global shares in, 175i, 177Informed trading, 349–350Initial public offerings (IPOs),154–157Insider holdings, in capitalization-weighted indexing, 353Institute for Supply Management(ISM), 243
373
Integrys Energy Group, 48Intel, 38, 155, 156, 158, 176ion Nasdaq, 44Interest costs, inflationarybiases in, failure of stocks aslong-term inflation hedge and,203–204Interest rates:on bonds, 7–9, 9ifailure of stocks as long-terminflation hedge and,201–202Fed actions and, 196, 197i,198–199federal funds rate, 196on government bonds, abovedividend yield on commonstocks, 95–97during Great Depression, 8International AccountingStandards Board (IASB), 105,174International incorporations, 174International stocks, 362Inventory accounting methods,failure of stocks as long-terminflation hedge and, 203Investing:bear market and its aftermath and, 89–91beginning of great bullmarket and, 85–86common stock theory of, 82early views of, 79–82postcrash view of returnsand, 83–85practical aspects of, 360radical shift in sentimentand, 82–83successful, guides to,360–363top of bubble and, 88–89warnings of overspeculationand, 86–88Investment advisors, 364Investment strategy, 363–364Investor sentiment, 333–334,335i
Iraq, defeat in Gulf War, 85“It Pays to Be Contrary” (Neill),333Jagannathan, Ravi, 241nJanuary effect, 306–311, 307icauses of, 309–310weakening of, 310–311Japan:global market share of, 179,179i, 180imarket bubble in, 165sector allocation and, 175i,176, 177JCPenney, 64JDS Uniphase, 89Jegadeesh, Narasimhan, 302Jensen, Michael, 99n, 345Jobs and Growth ReconciliationAct of 2003, 69–70Johnson, Lyndon B., 193, 226Johnson & Johnson, 144, 176i, 177Jones, Robert, 356Jorion, Phillipe, 12nJournal of the American StatisticalAssociation, 81JPMorgan Chase, 176iKahneman, Daniel, 322–323,328, 330Kansas City Board of Trade, 256Kaufman, Henry, 86, 87nKeim, Donald, 306, 309n,316–317Kennedy, John F., 226Keta Oil & Gas, in DJIA, 38–39Keynes, John Maynard, 81, 278,285, 287, 359q, 364Knowles, Harvey, 147Kohlberg Kravis Roberts & Co.(KKR), 62, 63Korean War, 233Kraft Foods, 62Kroger, 59iKump, Cecily, 109nLaclede Gas, in DJIA, 39i, 48Laclede Group, Inc., 47, 48
374
Lakonishok, Josef, 295n, 304n,308nLampert, Eddie, 57Lander, Joel, 113nLane Bryant, 60iLarge-cap stocks, small-capstocks versus, 141–144, 142iLeBaron, Blake, 295n, 304nLegg Mason Value Trust, 348Leroy, M., 65nLeverage, futures contracts and,261Liberty Acorn Fund, 346Lichtenstein, S., 326nThe Limited Stores, 156Lintner, John, 140nLitzenberger, Robert, 145Lo, Andrew, 304n, 327nLocal risk, 169London Stock Exchange, 188Long-Term Capital Management (LTCM), 88, 282Long-term returns, 12–14, 13iLorie, James, 45, 84Lorillard, 60i“The Loser’s Game” (Ellis), 350Losing trades, holding on to,328–330Loss aversion, 328–330myopic, 332–333Lowenstein, Roger, 77q, 86Lynch, Peter, 207q, 251q, 268,346, 348Lyondell Chemical, 48Ma Bell, 57, 58MacCauley, Frederick, 291Mackay, Charles, 324MacKinlay, Craig, 327nMaddison, Angus, 181nMagellan Fund, 345–346, 348Major Market Index, stockmarket crash of 1987 and, 273Malkiel, Burton, 303, 345n, 348Mamaysky, Harry, 304nMarathon Oil Company, 57Market capitalization, ratio toGDP, 120
Index
Market expectation, 239Market movements:causes of, 223–226, 224i, 225ipolitical parties and,227–228, 228i–230i, 230terrorist attacks and,221–223, 222i, 226uncertainty and, 226–227war and, 225, 231–235Market orders, 275Market peaks, returns from, 27,28iMarket timers, 27Market valuation, 110–120book value and, 117corporate profits and national income and, 115–116,116iFed model and, 113–115, 114iprice-earnings ratio for,110–112, 111i, 112iTobin Q and, 117–119, 118ivalue relative to GDP andother ratios and, 119–120,119i, 120iMarket value, 117ratio to dividend yield, 120,120iratio to GDP, 120, 120iratio to price-earnings ratio,120, 120iMarket volatility, 14, 269–287circuit breakers and, 276–277distribution of large dailychanges and, 283–284, 284ieconomics of, 285–286historical trends of, 278–279,279i, 280i, 281implied, 281nature of, 277–278recent, low, 283significance of, 286–287stock market crash of 1987and, 271–276VIX and, 281–282, 282iMarkowitz, Harry, 159nMarsh, Paul, 18, 19n, 20Marshall, John, 65q
Martingale, 292nMaterials sector, in GICS, 53Matsushita Electric Industrial,176Mayer, Martin, 165n, 274nMcGraw-Hill Book Co., 59i, 61The McGraw-Hill Companies,37McGraw, James H., 61McKinley, William, 226–227McNees, Stephen K., 216McQuaid, Charles, 346Mean aversion, 30Mean reversion, of equityreturns, 13Mean-variance efficiency, 354Measuring Business Cycles(Mitchell), 209Melamed, Leo, 165, 251q, 274Melville, Frank, 61Melville Shoe Corp., 59i, 61MENA (Middle East and NorthAfrica), 179Mental accounting, 329Mercantile Exchange, 256Merck, 59i, 177Merrill, Lynch, Pierce, Fenner &Smith, 45Merton, Robert, 35n, 266nMetz, Michael, 86, 253Meyers, Thomas A., 295–296Michelin Group, 49Microsoft, 38, 57n, 118, 144, 156,158, 176ion Nasdaq, 44Middle East:growing market share of, 178oil reserves of, 178Millennium Chemicals, 48Miller, Bill, 348Miller, G. William, 195Miller, Merton H., 99nMitchell, Wesley C., 209, 210nMitsubishi, 177Mitsui, 177Mittal Steel USA, 57Mohawk and Hudson Railroad,22
Index
Mohn, Robert, 346Molodovsky, Nicholas, 97Momentum investing, 302–303Monetary policy:postdevaluation, 193–194postgold, 194–195Money creation, 195–196Money managers, skilled,finding, 346–348, 347iMoney supply, inflation and,189–190, 191iMoore, Philip, 355n, 356Morgan, J. P., 57Morgan Stanley, 52Morgan Stanley all-worldindex, 313Morgan Stanley CapitalInternational (MSCI), 356Morgan Stanley Capital MarketIndex, 173, 311Morgan Stanley EAFE Index,169, 170, 171correlation between U.S. andEAFE returns and, 172, 172iMorris, David, 356Moskowitz, Tobias, 302nMoving averages, 295–302distribution of gains andlosses and, 301–302, 301iNasdaq moving-averagestrategy and, 300–301, 300i200-day moving-averagestrategy and, 296–297, 298i,299–300, 299iMutual funds:management of, 346–350performance of, 342–346,343i–345i, 348–349Mutual Shares Z, 346Myers, Stewart C., 171nMyopic loss aversion, 332–333Nabisco, 60iNabisco Group Holdings, 62Nakamura, Leonard, 109Nasdaq, 37–38compared with otherexchanges, 43
375
Nasdaq (Cont.):rise in late 1990s, 89rivalry with NYSE, 44–45Nasdaq Index, 43–45, 47Nasdaq moving-averagestrategy, 300–301, 300iNational Association ofPurchasing Managers(NAPM), 243National Association ofSecurities Dealers AutomatedQuotations (see Nasdaqentries)National Biscuit Co., 62National Bureau of EconomicResearch (NBER), 209Business Cycle DatingCommittee of, 210, 211National Can, 60i, 64National Dairy, 60iNational Distillers andChemical, 48National income, ratio ofcorporate profits to, marketvaluation and, 115–116, 116iNational Lead, 47in DJIA, 39i, 48NBC, 48, 57Neill, Humphrey B., 333Nestlé, 177Net income, 102–104(See also Earnings)New Economic Policy, 194New York Stock Exchange(NYSE), 256antecedents of, 21closings of, 231–232Nasdaq compared with, 43rivalry with Nasdaq, 44–45stock market crash of 1987and, 272–273stock returns since 1871 and,83stopping of trading on,276–288Newton, Isaac, 221qNext best price, 275Nicholson, S. F., 149
Nifty Fifty, 143Nikkeo Dow Jones, 165NIOC, 178Nippon Telephone andTelegraph, 165Nixon, Richard M., 194, 233NL Industries, 48Noisy market hypothesis,158–159No-load funds, 263Nominal price, 70Nonfarm payroll, 242Norris, Floyd, 86North American, 47in DJIA, 39i, 48North American IndustrialClassification System(NAICS), 52nNovartis, 177Odean, Terrance, 325n, 326n,330nO’Higgins, Michael, 147Oil reserves, of Middle East, 178OPEC oil embargo, 85OPEC oil price hikes, failure ofstocks as long-term inflationhedge and, 202Open market, 195Open market operations, 196Open market purchases, 195Open market sales, 196Operating earnings, 103, 107Oracle, 38, 89, 156on Nasdaq, 44Orphanides, Athanasios, 113nO’Shaughnessy, James, 145Out-of-favor stocks, 336Out-of-the-money puts, 266Outperformance of market,139–159combining capitalizationsize and valuation criteriaand, 152–154, 153i, 154idividend yields and,145–149, 146i–149iexplanation of size and valuation effects and, 157–159
376
Outperformance of market(Cont.):initial public offerings and,154–157, 156inature of growth and valuestocks and, 157price-earnings ratios and,149–150, 151iprice-to-book ratios and, 150,152small- versus large-cap stocksand, 141–144, 142ivalue versus growth stocksand, 144–145Overconfidence, 325–328Overspeculation, warnings of,86–88Panic of 1907, 231Paper money, value of, 11nPaper money standard, shift to,9–10Passive investing, 351Patel, Jayendu, 348nPayroll survey, 241Pearl Harbor attack, 233Penick & Ford, 60i, 62Pension costs, controversies inaccounting for, 105–107Pension plans, funding of, 106Pension Protection Act of 2006,106Peoples Energy Corp., 48Peoples Gas Light & Coke Co.,48Pepsi-Cola Co., 59i, 61, 64Personal consumptionexpenditure (PCE) deflator,246PetroChina, 177, 182Pettengill, Glenn N., 303nPetty, Damon, 147Pfizer, 59i, 109, 176i, 177Philip Morris, 58–61, 59i, 60i,62Phillips Petroleum, 54–55, 56i,57PIMCO, 90
Index
Pioneering Portfolio Management:An Unconventional Approach toInstitutional Investment(Swensen), 90Polefka, J., 326nPolitical parties, market movements and, 227–228, 228i–230i,230Population, world, 162, 163i,164Portfolio allocations, recommended, 34–35, 34iPortfolio insurance, 273, 275Portfolio monitoring, 332–333Portfolios, structuring for longterm growth, 359–365Positive liquidity shocks, 159Poterba, James M., 224nPowershares, 356Precommitment, 331Premiums:equity risk, 16–18, 17i,332–333futures contracts and, 258on options, 265President, uncertainty about,226–227Price-earnings (P-E) ratio,110–112, 111ifor formulating winningstrategy, 149–150, 151ifuture stock returns and,111–112, 113iratio of market value to, 120,120iPrice-to-book ratio, formulatingwinning strategy using, 150,152Price-weighted indexes, 40Prices:historical, 117next best, 275Nixon’s freezing of, 194nominal, 70of stock (see Stock prices)strike, of options, 265Primary wave, 290Pring, Martin J., 290
Procter & Gamble, 59i, 62, 144,176i, 177Proctor, William, 65nProducer price index (PPI),244–245Profits:ratio to national income,market valuation and,115–116, 116i(See also Earnings)Program traders, 255Programmed trading, 258Prospect theory, 322–323,328–330Public capital, in global markets, 177–178Purchasing managers index(PMI), 243Purchasing power, growth of,11–12, 11iPurchasing power parity, 173Puts, 264in-the-money, 266out-of-the-money, 266Quality of earnings, 108–109Quantum Chemical Corp., 48Quest Communications, 64Ramaswamy, Krishna, 145Random walk, 29, 29i, 291–292A Random Walk Down Wall Street(Malkiel), 303Raskob, John J., 3–5Rational theory of consumerchoice, 322Reagan, Ronald, 274Real returns, 112annual, in United States, 20on fixed-income assets,14–16, 15itotal, growth of, 11–12, 11iRebalancing, of fundamentallyweighted portfolios, 355Regulation Q, 8Reported earnings, 102–104Representative bias, 326Research Affiliates, 356
Index
Reserve accounts, 195–196Residual risk, 140Resistance level, 294Retained earnings, 98Return biases, in stock indexes,46–47Returns:arithmetic, 22buy-and-hold, 215effects of costs on, 350from 1802-1870, 21–22from 1802-present, 5–7, 6iexcess, 215for fixed-income assets,standard deviation of, 30geometric, 22long-term, 12–14, 13ifrom market peaks, 27, 28imean reversion of, 13measurement of, 23–24predicting using trend lines,41–42real (see Real returns)realistic expectations for,360–361short-term, 14on stocks and bonds, correlation between, 30–32, 31iswitching, 214–215, 215itaxes and (see Taxes)time horizons and, 361total, defined, 5Revenue Act of 1913, 74Review of Economic Statistics, 81Rexall Drug, 62Rhea, Charles, 290Richardson, Scott, 108nRichardson Merrell, 60i, 62Risk:in defined benefit plans,106–107diversifiable (residual), 140holding period and, 24–27,25i, 26ilocal, 169measurement of, 23–24standard measures of, 28–30,29i
377
Risk (Cont.):to stockholders, lowering ofby employee stock options,105Ritter, Jay, 310nRJ Reynolds Tobacco Co., 60i, 62RJR Nabisco, 62Roberts, Harry, 291, 292Roche, 177Roosevelt, Franklin D., 193, 227,232Ross, Stephen A., 18nRoyal Bank of Scotland, 175Royal Dutch Petroleum, 55, 56i,183Royal Dutch Shell, 183Ruane, Cunniff, and Goldfarb,346Russell 1000, 45, 46iRussell 2000, 45, 46iRussell 3000, 45Russell 2000 Index, 142nRussell indexes, 342Russian default on bonds, 88S. A. B. de C. V., 177Safe-haven status, 32Samsonite fund, 351nSamsung Electronic, 177Samuelson, Paul, 24, 35n, 207q,292Samuelson, William, 35nSaturday Night Massacre, 195Saunders, Edward M., Jr., 314nSBC Communications, 58Schering, 59iSchleifer, A., 326nSchlumberger, 59i, 61Schlumberger, Conrad, 61Schmitt, Dennis E., 303nSchneider, D. J., 326nScholes, Myron, 265, 266Schwert, G. William, 5nSears and Roebuck, 56i, 57Seasonal anomalies, 306–316January effect, 306–311, 307ilarge monthly returns and,311, 312i, 313i
Seasonal anomalies (Cont.):September effect, 311,313–315, 314iSector diversification, in globalmarket, 173–177, 174i, 175iSectors, in S&P 500, 52–58, 53i,55i, 56iSecurity Analysis (Graham andDodd), 83, 141, 150Self-attribution bias, 326Sell-on-close orders, 318Sell programs, 258Sentiment, 333–334, 335iSeptember effect, 311, 313–315,314iSequoia Fund, 346Settlement dates, for futures,256Settlement procedure, forfutures, 257Shareholder value, sources of,98–102Sharpe, William, 140n, 266n, 345Shefrin, Hersh, 329n, 331nShell Oil, 55, 56iShell Transport and Trading, 183Shiller, Robert, 5n, 87, 91, 285,323, 325nShort-term returns, 14Shorting stock, 262Shulman, David, 86Siegel, Jeremy, 7n, 17n, 86, 88–89,100n, 159n, 305, 354n, 363Siemens, 177Silk, Leonard, 218Silverblatt, Howard, 107n, 108nSinquefield, Rex, 84Slatter, John, 147Sloan, Paul, 90n, 331nSloan, Richard, 108Slovic, P., 326nSmall-cap stockslarge-cap stocks versus,141–144, 142itrends in returns on,142–144, 143iSmith, Edgar Lawrence, 79–81,81n, 82, 83, 86, 201
378
Smith, Frank P., 83–84Smith, Steven, 12n, 21nSmithers, Andrew, 117, 118Social dynamics, 323–325Socony Mobil Oil, 55, 56iSoliman, Mark, 108nSony Corporation, 176Southwest Airlines, 156Spiders, 252Spot market, 257Standard & Poor’s (S&P), 37, 61core earnings of, 107–108Standard & Poor’s 500Depository Receipts (SPDRs),252Standard & Poor’s 500 stockindex, 37, 40, 47, 51–64, 342outperformance of originalS&P 500 firms and, 63–64reaction to business cycle,208, 20isector allocation and, 175isector rotation in, 52–58, 53i,55i, 56itop-performing firms in,58–63, 59i, 60iStandard & Poor’s (S&P) Index,42–43Standard & Poor’s (S&P) Indexfutures, 256Standard Brands, 60i, 62Standard Industrial Code (SIC),52Standard Oil of California, 55,56iStandard Oil of Indiana, 55, 56iStandard Oil of New Jersey, 55,56iStatman, Meir, 329nStattman, Dennis, 150, 152nStaunton, Mike, 18, 19n, 20Steiner, Robert, 253nStern, Siegfried, 81Stewart, James, 273nStires, David, 106nStock bubbles, 323–325avoidance by fundamentallyweighted portfolios, 355
Index
Stock index funds, 361–362Stock index futures, 253, 254i,255–264arbitrage and, 257–258basics of markets for,255–257choosing, 262–264, 263idouble and triple witchingand, 260–261fair market value of, 259Globex trading and, 258–260importance of, 267–268leverage and, 261margin and, 261stock market crash of 1987and, 275–276using, 261–262Stock indexes, 37–49Dow Jones, 38–42(See also Dow JonesIndustrial Average [DJIA])market averages and, 37–38prediction of future returnsusing trend lines and,41–42return biases in, 46–47value-weighted, 42–45(See also Center for Research in Security Prices[CRSP] index; NasdaqIndex; Standard & Poor’s[S&P] Index)Stock Market Barometer(Hamilton), 290Stock market crash of 1929, 4–5,6, 269, 270iBabson’s prediction of, 78Stock market crash of 1987, 224,269, 270i, 271–276causes of, 273–276futures markets and, 273trading on NYSE and,272–273Stock prices:economic growth and,240–241randomness of, 291–292,293i, 294
Stocks:outperformance over bonds,26–27returns on (see Returns)yields on, bond yieldsrelated to, 95–97“Stocks, Bonds, Bills, andInflation: Year-by-YearHistorical Returns (1926-74)”(Ibbotson and Sinquefield),84–85Stocks for the Long Run (Siegel),86, 88–89, 305, 363Stop-loss orders, 275Story stocks, 158Strike price, of options, 265Subrahmanyam, Avandihar,326nSummers, Lawrence H., 224n