Index
A
active asset allocation in global macro strategy, 23
adjusting data, 69
advance/decline ratio, momentum and, 107-110
AIG, liquidity problems of, 135
American Association of Individual Investors, 161
annual returns, estimating range of, 16
asset allocation, 5
active allocation, 23
tactical allocation, 39
asset classes, turning points within, 200
B
Barron’s, sentiment indicator in, 161-162
bear market of 2000-2002 example, 193-194
Bed Bath & Beyond example, 32
benchmarks for metrics, 69-72
Berkshire Hathaway, 176
Bernanke, Ben, 146
Berns, Gregory, 158
bias in metrics, 75
“big liquidity,” 144-147
Black Monday (Oct. 19, 1987), emotional reactions to, 51
bond market example (fundamental valuations), 174-175, 185-186
breadth (of market), 107-110
BRIC countries (Brazil, Russia, India, China), 74
BusinessWeek cover story, effect on market psychology, 159
C
Canadian oil sands junket, 31
casual versus causal relationships, 76-78
CDOs (collateralized debt obligations), 62
central banks, effect on liquidity, 144-147
Claussen, Ron, 87
closed-end mutual funds
liquidity and, 142-143
open-end mutal funds versus, 46
Clusius, Carolus, 15
collateralized debt obligations (CDOs), 62
commodities, 197-198
momentum and, 104
Conference Board’s Composite Index of Leading Indicators, 128
context in metrics, 75-78
contradictory signals, handling, 89-92
contrarian indicators, 164
conviction, power of, 54
corporate profits, relationship with stock prices, 118
correlation, 76-78
cover stories, effect on market psychology, 159-160
Cramer, Jim, 47
credit risk, 186-187
credit spreads, 140
cyclic nature of economy, 118-120
D
Dabora, Emile, 45
data
adjusting for metrics, 69
benchmarks for metrics, 69-72
bias in metrics, 75
identifying for metrics, 61-68
for investment strategy factors, 81-96
combining all factors, 189-202
contradictory signals, handling, 89-92
fundamental valuations, 88-90, 171-188, 193-194
rules of thumb for usage, 195-201
reliability for metrics, 68-69
selecting, 24-25
days to cover ratio, 167
decision matrix, 20-22
deductive reasoning, 53-54
dividend discount model, 180
domestic stock market, selecting versus international stock markets, 181-182
Dow Jones Industrial Average, 69
Dow Jones-AIG Commodity index, 72
Dunning, David, 50
Dutch tulip-bulb mania, 15
E
earnings yield model, 177-180
cyclic nature of, 118-120
global economic data, 129-131
human nature and, 121
metrics for, 121-128
Economist cover story, effect on market psychology, 159
edge (for individual investors)
avoiding emotional decisions, 41-57
avoiding stock-picking, 27-39
efficient market theory, 14-15, 42-43
emerging markets
example, 73-75
fundamental valuations in, 184-185
emotions, 154. See also human nature; psychology
avoiding relying on, 27-28, 41-57, 191-192
Esser, Jane, 134
estimating range of annual returns, 16
ETFs (exchange-traded funds), liquidity and, 143-144
evaluating
metrics, 79-80
stocks, 18-19
evolving markets, metrics in, 72-75
exchange-traded funds (ETFs), liquidity and, 143-144
F
factors in investment strategies, 81-96
combining all factors, 189-202
contradictory signals, handling, 89-92
cyclic nature of, 118-120
global economic data, 129-131
human nature and, 121
metrics for, 121-128
fundamental valuations, 88-90, 171-188, 193-194
bear market of 2000-2002 example, 193-194
bond market example, 174-175, 185-186
credit risk, 186-187
dividend discount model, 180
earnings yield model, 177-180
in emerging markets, 184-185
income flow, 187
P/E ratios, 183-184
real estate market example, 173-174
relative valuation, 182-183
selecting domestic versus international stock markets, 181-182
stock market example, 175-176
types of, 176
central banks and, 144-147
ETFs and, 143-144
interest rates and, 139-140
mutual fund flows and, 141-143
relationship with psychology, 136
restoring, 138
risk aversion and, 147-151
small-cap stocks and, 151-152
types of, 134
yield spreads and, 140-141, 147-151
advance/decline ratio and, 107-110
commodities and, 104
high/low indicators and, 110-113
moving averages and, 102-106
Barron’s sentiment indicator, 161-162
cover stories’ effect on, 159-160
insider stock trading and, 168
relationship with liquidity, 136
short selling and, 166-168
VIX Index, 163-165
rules of thumb for usage, 195-201
Fama, Eugene, 42
Fed model, 177
federal funds futures curve, 125, 128
Federal Reserve valuation model, 56
Fosback, Norman, 110
Froot, Kenneth, 45
fundamental valuations, 88-90, 171-188
bear market of 2000-2002 example, 193-194
bond market example, 174-175, 185-186
credit risk, 186-187
dividend discount model, 180
earnings yield model, 177-180
in emerging markets, 184-185
income flow, 187
P/E ratios, 183-184
real estate market example, 173-174
relative valuation, 182-183
selecting domestic versus international stock markets, 181-182
stock market example, 175-176
types of, 176
funding for investment decisions, determining, 198
funding liquidity, 134
Future Shock (Toffler), 83
G
Gates, Robert, 24-25
global economic data, 129-131
global indexes, 73-75
global macro strategy, 5, 11-26
Goldman Sachs Commodity Index, 71
government regulations, cost of, 6
Grubman, Jack, 36
H
Hardy, G. H., 59
Help Wanted Index, 78
high/low indicators, momentum and, 110-113
human nature. See also emotions; psychology
economic data and, 121
effect on investment decisions, 15-17
I
income flow, 187
index-fund investments, 14-15
indexes
as benchmarks, 69-72
global indexes, 73-75
rebalancing, 71-72
individual investors
avoiding emotional decisions, 41-57
avoiding stock-picking, 27-39
inductive reasoning, 53-55
industry specialty, picking stocks via, 33-36
inflation, 131
inflation data, 124
information overload, 83
insider trading, 31
psychology and, 168
interest rates
liquidity and, 139-140
reasons for movement, 92
as signal of economic health, 124-128
tracking, 88
international stock markets, selecting versus domestic stock market, 181-182
investment strategies
effect of human nature on, 15-17
factors in, 81-96
combining all factors, 189-202
contradictory signals, handling, 89-92
fundamental valuations, 88-90, 171-188, 193-194
rules of thumb for usage, 195-201
global macro strategy, 5, 11-26
individual investors
avoiding emotional decisions, 41-57
avoiding stock-picking, 27-39
selecting, 11-14
investor psychology, 93
irrational behavior, 50
“irrational exuberance,” 157
isolation, effect of, 158
J–K–L
Jacob, Ryan, 37
Kruger, Justin, 50
Laughlin, Ron, 198
central banks and, 144-147
ETFs and, 143-144
interest rates and, 139-140
mutual fund flows and, 141-143
relationship with psychology, 136
restoring, 138
risk aversion and, 147-151
small-cap stocks and, 151-152
types of, 134
yield spreads and, 140-141, 147-151
Lynch, Peter, 48
M
macro investing, 20
Malkiel, Burton, 14-15
market breadth indicators, 107-110
market liquidity. See liquidity
market psychology. See psychology
market selection. See asset allocation
market signals, reacting to, 3
market volatility in 2008, 1-9
McGuigan, Thomas, 37
medical devices example, 21-22
Medtronic example, 21-22
metrics, 59-81
bias in, 75
data needed
adjusting, 69
benchmarks for, 69-72
identifying, 61-68
reliability of, 68-69
defined, 59-60
for economic data, 121-128
evaluating periodically, 79-80
in evolving markets, 72-75
relationships and context, 75-78
risk/return tradeoff, 66-67
rules of thumb for usage, 195-201
time horizons, selecting, 78-79
yield curve, 63
advance/decline ratio and, 107-110
commodities and, 104
high/low indicators and, 110-113
moving averages and, 102-106
momentum metrics, coupling with fundamental valuations, 185
money flows in mutual funds, liquidity and, 141-143
money management, market volatility in 2008 and, 4-6
moving averages, momentum and, 102-106
mutual fund flows, liquidity and, 141-143
N–O–P
O’Neill, Jim, 74
open-end mutual fund pricing, closed-end mutual funds versus, 46
optimism/pessimism, measuring, 165
patience, importance of, 94, 192
perception of value, 44
performance of market in 2008, 1-9
pessimism/optimism, measuring, 165
price/earnings ratio, 76, 178, 183-184
professional investment firms, advantages over individual investors, 27-36, 39
profits (corporate), relationship with stock prices, 118
Barron’s sentiment indicator, 161-162
cover stories’ effect on, 159-160
insider stock trading and, 168
relationship with liquidity, 136
short selling and, 166-168
VIX Index, 163-165
Q–R
quantitative analysis, background of, 82-86
Ramanujan, Srinivasa, 59
A Random Walk Down Wall Street: A Time-Tested Strategy for Successful Investing (Malkiel), 14
random walk theory, 14-15, 42-43
real estate investment trusts (REITs), liquidity and, 143-144
real estate market example (fundamental valuations), 173-174
rebalancing indexes, 71-72
regulations, 6
REITs (real estate investment trusts), liquidity and, 143-144
relationships
causal versus casual, 76-78
in metrics, 75-78
relative valuation, 171, 182-183
reliability of data, 68-69
restoring liquidity, 138
retail sales data, 123
risk aversion, liquidity and, 147-151
risk-free rate of return, 66
risk/return tradeoff, 66-67
Robertson, Julian, 176
Royal Dutch Shell example, 45
Russell 2000 Index, 69
S
selecting
data, 24-25
investment strategies, 11-14
markets. See asset allocation
time horizons for metrics, 78-79
semi-strong form of efficient market theory, 43
sentiment. See psychology
September/October 2008 crash
bailout package for, 55
emotional reactions to, 52
short interest ratio, 166-168
signals, 3
Simon, Herbert, 45
small-cap stocks, liquidity and, 151-152
Smith, Adam, 44
social isolation, effect of, 158
spectator selling, 28
St. Jude example, 21-22
standard deviation, defined, 16
stock market example (fundamental valuations), 175-176
stock market volatility, 1-9
stock prices, relationship with corporate profits, 118
stock-picking, avoiding, 27-39
as default investment, 199
evaluating, 18-19
selecting domestic versus international, 181-182
strategic thinking in investment decisions, 192
strong form of efficient market theory, 42
Super Bowl winners, relationship with stock market predictions, 77
survivor bias, 75
T
tactical asset allocation, 39
technical analysis, 102
Time cover story, effect on market psychology, 160
time horizons for metrics, selecting, 78-79
Toffler, Alvin, 83
Treasury bills, risk-free rate of return, 66
trends, following, 102
tulip-bulb mania, 15
200-day moving average, 102
U–V
U.S. Treasury securities, yield curve, 63
UBS Index of investor optimism, 166
unbounded rationality, 44
value, distorted perception of, 44
Vilar, Alberto, 37
VIX Index, 163-165
volatility, 158
in 2008, 1-9
VIX Index, 163-165
W–Z
weak form of efficient market theory, 42
Weill, Sandy, 36
Weniger, Jeffery, 169
Yardeni, Edward, 178
yield spreads, liquidity and, 140-141, 147-151
Your Money and Your Brain (Zweig), 158
Yum Brands example, 18
Zweig, Jason, 158