1,21nBank of the United States, 21Bankruptcy, stock indexes and,47Banz, Rolf, 141Barber, Brad, 325nBarberis, Nicholas, 35n, 326nBasu, Sanjoy, 149B.A.T. Industries, 48Bear markets, 6in early 2000s, 89–91Great Depression and, 79
Bear markets (Cont.):during 1966-1982, 85Beating the Dow (O’Higgins andDownes), 147Becker Securities Corporation,344Behavioral finance, 322–337contrarian investing andinvestor sentiment and,333–334, 335iexcessive trading, overconfidence, and representativebias and, 325–328fads, social dynamics, andstock bubbles and, 322–325myopic loss aversion, portfolio monitoring, and equityrisk premium and, 332–333out-of-favor stocks and Dow10 strategy and, 335–336prospect theory, loss aversion, and holding on tolosing trades and, 328–330rules for avoiding behavioraltraps and, 331Bell, Heather, 351nBenchmarks, for fund performance, 342Berkshire Hathaway, 43, 101n,176i, 346Bernanke, Ben, 246Bernartzi, Shlomo, 332–333Bernstein, Peter, 363Best Food, 47Bestfoods, 47Beta, 140nBethlehem Steel, 56i, 57Bias:forward-looking, 330367
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Bias (Cont.):representative, 326return, in stock indexes,46–47self-attribution, 326survivorship, 18, 343, 343iBig Board (see New York StockExchange [NYSE])Bikhchandani, S. D., 325nBill and Melinda GatesFoundation, 7nBills, interest rates on, 7–9, 9iBirrell, Lowell, 38–39Black, Fischer, 265, 266nBlack-Scholes formula, 266Blake, Christopher R., 348Blitzer, David, 107, 108n, 353nBlodget, S., Jr., 7nBlue Chip Economic Indicators,217, 218Bodie, Zvi, 35nBogle, John C., 343n, 348Bonds:current yield of, 111equity premium and, 16–18,17igovernment, interest rate on,above dividend yield oncommon stocks, 95–97inflation-indexed, 35long-term performance of,7–9, 9ireal returns on, 14–15, 15ireturn on, correlation withstock returns, 30–32, 31iRussian default on, 88standard deviation of returns for, 30stocks’ outperformance of,26yields on, stock yields related to, 95–97(See also Fixed-income assets)Book value, 117Bos, Roger, J., 353nBosland, Chelcie C., 82Boyd, John, 241nBP (British Petroleum), 177, 183
Index
BP Amoco, 55Brealey, Richard A., 171nBristol Myers, 59nBritish American Tobacco, 63, 177Brock, William, 295n, 304nBrown, Stephen J., 18nBrowne & Co., 21nBubbles:stock (see Stock bubbles)technology, 167Buffett, Warren, 7n, 61, 104, 107,187q, 268, 359qBull markets:beginning of, 85–86from 1982-1999, 14Bureau of Labor Statistics (BLS),241Burns, Arthur, 210nBush, George W., 69, 75Business cycle, 207–219, 285dating of, 208–211definition of, 209–210prediction of, 216–219timing of, gains through,214–216, 215iturning points of, stockreturns around, 211–214,212i–214iBuy-and-hold returns, 215Buy and write strategy, 267Buy programs, 258Buybacks, 98CAC index, 238Calendar anomalies, 305–318day-of-the-week effects,316–318, 317iinvesting strategies for, 318seasonal, 306–316California Packing Co., 60i, 62Calls, 264Campbell, John Y., 35n, 87, 158Capital asset pricing model(CAPM), 140, 141Capital gains taxes:benefits of deferring, 69–70failure of stocks as long-terminflation hedge and, 204
Capital gains taxes (Cont.):historical, 66, 67iincreasingly favorable taxfactors for equities and,72–73inflation and, 70–72, 71itotal after-tax returns indexand, 66, 68–69, 68i, 69iCapitalization-weighted indexing, 351–352, 352ifundamentally weightedindexation versus, 353–355Carnegie, Andrew, 57Carvell, Tim, 107nCash flows, from stocks,valuation of, 97–98Cash market, 257Cash-settled futures contracts,257CBOE Volatility Index, 281–282,282iCelanese Corp., 60i, 64Center for Research in SecurityPrices (CRSP) index, 45, 46i,141Central bank policy, 247(See also Federal ReserveSystem [Fed])Chamberlain, Lawrence, 82Chamberlain, Neville, 78Channels, 40technical analysis and, 294Chartists (see Technical analysis)Chevron, 176i, 177ChevronTexaco, 55Chicago Board of Trade (CBOT):closure due to Chicago Riverleak, 253, 254i, 255stock market crash of 1987and, 273Chicago Board OptionsExchange (CBOE), 264–265Volatility Index of, 281–282,282iChicago Gas, 47in DJIA, 39i, 48Chicago Mercantile Exchange,stopping of trading on, 276
Index
Chicago Purchasing Managers,244China:global market share of, 178,179i, 180, 180isector allocation and, 177China Construction Bank, 175China Mobile, 177, 183China National Petroleum Corporation, 182Chrysler, 64Chunghwa Telecom, 177Cipsco (Central Illinois PublicService Co.), 48Circuit breakers, 276–277Cisco Systems, 38, 57n, 89, 104,155, 157, 176ion Nasdaq, 44Citigroup, 144, 175, 176iClinton, Bill, 75, 227, 238Clough, Charles, 86CNBC, 48, 88Coca-Cola Co., 59i, 61, 64Cognitive dissonance, 328Colby, Robert W., 295–296Colgate-Palmolive, 59iColombia Acorn Fund, 346Comcast, 176Common stock theory of investment, 82Common Stocks as Long-Term Investments (Smith), 79, 83, 201Communications technology,bull market and, 88Compagnie Française desPétroles (CFP), 184Conference Board, 244Conoco (Continental Oil Co.),57ConocoPhillips, 176i, 177, 183Consensus estimate, 239Consumer choice, rational theory of, 322Consumer discretionary sector:in GICS, 53global shares in, 175i, 176Consumer Price Index (CPI),245
369
Consumer staples sector:in GICS, 53global shares in, 175i, 177Consumer Value Store, 61Contrarian investing, 333–334Core earnings, 107–108Core inflation, 245–246Corn Products International,47Corn Products Refining, 47Corporate earnings taxes,failure of stocks as long-terminflation hedge and, 202–203Correlation coefficient, 168Corvis Corporation, 156–157Costs:agency, 100effects on returns, 350employment, 246interest, inflationary biasesin, failure of stocks as longterm inflation hedge and,203–204pension, controversies inaccounting for, 105–107Cowles, Alfred, 42, 83Cowles Commission forEconomic Research, 42, 83CPC International, 47Crane, Richard, 61Crane Co., 59i, 60i, 61Cream of Wheat, 62Creation units, 252Crowther, Samuel, 3Cubes (ETFs), 252Currency hedging, 173Current yield of bonds, 111Cutler, David M., 224nCVS Corporation, 61Cyclical stocks, 144DaimlerChrysler, 176Daniel, Kent, 326nDart Industries, 62Dash, Srikant, 353nData mining, 326–327David, Joseph, 21DAX index, 238
Day-of-the-week effects,316–318, 317iDay trading, futures contractsand, 261Dean Witter, 286De Bondt, Werner, 302–303, 335Defined benefit plans, 106–107Defined contribution plans,105–106Delaware and Hudson Canal,22Deleveraging, 120Del Monte Foods, 62Department of Commerce, 203Depreciation, failure of stocksas long-term inflation hedgeand, 203Deutsch, Morton, 324nDeutsche Post, 177Deutsche Telekom, 177Dexter Corp., 21nDiamonds (ETFs), 252Dilution of earnings, 104Dimensional Fund Advisors(DFA) Small Company fund,142nDimson, Elroy, 18, 19n, 20Discounts, futures contractsand, 258Distiller’s Securities Corp., 48Distilling and Cattle Feeding,47in DJIA, 39i, 48Diversifiable risk, 140Diversification in world markets, 168–178currency hedging and, 173efficient portfolios and,168–172, 169i–171iprivate and public capitaland, 177–178sector diversification and,173–177, 174iThe Dividend Investor (Knowlesand Petty), 147Dividend payout ratio, 101Dividend policy, value of stockas related to, 100–102
370
Dividend yields, 145–149,146i–149iinterest rate on governmentbonds above, 95–97ratio of market value to, 120,120iDodd, David, 77q, 83, 95q, 139q,141, 145n, 150, 152, 289q, 304n,334nDogs of the Dow strategy,147–149, 148i, 149i, 336Dollar cost averaging, 84Domino Foods, Inc., 47Dorfman, John R., 147nDouble witching, 260–261Douvogiannis, Martha, 113nDow, Charles, 38, 290–291Dow Chemical, 58Dow Jones & Co., 38Dow Jones averages, computation of, 39–40Dow Jones Industrial Average(DJIA), 37, 47breaks 2000, 85breaks 3000, 85breaks 8000, 87crash of 1929 and, 4creation of, 38fall in 1998, 88firms in, 38–39, 39ifollowing Iraq’s defeat inGulf War, 85long-term trends in, 40–41,41iNasdaq stocks in, 38during 1922–1932, 269, 270iduring 1980–1990, 269, 270ioriginal firms in, 47–49original members of, 22predicting future returnsusing trend lines and,41–42as price-weighted index, 40Dow Jones Wilshire 5000 Index,45Dow 10 strategy, 147–149, 148i,149i, 336Dow Theory (Rhea), 290
Index
Dow 36,000 (Hassett), 88Downes, John, 147Dr. Pepper, 60i, 64Dreman, David, 319q, 328nDuer, William, 21DuPont, 56i, 58Dyl, Edward A., 44nE. F. Hutton, 85E-minis, 256EAFE Index, 313sector allocation and, 175iEarnings, 102–110core, of Standard & Poor’s,107–108dilution of, 104downward biases in, 109–110employee stock optioncontroversy and, 104–105operating, 103, 107pension cost accountingcontroversies and, 105–107quality of, 108–109reporting methods for,102–104Earnings quality, 108–109Earnings yield, 111–112, 113iFed model and, 113–115,114iEastman Kodak, 56i, 58Economic data, 237–248central bank policy and, 247cycle of announcements and,243–244, 243ieconomic growth and stockprices and, 240–241employment report and,241–243impact on financial markets,246inflation reports and, 244–246information content of datareleases and, 239–240market movements and, 238principles of market reactionand, 238–239Economic growth, stock pricesand, 240–241
Edison, Thomas, 57Edison General Electric, 57Edwards, Susan M., 303nEfficient frontiers, 32–33, 33i,170Efficient market hypothesis,292Efficient markets, 354Efficient portfolios, diversification in world markets and,168–172, 169i–171nEggert, Robert J., 217Eisenhower, Dwight D., 224,226Eiteman, Wilford J., 83–84Electricité de France (EDF), 177,184Ellis, Charles D., 341q, 350Elton, Edwin J., 348EMC Corp., 156Emerging markets:market bubble in, 166–167sector allocation and, 175i,177Emotion, coping with, 363Employee Retirement IncomeSecurity Act of 1974 (ERISA),143–144Employee stock options,controversy over, 104–105Employment cost index (ECI),246Employment costs, 246Employment report, 241–243Employment statistics,237–238Enel, 177Energy sector:in GICS, 53global shares in, 175i, 177England, end of gold standardin, 187–188ENI, 177Enron, 89, 234–235Equity, world, 162, 163i, 164Equity risk premium, 16–18,17i, 332–333Establishment survey, 241
Index
Europe:global market share of, 179,179i, 180isector allocation and, 175i,177Evans, Richard E., 356“Everybody Ought to Be Rich”(Crowther), 3Excess returns, 215Excessive trading, 325–328Exchange-rate policies, stockmarket crash of 1987 and,274–275Exchange-traded funds (ETFs),252–253, 258, 342authorized participants and,252choosing, 262–264, 263icreating, 258creation units and, 252cubes, 252diamonds, 252exchanges in kind and, 253spiders, 252using, 261–262Exchanges in kind, 253Exelon Corp., 177Extraordinary Delusions and theMadness of Crowds (Mackay),324Exxon, 55Exxon Mobil, 40, 144, 176i,177–178, 183Fads, 323–325Fama, Eugene, 140–141, 152, 157Fannie Mae, 54, 116“Fear and Greed” (Shulman), 86Fed model, 113–115, 114iFederal funds market, 196Federal funds rate, 196Federal Reserve System (Fed):dollar stabilization programand, 274establishment of, 191–192Great Depression and, 79interest rates and, 196, 197i,198–199
371
Federal Reserve System (Fed)(Cont.):money creation and, 195–196postdevaluation monetarypolicy and, 193–194postgold monetary policyand, 194–195rate cuts following 1998 fallon DJIA, 88Fernandez, Henry, 356nFidelity Magellan Fund,345–346, 348Financial Accounting StandardsBoard (FASB), 102–103Financial Analysts Journal, 97Financial markets:central bank policy and,247inflation’s impact on, 246Financial sector:in GICS, 53global shares in, 175, 175iFirestone, 64First National Bank ofPennsylvania, 21nFirst Union Bank, 21nFischhoff, B., 326nFisher, Irving, 4n, 23q, 78–79, 79,80, 86, 201nFisher, Lawrence, 45, 84Fisher effect, 201–202Fixed-income assets:fall in returns on, 15–16real returns on, 14–16, 15i(See also Bonds)Flintkote, 60i, 62–63, 64Float-adjusted shares, incapitalization-weightedindexing, 353Foman, Robert, 85Ford, Gerald, 216Ford Motor Company, 64Foreign exchange risk, hedging,173Foreign markets (see Globalinvesting)Fortune Brands, 48, 61, 61nForward-looking bias, 330
Franklin, Benjamin, 65qFranklin Templeton, 346Freddie Mac, 54, 116French, Ken, 140–141, 152,157Friedman, Robert, 108nFroot, Kenneth A., 173nFT-SE index, 238Fund performance, 342–346,343i–345iFundamental analysis (seeTechnical analysis)“Fundamental Indexation”(Arnott, Hsu, and Moore),356Fundamentally weightedindexation, 353–357capitalization-weightedindexing versus, 353–355history of, 356–357Fundamentals, 110Futures contracts (see Stockindex futures)Gaps, 275–276Gartley, H. M., 295nGazprom, 177, 182–183General Electric, 47, 54, 56i, 57,89, 176i, 177in DJIA, 38, 39i, 48General Foods, 60i, 62General Motors, 40, 56i, 58, 64,149n, 183The General Theory (Keynes),287, 364Generally accepted accountingprinciples (GAAP), 103Genstar, 63Geometric return, 22George, Thomas J., 302nGerard, Harold B., 324nGervais, Simon, 326nGlassman, James, 88, 147GlaxoSmithKline, 177Glickstein, David, 290nGlobal Crossing, 64Global Industrial ClassificationStandard (GICS), 52–53
372
Global investing, 161–184cycles in foreign marketsand, 164–167, 164idiversification in worldmarkets and (see Diversification in world markets)emerging market bubbleand, 166–167future of, 178–182Japanese market bubble and,165largest non-U.S.-basedcompanies and, 182–184population, production, andequity capital and, 162,162i, 163i, 164technology bubble and, 167Global Marine, 63Global stocks, 18–20, 19iGlobal Wealth Allocation, 356Globex, 258–260Goethe, Johann Wolfgang, 37qGoetzmann, William, 12n, 18nGold:as backing for U.S. currency,193–194price of, 10Gold standard:adherence to, 191end of, 9–10, 10i, 187–189,192–193“Good Beta, Bad Beta”(Campbell), 158Goodyear, 64Google, 176i, 355Gordon, William, 295Government bonds, interestrate on, above dividend yieldon common stocks, 95–97Graham, Benjamin, 77q, 82–83,95q, 100, 139q, 141, 145n, 150,152, 289q, 304, 334, 341qGrant, Linda, 359nGrantham, Jeremy, 90Great Britain, end of goldstandard in, 192Great Crash (see Stock marketcrash of 1929)
Index
Great Depression:interest rates during, 8investors’ reaction to, 16postcrash view of stockreturns and, 83–85Greenspan, Alan, 87, 113, 246Grinblatt, Mark, 302nGross, Bill, 89–90Gross domestic product (GDP):market value relative to,119–120, 119i, 120iworld, 162, 163i, 164Gross, Leroy, 329Growth stocks:nature of, 157value stocks versus, 144–145Gruber, Martin J., 348Gulf of Tonkin incident, 233Gulf Oil, 55Gulf War, 85, 233–234H. J. Heinz Co., 59i, 61, 64Hall, Robert E., 211Hamilton, William, 290Hansol PLC, 48Harding, Warren, 227Hassett, Kevin, 88Hastorf, A. H., 326nHaugen, Robert, 308nHawawini, Gabriel, 309n,316–317Hay, William W., 82nHealthcare sector:in GICS, 53global shares in, 175i, 177Hedging stock market risk, 262Hendricks, Darryll, 348nHenry, Patrick, 3qHerding instinct, 324Hershey Co., 59i, 61Hertzberg, Daniel, 273nHigh-growth country stocks, 362Hilscher, Jens, 158nHirshleifer, David, 325n, 326nHistorical prices, 117Hitler, Adolph, 78Holding period, risk and,24–27, 25i, 26i
Home Depot, 155, 156, 176Honda Motor, 176Hong Kong and ShanghaiBank, 184Hoover, Herbert, 227Houdaille, Maurice, 63Houdaille Industries, 60i, 63Household survey, 241HSBC Holdings, 175, 184Hsu, Jason, 159n, 355n, 356Hu, Jian, 241nHumphrey-Hawkins Act of1978, 194, 195nHussein, Saddam, 85Hwng, Chuan-Yang, 302nIbbotson, Roger, 84IBM, 56i, 57, 176iIDEX, 63nImasco, 63Implied volatility, 281“In the Market We Trust”(Kaufman), 86–87In-the-money puts, 266Income:median, in United States, 189national, ratio of corporateprofits to, market valuationand, 115–116, 116inet, 102–104(See also Earnings)Income taxes:on corporate earnings,failure of stocks as longterm inflation hedge and,202–203historical, 66, 67itotal after-tax returns indexand, 66, 68–69, 68i, 69iIndex arbitrage, 257–258Index futures (see Stock indexfutures)Index mutual funds, 342choosing, 262–264, 263ino-load, 263Index options, 264–268buying, 266–267importance of, 267–268
Index
Index options (Cont.):selling, 267Indexation:capitalization-weighted,351–352, 352i, 353–355fundamentally weighted,capitalization-weightedindexing versus, 353–355India:global market share of, 179i,180, 180igrowing market share of, 178Industrial and CommercialBank of China (ICBC), 175, 184Industrial sector:in GICS, 53global shares in, 175i, 177Inflation:after World War II, 9, 10icapital gains tax and, 70–72,71icore, 245–246economic downturns and,30–31impact on financial markets,246money supply and, 189–190,191iduring 1970s, 9stocks as hedges against,199, 200i, 201–204Inflation hedges, 199, 200i,201–204long-term, failure of stocksas, 201–204Inflation-indexed bonds, 35Inflation reports, 244–246Information cascade, 325Information technology sector:in GICS, 53