by David Dreman
and abandonment of security analysis, 289
acceptance of, 256–57
alternatives to, 343–46
as “anomalies,” 99n
application of, 292–302
benefits of, 321–22
“best,” 291–92
“boot hills” of concept stocks and, 250–51
Dreman’s portfolio performance and, 181n
EMH and, 256–57
expectations and, 307
Fama’s confirmation of, 257–59, 260
Fama’s “discovery” of, 99n
as a hypothesis, 269
implementation of, 288–302
index fund built on, 289, 289n
industries and, 310–16
limitations of, 321–22
long-term return and, 251–66, 266n, 273, 302–9, 322
and number of stocks in portfolio, 288
paradigm change and, 162
performance summary concerning, 301–2
politics and, 297, 298
Psychological Guidelines and, 248, 266
psychology and, 5, 8, 10, 27, 248–49, 267, 307, 317, 318
recent performance using, 277–79
research studies on, 99n
risk and, 144, 162, 249, 259, 260, 284–85
selection indicators and, 289–92, 302
selection of stocks and, 288–92, 320–21
as success, 10, 251–66, 267, 289, 302, 417
See also specific strategy or topic
Coombs, B., 39
corrections: bubbles and, 15
correlation
causation and, 139–40
illusory, 175–76
information processing and, 175–76
of judgments of risk and benefits, 33, 39–43, 40n, 47
Psychology Guideline about, 176
counterfeiting, 410
Countrywide Financial, 390
Cowan, Nelson, 75
Cowles, Alfred, 93–94
Cowles Commission for Research in Economics, 72, 93
Cragg, John, 201, 202
Cramer, Jim, 21, 66–67
Crash of 1929
causes of, 106
characteristics of bubbles and, 15, 19, 20, 21–22
Crash of 1987 compared with, 61–62, 116
Crash of 2007–2008 compared with, 80
credit-rating agencies and, 394
impact of, 16
margins and, 106, 355
“New Era” and, 20
representativeness and, 61–62
Crash of 1987
academics and, 105, 106–7, 108, 109, 110–11, 112–13, 115, 116
Brady Commission report about, 110
commodities and, 105–6, 107
Crash of 1929 compared with, 61–62, 116
Dow Jones Industrial Average and, 61, 66, 111
EMH and, 104, 105–16, 132, 134
futures trading and, 105–8, 108n, 109, 112, 112n, 113, 114–15, 116
Garzarelli call of, 66
Greenspan and, 391, 391n
ignoring of previous warnings and, 110–11
index arbitrage and, 107–8, 110, 111–12, 113–14, 115, 334
insensitivity to probability and, 39
IOH and, 276
leverage and, 355, 356
liquidity and, 106, 108–9, 112, 113, 115, 116, 121, 327, 354, 356
margins and, 106, 110, 114, 116
portfolio insurance and, 108–10, 111–14, 115, 334
rationality and, 108, 114, 115, 116
representativeness and, 61–62
risk and, 116
S&P 500 futures market and, 355
as theoretically impossible, 111–14
volatility and, 106, 109, 110, 111–12, 116, 132, 134
Crash of 2000–2002. See Dot-Com Bubble/Crash (1996–2002)
Crash of 2007–2008
causes of, 2–3, 3n, 382
characteristics of bubbles and, 15, 19
commodities and, 62–63
congressional investigations of, 381, 397, 399–400
contrarian strategies and, 8, 277–79, 298–300, 310
Crash of 1929 compared with, 80
derivatives and, 385–86
explanations of, 381–82
Federal Reserve and, 381–82
Greenspan views about, 386
investor confidence and, 324
leverage and, 355
liquidity and, 353, 393
losses during, 1, 16
and probability of success using IOH, 304
representativeness and, 62–63
sell strategies and, 348
See also subprime mortgages
crashes
beneficiaries of, 326–27
EMH and, 128–29, 276
impact on economy of, 24–25
liquidity and, 356
margin as cause of, 355
paradigm change and, 162
rationality and, 128–29
risk and, 7
severity of contemporary, 24–25
understanding of psychological behavior and, 17–18
See also flash crashes; specific crash
credit, 16, 19, 387
credit default swaps, 385, 397
credit-rating agencies, 79, 124n, 387, 389, 394–99. See also specific agency
Credit Suisse, 380, 396
Crockett, Jean, 94
Culp, Michael, 203
currency issues, 120, 410–11, 414, 415, 416
Darwin, Charles, 351
data mining, 162
Dayan, Peter, 237, 238
De Bondy, Werner, 271
debt, U.S., 2, 413–14, 415
decision-making, financial
anchoring and, 77–78
availability heuristic and, 51–52, 53–60, 79
disregard of prior probabilities and, 68–70
group pressures and, 53
heuristics and, 52–53, 79–81
hindsight bias and, 78–79
“hot” analysts and, 65–67
information overload and, 74–76
instant government statistics and, 67–68
law of small numbers and, 64–65
Psychological Guidelines about, 59
regression to the mean and, 70–73
representativeness and, 61–65, 70, 76, 79, 80
role of psychology in, 29–30
safety and, 80
See also Affect; efficient-market hypothesis; forecasting; heuristics; information; psychology
Degeorge, Francois, 202
Dell Computers, 311
depression
use of term, 413
See also Great Depression
derivatives
CDOs and, 395n
Crash of 1987 and, 111
credit-rating agencies and, 396–97
deregulation of, 385–86
EMH and, 119–20, 120n, 124
Federal Reserve and, 393–94
HFT and, 338
hindsight bias and, 78–79
Housing Bubble (2008) and, 124
LTCM debacle and, 119–20, 120n
risk and, 358, 359
shorting of, 397
Desai, Hemang, 148
Deutsch Bank, 396
Dickinson, Anthony, 238–39
Dimon, Jamie, 299
Disciplined Investment Advisors, 66
diversification, 288, 318, 339, 340, 345, 416
dividends
“businessman’s risk” stocks and, 285
contrarian strategies and, 260, 262, 263, 280, 283, 284, 290, 291, 293, 296
EMH and, 151–52
favored stocks and, 280, 283
growth stocks versus, 218
high-yield strategy and, 286, 287
P/BV strategy and, 283, 284–85
P/E strategy and, 280, 284, 293
risk and, 361, 373, 374n
selection of stocks and, 320
unfavored stocks and, 280, 283
&nb
sp; Dodd, David, 46, 48, 77, 270, 291, 317, 358
“The Dogs of the Dow” strategy, 253
dopamine study, 236–39
Dorfman, John, 181, 203
Dot-Com Bubble/Crash (1996–2002)
abandoning of winning strategy and, 308
Affect and, 35–39, 41–42, 45, 48
availability heuristic and, 55–56, 57, 58, 59
Boot Hill of stocks and, 250
and change in bubbles over time, 23, 24
characteristics of bubbles and, 20, 21
contrarian strategies and, 8, 277–79, 310
decision-making and, 57–59, 60, 80
EMH and, 101, 134
forecasting during, 193
Greenspan and, 391
and hero worship of analysts, 188
heuristic math and, 77
insensitivity to probability and, 35–39, 70
IPOs and, 57–59
losses during, 1, 387
mutual funds during, 64–65
and negative correlation of judgments of risk and benefits, 41–42
“New Economy” and, 20
pressures on security analysts and, 188, 204
price-to-earnings ratio and, 37–39
representativeness and, 63, 64–65
researching the, 60
and severity of contemporary crashes, 25
South Sea Bubble compared with, 17n
Temporal Construal and, 45
volatility and, 134
dot-com stocks
abandoning of winning strategy and, 308
Affect and, 41, 42, 47, 48
Boot Hill of, 250
heuristic math and, 77
IPOs of, 56
and negative correlation of judgments of risk and benefits, 41, 42
and severity of contemporary crashes, 25
volatility and, 134
See also Dot-Com Bubble/Crash
Dow Jones Industrial Average
Crash of 1929 and, 16, 21–22, 35
Crash of 1987 and, 61, 66, 111
flash crashes and, 2, 216, 324–25, 326, 332–33
Graham’s studies using, 252–53
HFT and, 329, 330, 332–33, 334
inflation and, 416
measurement of return on portfolios and, 99
randomness of price movements and, 89, 90
regression to the mean and, 72
risk and, 373
and success of contrarian strategies, 252–53
Dreman, David
criticisms of work of, 9–10, 256–57
expectations of mutual fund investors study of, 45
Forbes columns/publications of, 61–62, 63, 110, 130, 161, 178, 190, 254, 256–57, 381, 384
industry study using contrarian strategies by, 311–16
IPO study by, 58
P/E studies/publications of, 161, 253, 254, 254n, 258
and success of contrarian strategies, 260
surprises study of, 219–33
Dreman ADR International Fund, 345n
Dreman Foundation, 52n, 58
Dreman High Opportunity Mutual Fund, 292
Dreman Market Overreaction Fund, 289, 289n
Dreman Value Management, 308
dual-process theories, 31
Durability Bias, 33, 43, 47
E*Trade, 193
earnings
company, 187–90
conservative estimates of, 291
contrarian strategies and, 290–91, 292–302
Durability Bias and, 43
industry, 195–97, 199
randomness of, 201–2
reports of, 149, 151
revision of estimates of, 233
sell strategies and, 348–49
See also forecasting; surprises
earnings discount model, 38–39, 38–39n, 49
Eastern Europe: bubbles in, 22
Eaton Corporation, 63
eBay, 39
economics
crisis of modern, 155–63
influence on global well-being of, 86–87
mathematics and, 156, 157–60
rationality as key assumption in, 156–63
economists
optimism of, 178–79
“top-down” forecasts by, 178
efficient-market hypothesis (EMH)
academics and, 7, 85–96, 98–99, 100, 101–2, 104, 105, 106–7, 108, 109, 110–11, 112–13, 115, 116
Achilles’ heel of, 140–41
anomalies/black swans of, 98–99, 144–45, 153, 160, 161–62, 162n, 163, 200, 257
contrarian strategies as different from, 256–57
contrarian strategies as success and, 253, 257–59, 260
core assumptions of, 95, 115–16, 129, 133, 144, 155, 155n, 156–57
crisis in modern economics and, 156–63
development of, 85–96
event studies and, 98
as explanation of market, 132
as extension of last 200 years of economic theory, 101
as failure, 4, 130–63, 275
forums for dissenting from, 161–62
Greenspan and, 391n
importance of, 87, 97, 163, 168
information and, 95–96, 97, 141, 143, 145–52, 154–55, 155n
limitations of, 100–102
Little’s studies and, 201
mathematics as underlying of, 131, 157–60
Monty Python and the Holy Grail as analogous to, 103–5
and need for new paradigm, 214
as paradigm, 160–63, 160n
power of ideas and, 99–100
predictive powers of, 132
as prevailing market theory, 81, 100
psychology and, 4, 100, 153, 155, 267, 275–76
Ptolemaic epicycles compared with, 7, 130–32, 140, 155
rationality and, 4, 101, 108, 114, 115, 116, 129, 133, 144, 156–57, 168, 177, 275, 276
refutation of basic premises of, 4–5, 101, 102, 104–29
return on investment and, 119–20, 129, 132–46, 148, 149, 155, 155n, 176, 259
revisions of, 104, 143
as revolutionary new financial hypothesis, 86–87
risk and, 6–7, 99–100, 116–21, 123, 124, 124n, 127, 131–43, 145, 154–56, 162, 253, 259, 275, 276, 351, 354–55, 358
scientific method and, 153
semi-strong form of, 98
statistics and, 141–44
“strong form” of, 97
support for, 155–56, 161
as transitory, 163
and University of Rochester Conference (June 1987), 110–11
valuation and, 128, 140, 141, 152–53
volatility and, 106, 109–12, 116, 118–21, 123, 124, 127, 129, 131, 132–40, 142, 143, 152, 176, 257, 259, 276, 350, 358
“weak form” of, 97
See also capital asset pricing model (CAPM); index arbitrage; modern portfolio theory; specific topic
Einstein, Albert, 156, 254
El-Erian, Mohamed, 55
elections of 2010, 381
Emerson Electric, 63
employment, 2, 7, 16, 25, 62, 67, 381, 405–6, 407, 409–14
Enron, 180, 216, 283
Epstein, Seymour, 31
errors
causes of, 200–206
and favorite stocks/industries of professionals, 180–84
in forecasting earnings estimates, 185–214, 192n
illusory correlation and, 176
information processing and, 171
IOH as largest source of investor, 321
learning from, 200
psychology and, 168–70
ethics, 400, 401
eToys.com, 36–37, 42, 218
Europe/European Union, 332, 358, 405, 411, 414, 415
European Central Bank, 16
European Securities and Markets Authority (ESMA), 332
event studies, 98
event triggers, 229–33, 234, 235, 236–37, 238, 239, 241, 242, 274
exchange rates
, 343–46
exchange-traded funds (ETFs), 339–41
“exotic” derivatives, 396–97
experiential system, 31–32, 33, 37, 49, 169, 171
explanation
characteristics of scientific method and, 131
and EMH as explanation of market, 132
Exxon Mobil, 294
FactSet, 345
fair trade, 404, 407–8, 411, 412–13
Fama, Eugene
“beta is dead” statement of, 136
bubbles and crashes explanation of, 115, 128
contrarian strategies and, 99n, 144, 257–59, 260
as EMH advocate, 94, 98, 101, 118–19, 128
EMH anomalies and, 162n
EMH literature survey by, 145–46, 148
housing markets comment of, 127
and information availability, 145
mergers and tender offers statement of, 150
New Yorker article and, 128
price-information study of, 146–48, 148n, 150
and randomness of stock prices, 89
three-factor model of, 136–37, 138, 259
views about return on investments of, 135–37, 140–41, 143, 144
volatility views of, 124, 127, 140
Fannie Mae, 296–98
favored stocks
Affect and, 270–71
Boot Hills of, 250–51
contrarian strategies and, 8, 248–67, 266n, 270, 277–79, 283–86
contrarian strategies within industries and, 318
dividends and, 280, 283
EMH and, 183
forecasting and, 171, 180–84, 272, 310
high-yield strategy and, 286–88
in industries, 311–16
information processing and, 6
IOH and, 8, 271, 272, 273–75, 276, 279–82, 283–86
neuroeconomics and, 237, 238, 239
price and, 272
price-to-book value ratio and, 283–86
price-to-cash flow ratio and, 282–83
price-to-earnings ratio and, 279–82
reevaluation of, 248, 274
regression to the mean and, 272
risk and, 6
surprises and, 8, 217–18, 219, 220–34, 237, 238, 239, 240–43, 248, 271, 272
Federal Accounting Standards Board (FASB), 283
Federal Bureau of Investigation (FBI), 390
Federal Deposit Insurance Corporation (FDIC), 299
Federal Housing Finance Agency (FHFA), 297
Federal Reserve Bank of New York, 122
Federal Reserve, U.S.
AIG crisis and, 397–98
bailouts and, 3, 381–82, 414
bear markets and, 72
Bear Stearns–JPMorgan Chase deal and, 299
concerns about, 2, 415
Crash of 1929 and, 19
Crash of 2007–2008 and, 381–82
derivatives and, 393–94
EMH and, 18
forecasting and, 213
functions of, 384
Glass-Steagall Act and, 384–85
Great Depression and, 393
interest rates cuts by, 386, 387
margin requirements and, 106, 355–56
powers of, 393