You are hoping to find market mistakes through the screens

Contrarian value investors

believe that markets overreact to good and bad news; companies that have negative news, earnings declines, or bad acquisitions could be undervalued

Small cap premium

compensation for the risks associated with investing in smaller companies. Small cap stocks tend to outperform large caps when the yield curve is downward sloping and inflation is high

Charles Dow

credited as the pioneer of technical analysis

Hedged equity funds

fund that attempts to identify overvalued or undervalued equities -can be heavily concentrated in a few companies and short positions could be a small percentage of the value of long positions

Aggregate Bond Indices

include various bond sectors and weightings that may not match individual investors desired exposure

Accredited investor

individual investors with a net worth over $1 million not including private residence Individual that has an annual income over $200k ($330k jointly with a spouse)

Dollar Cost Averaging

investing roughly equal amounts of money at regular intervals

Enterprise value

market value of equity + debt - cash

Breadth of the market

measure of the number of stocks in the market which have advanced relative to those that have declined Low number of companies advancing = low breadth

Characteristics of successful value investors

patience, appropriate temperament, ability to stay calm and emotionally intelligent, self confidence

Sector rotation

shift money within the equity market from sector to sector based on future expectations of economic and market growth

Margin of safety

the buffer that value investors build into their investment decision to protect themselves against risk

High water mark

the previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees

Relative strength

the ratio of its current price to its average over a longer period (i.e. six months). The rule suggests buying stocks which have the highest relative strength (which will also be the stocks that have gone up the most in that period)

Sell Side Analysts

typically cover companies with the following characteristics -larger market cap -greater institutional holdings -liquid stocks (higher trading volume)