by David Dreman
role of, 159
statistics of, 67, 68
subprime mortgages and, 387, 390, 391–94
U.S. budget deficit and, 414
Federal Reserve, U.S, See also Bernanke, Ben; Greenspan, Alan
Fedorikhin, Alexander, 75
fees/commissions, 282, 285, 330, 340, 341, 357, 389. See also transaction costs
Feiger, George, 328
FFJR. See Fama, Eugene; Fisher, Lawrence; Jensen, Michael; Roll, Richard
Fidelity Destiny, 308
Fidelity Investments, 308
Fidelity Select Telecommunications Equipment fund, 65
Financial Analysts Journal
Dreman’s submission of paper to, 257
forecasting study in, 190–91
Financial Markets Research Center, 4
financial ratios
contrarian strategy and, 290, 290n
See also specific ratio
Financial Reform Act (2010), 393
financial statements, 290
financial stocks, 291
Financial World: study of analysts’ results by, 189–90
First Call, 190
Fischhoff, Baruch, 39
Fisher, Lawrence, 146–48, 148n
Fitch (credit-rating agency), 78–79, 389, 394
fixed-income securities, 360, 364, 372, 372n, 373–74, 415
flash crashes, 216, 323, 324–27, 331, 332–33, 335, 355, 356
Florida: swampland in, 22
Food and Drug Administration (FDA), 231–32
Forbes magazine
criticisms of Dreman’s publications in, 256–57
and dissent about EMH, 110, 161
Dreman recommendations in, 292, 294, 295, 296
Dreman’s column/publications in, 61–62, 63, 110, 130, 161, 178, 190, 254, 256–57, 381, 384
ranking of mutual funds by, 341, 341n
Ford, Henry, 15
Ford Motor Company, 288
forecasting, 167–84, 185–214
accuracy of, 7, 180–84, 185–214, 192n, 219, 229, 250, 274, 289, 291
black swans in, 200
as characteristic of scientific method, 131
confidence and, 172–77, 184, 186, 207, 212–14, 230, 310
consensus, 193–95, 198–99, 219, 220
contrarian strategies and, 8, 181n, 211, 250, 289, 291
of earnings estimates, 185–214
economic conditions and, 196–98, 199
EMH and, 132, 199, 201, 210
and extrapolations of current trends, 201, 202
favored stocks/industries and, 171, 180–84, 272, 310
and forecasters’ curse, 209–12
as heart of security analysis, 171
index funds and, 211
about industries, 195–97, 199, 274
information and, 168–77, 180–84, 199–200, 201, 207, 214
inside and outside, 207–9, 211, 212, 213, 214
IOH and, 272, 274
and learning from errors, 200
as more art than science, 202
mutual funds and, 192, 211
and need for new paradigm, 214
optimism and, 176–80, 197–98, 199, 212–13, 214
outside, 207–9, 211, 212, 213, 214
price and, 218, 274
Psychological Guidelines about, 174–75, 176, 180, 184, 195, 196, 202, 204, 211, 213
psychology and, 206–8, 211–12
randomness and, 201–2
rationality and, 200
return and, 211
risk and, 413
sell recommendations and, 204–6
surprises and, 7, 217, 218, 219–33, 241
technology influence on, 212
unfavored stocks and, 272, 310
valuation and, 199
about volatility, 135–37
foreign investing, 343–46
Fortune magazine, 98, 136, 259
Francis, Jennifer, 177–78
Frank, Barney, 297
Frankfurter, George, 137
Freddie Mac, 296–97, 298
free enterprise: Greenspan views about, 382, 383
free trade, 403–13
Freeport-McMoRan, 63
French, Kenneth, 136–37, 143, 144, 258–59, 270, 270n
Fridson, Martin S., 290n
Friedman, Milton, 139
Friend, Irwin, 94
functional magnetic resonance imaging, 238
fundamental analysis, 88, 92–95, 97, 99–100, 104, 128, 152–53
fundamentals
Affect and, 46–47, 49–50
disconnect between price and, 46–47
futures
concerns about, 357
Crash of 1987 and, 105–8, 108n, 109, 112, 112n, 113, 114–15, 116
EMH and, 105–8, 108n, 109, 112, 112n, 113, 114–15, 116, 120
HFT and, 325, 325n, 326, 327, 328, 330, 331, 333, 334, 339
liquidity and, 355
LTCM debacle and, 120
margins and, 355, 356
regulation of, 105, 106
risk and, 359
shorting, 359
volatility of, 120
See also S&P 500 Index: futures on
Galileo, 130, 131, 132, 161
Galton, Francis, 70–71
gambling, 34, 106, 359, 379–80. See also casinos, market
“gaming” practice, 325
Ganzach, Yoav, 41
Garzarelli, Elaine, 66
Geithner, Tim, 297, 397
General Electric, 409
General Motors, 412
geocentric view, 130–31
Georgetown University: Greenspan speech at, 386
Germany, 415, 416
Getco LLC, 330
Gibbon, Edward, 86
Gilbert, D. T., 43
Glass-Steagall Act, 354, 384–85, 394
global economy, 329, 387. See also fair trade; free trade
Global Industry Classification Standard (GICS), S&P, 195n, 311
Go-Go Bubble (1966–1969), 13–14, 19, 23, 24
gold, 2, 272, 329, 359, 382, 414, 416
Goldman Sachs, 19, 79, 174, 379–80, 388, 396, 397–400, 399n
Google, 212
GoTo stock, 188
Graham, Benjamin, 46, 47, 48, 77, 252–53, 262, 266, 270, 283, 291, 293, 317, 358, 416
Gramlich, Edward, 391–92
Granger, Clive, 89
Great Depression
bubbles and, 16, 22
credit-rating agencies and, 394
deflation during, 415
economy of 2008–2009 compared with, 62–63
Federal Reserve actions during, 393
Guthrie’s songs about, 167
long-term return and, 369
oil impact on economy during, 62–63
reflection about, 416–17
safe havens during, 80
unemployment during, 407
World War II and, 216
Great Recession, 8, 62, 158, 323, 382, 393, 413, 414
“Greater Fool Theory,” 20–21
greed, 4, 347, 348, 381, 382, 386
Greenspan, Alan, 18, 25, 68, 116, 124–25, 382–87, 390–93, 391n, 396, 403
Gross, Bill, 55, 180
group therapy, 13–14
growth stocks, 218, 262, 264, 307, 308
growth strategies: contrarian strategies and, 264, 266n
Grubman, Jack, 187–89, 203n
GSAMP 2007–FMI, 399
gut feelings, 33
Guthrie, Woody, 167
Haldane, Andrew, 332
Hamilton, Alexander, 404, 408
Hartford Insurance, 311
Harvard Business School: candidate interviews at, 172
Haugen, Robert, 134
hedge funds
as beneficiaries of crashes, 326
commodities trading and, 106
Crash of 2007–2008 and, 3n, 124, 124n, 125, 213
credit-rating agencies and, 396
HFT and, 330
>
leverage and, 356
liquidity and, 354, 356
LTCM debacle and, 116–23
mortgages and, 389n
portfolio insurance and, 108
regulation of derivatives and, 385
risk and, 357, 358
height study, 71, 73
Heins, James, 134
Hemline Indicator, 139
heuristics (mental shortcuts)
decision-making and, 53, 79–81
impact of, 6
information overload and, 75–76
limitations of, 53
See also specific heuristic
high-frequency trading (HFT)
August 2011 crash and, 329–34
diversification and, 339, 340
in Europe, 332
flash crashes and, 324–27, 331, 332–33, 335
futures and, 325, 325n, 326, 327, 328, 330, 331, 333, 334
increase in, 332
liquidity and, 326, 327, 328
as manipulating the market, 331–33, 334, 335
panics and, 332–34, 335, 336
problems with, 324–28
profits from, 330
protective measures from, 328, 334–42
regulation and, 327, 328, 330, 331–32, 334, 335–36
risk and, 336
volatility and, 328–34, 336–39
high-yield strategy
bear markets and, 287
bonds and, 286–87
contrarian strategies within industries and, 311–16, 319
examples of contrarian stocks using, 300–302
favored and unfavored stocks using, 250, 286–88
as important contrarian strategy, 249
IOH and, 275, 277–79, 281, 286–88, 303–4
selection of stocks using, 291, 321
selling strategies and, 347
and success of contrarian strategies, 258–59, 262–63, 264–66
Hills, Fred, 16
hindsight biases, 78–79
Holocaust, The, 33
Home Ownership and Equity Protection Act (1994), 392
Hoover, Herbert, 15
“hot” analysts, 65–67
“hot” stocks/funds, 6, 64–65
housing
boom in early 2000s of, 387
global financial system and, 387
price of, 388
risk and, 373
See also Housing Bubble (2007–2008); mortgages; subprime mortgages
Housing Bubble (2007–2008)
beginning of, 387
characteristics of bubbles and, 19
contrarian strategies and, 277–79
defaults and, 124n
EMH and, 123–27, 132, 135
forecasting about, 174, 213
foreclosures and, 125
Greenspan and, 386
hindsight bias and, 78
information about, 174
interest rates and, 124n
leverage and, 124, 125, 126, 127
liquidity and, 124, 125, 126, 127, 135
margin and, 125
mortgage-backed securities and, 125–26, 127
mortgage bonds and, 125, 126
risk and, 124, 124n, 127
volatility and, 123, 124, 127, 132
See also mortgages; subprime mortgages
Hsee, Christopher, 34
Hudson Mezzanine, 398, 399
Huxley, Thomas, 351
I/B/E/S earnings-forecasting service, 178, 190
Ibbotson, Roger, 72
IBM, 24
iceberging, 325
Ikenberry, David, 148
Ilieva, Vladimira, 58, 219, 311
illegal aliens, 406
“illusion of validity,” 207
illusory correlation, 175–76, 177
index arbitrage (program trading), 107–8, 110, 111–12, 113–14, 276, 334
index funds, 99, 114, 211, 289, 289n, 317, 339–42, 346, 416. See also specific fund
India, 405, 406, 407, 408, 409, 411
Indonesia, 405, 409
industrial production: government statistics about, 67
industries
bear markets and, 319
buying cheapest stocks in, 311–18
contrarian strategies and, 310–16
favored stocks in, 311–16
forecasting about, 195–97, 199, 274
HFT and sector funds by, 340
IOH and, 273, 274
unfavored stocks in, 311–16
inflation
contrarian strategies and, 416
foreign investing and, 343–44
free trade and, 407
in future, 8–9, 404, 413–16
global, 415
interest rates and, 414, 415
money supply and, 414
risk and, 359–60, 361, 362–64, 367, 368, 371, 372, 373
safe havens during, 2
U.S. budget deficit and, 413–14
information
accuracy and, 172, 207
availability of, 145, 185
bubbles and, 154
cognitive bias and, 175
cognitive heuristics and, 171
confidence in, 172–77
and earnings reports, 149, 151–52
EMH and, 95–96, 97, 141, 143, 145–52, 154–55, 155n
forecasting and, 168–77, 180–84, 199–200, 201, 207, 214
and human mind compared with computer logic, 168–69, 170
illusory correlation and, 175–76, 177
inside, 97, 207–9, 211, 212, 213, 214
instantaneous reaction to, 95–96
interpretation of, 154–55
panics and, 154
price and, 145–49, 150, 154
processing/filtering of, 6, 75, 168–70, 171–77, 180, 184, 302
Psychological Guidelines about processing, 174–75, 184
rationality and, 171
reactions to, 141, 143, 145–52
return and, 145–46, 149
too much, 74–76, 171–75, 184, 207
uncertainty and, 171–72, 175
volatility and, 152
See also decision-making, financial; forecasting
initial public offerings (IPOs)
Affect and, 34, 47
availability heuristic and, 55–59
contrarian strategies and, 266–67
in Dot-Com Bubble, 55–56
EMH and, 128, 144, 150
foreign investing and, 346
insensitivity to probability and, 34
IOH and, 274
pressures on security analysts and, 188
price of, 218, 346
quality of, 58
of start-ups, 57
valuation of, 56
insensitivity to probability, 33, 34–39, 46–47
inside forecasting, 97, 207–9, 211, 212, 213, 214
Institutional Investor magazine
“All-Star” analysts of, 187, 189, 204, 206
decline in bond market story in, 80
institutional investors, 108–10, 114, 192, 253, 266, 327, 331, 389, 389n, 400
Intel, 193
intellectual property, protection of, 409–10, 411
The Intelligent Investor (Graham), 252
interest rates
on bonds, 80, 286
Housing Bubble (2008) and, 124n
inflation and, 414, 415
safety and, 80
and severity of contemporary crashes, 25
International Court of Justice (The Hague), 33, 410
Internet Bubble (1996–2000). See Dot-Com Bubble/Crash
intrinsic value theory, 199
intuition, 52, 53, 76, 207. See also experiential system
investment banks/bankers
bailouts of, 126–27, 381–82
complexity of products offered by, 401
Crash of 2007–2008 and, 3n, 381, 382
credit-rating agencies and, 394, 395, 396
distrust of, 2–3
ethics
of, 400, 401
Glass-Steagall Act and, 385
and heuristical errors, 59
Housing Bubble (2007–8) and, 124, 125, 126–27, 213
leverage and, 356
liquidity and, 356
LTCM debacle and, 122–23
market casinos and, 380
mortgages and, 388, 395
pressures on security analysts and, 188, 189
regulation of, 394
risk and, 356, 357
transformed into banks, 400
Investment Research, 190
Investor Overreaction Hypothesis (IOH)
Affect and, 273
anomalies and, 271
behavior finance and, 273, 277
bonds and, 271, 272
bubbles/manias and, 269
cognitive heuristics and, 273
confirmation of, 277
contrarian strategies and, 250, 272, 275, 277–88, 302–9
Crash of 1987 and, 276
critical implications of, 276–77
definition of, 271–72
EMH and, 275–77
event triggers and, 274
favored stocks and, 8, 271, 272, 273–75, 276, 279–82, 283–86
forecasting and, 272, 274
goals of, 276
industries and, 273, 274
introduction of, 271
as largest source of investor error, 321
leverage and, 276
liquidity and, 276
neuroeconomics and, 271, 273
optimism and, 272, 274
overview of, 269–75
panics and, 269, 276
predictions of, 271–72, 273–75
price and, 269–70, 272, 274, 275, 276
probabilities of success using, 302–6
Psychological Guidelines about, 284, 285
psychology and, 271, 272, 273, 275–76
rationality and, 276–77
reevaluations and, 274
regression to the mean and, 272, 273, 274
reinforcing events and, 274
return and, 272, 275
risk and, 275, 276, 284–85
support for, 275–76
surprises and, 272, 273, 274
uncertainty and, 275
unfavored stocks and, 8, 271, 272, 273–75, 276, 279–86
valuation and, 272, 273, 274, 275
volatility and, 275
See also specific strategy
investors
aggressive, 284
as best educated in history, 25
conservative, 284
goals/objectives of, 284, 366, 367
information overload and, 75
psychology of overreaction of, 25
rationality of, 25, 26, 81
and severity of contemporary crashes, 25
study of expectations of mutual fund, 45
See also Investor Overreaction Hypothesis; type of investor
Investors Alliance, 320
“invisible hand,” 402, 403, 405
IOH. See Investor Overreaction Hypothesis
IPO Bubble (1961–62), 23
iShares, 342, 342n
iShares Russell 1000 Index Fund, 342
Israeli Air Force: criticism and praise in, 71–72
Jain, Prem, 148