Contrarian Investment Strategies
Page 53
Janney Montgomery Scott, 205
Janus Capital Group, 64
Janus Fund, 64–65
Japan, 2, 3
Jensen, Michael, 100, 101, 135, 141, 142, 143, 146–48, 148n
Johnson, Lyndon, 216
Johnson, Stephen, 45
Journal of Finance
Basu study published in, 255
Cragg-Malkiel study of forecasts in, 201
Leland article about portfolio insurance in, 109
Journal of Portfolio Management: Murphy article about risk in, 133–34
JPMorgan Chase, 218, 298–300, 299n, 301
judgmental heuristics, 52–53
Justice Department, U.S., 79, 332
Kahneman, Daniel, 27, 31, 52, 53, 61, 64, 207, 208, 208n, 209, 211, 212, 392–93
Kaufman, Ted, 328
Kennedy, Joseph, 417
Kepler, Johannes, 156
Keynes, John Maynard, 157, 363
Kidder Peabody, 205
Knight, Frank H., 359, 374
Kondratieff, Nikolai D., 90n
Kondratieff waves, 90, 90n
Koninkliijke Philips Electronics, 345
Kraft Foods, 292
Krugman, Paul, 158, 213, 391, 404–5
Kuhn, Thomas, 160–61
laissez-faire theory, 402, 403
Lakonishok, Josef, 260
Lanstein, Ronald, 257
law of comparative advantage, 404–5
Law, John, 17
law of small numbers, 64–65, 67, 112
Le Bon, Gustave, 26–27
Leasco Data Processing Equipment Corporation, 24
Lehman Brothers, 19, 119, 126, 174, 329, 380, 388, 392, 396
Leland, Hayne, 109
Leland O’Brien Rubinstein Associates, 108–10, 112
Lerner, Eugene, 66
leverage
Affect and, 355, 356
CDOs and, 394–95n
characteristics of bubbles and, 19
commodities trading and, 106
Crash of 1987 and, 116, 355, 356
Crash of 2007–2008 and, 355
credit-rating agencies and, 396
dealing with, 356–58
EMH and, 116, 119, 120, 121–22, 122n, 123, 124, 125, 126, 127, 129
flash crashes and, 356
hindsight bias and, 78–79
Housing Bubble (2007–2008) and, 124, 125, 126, 127
IOH and, 276
LTCM debacle and, 119, 120, 121–22, 122n, 123
margin and, 355–56
Psychological Guidelines about, 355, 356, 357
psychology and, 355
risk and, 355–58, 359
speculation and, 357
subprime mortgages and, 354
volatility and, 357
Levin, Carl, 79, 399, 410
Levin-Townsend Computer Corporation, 24
Levis, Mario, 59
Liberman, N., 44
Lichtenstein, Sarah, 39
limit orders, 336
LinkedIn, 266
Lintner, John, 135
Lipper, 341, 345n
liquidity
banks and, 7, 353–54
commodities trading and, 106
contrarian strategies and, 290, 299
Crash of 1987 and, 106, 108–9, 112, 113, 115, 116, 121, 327, 354, 356
Crash of 2007–2008 and, 353, 393
crashes and, 356
dealing with, 356–58
EMH and, 105, 106, 108–9, 112, 113, 115, 116, 119, 121–27, 122n, 129, 132, 134, 135
flash crashes and, 326, 327, 355, 356
futures and, 355
Great Recession and, 393
HFT and, 326, 327, 328
Housing Bubble (2007–2008) and, 124, 125, 126, 127, 135
importance of, 7
increase in, 355
infinite, 108–9
IOH and, 276
lack of, 353
little-traded issues and, 357–58
LTCM debacle and, 119, 121, 122, 122n, 123
portfolio insurance and, 108–9
price and, 354–55
Psychological Guidelines about, 355, 357
risk and, 132, 353–55, 356–58
sell strategies and, 356
subprime mortgages and, 7, 398
volatility and, 134
Little, Ian, 201, 202
little-traded issues: liquidity and, 357–58
Lo, Andrew, 328
Lockhart, James B. III, 297
Loewenstein, George, 34
Long Beach Mortgage Trust 2006–A, 399
Long-Term Capital Management (LTCM), 116–23, 120n, 122n, 124, 132, 134, 355
long-term return
Affect and, 43–45, 48
availability heuristic and, 59, 60
contrarian strategies and, 251–66, 266n, 273, 302–9, 322
contrarian strategies within industries and, 311–16
and probability of success using IOH, 302–9
regression to the mean and, 72, 73
risk and, 351, 366–75
sell strategies and, 348
Temporal Construal and, 43–45
volatility and, 351
losses, taking, 348
lotteries, 34, 210
Loughran, Tim, 57, 58, 59
Lovallo, Dan, 207
Lowenstein, Roger, 119
LTCM. See Long-Term Capital Management
Lucas, Robert Jr., 159
luck, 27, 56, 71, 97, 380, 417
Lufkin, Eric, 178, 195n, 219, 311, 319
MacBeth, James, 136
MacGregor, Donald, 40, 45
Mackay, Charles, 26, 27
Madoff, Bernie, 29, 216
Magellan Fund, 142
Malkeil, Burton, 145, 201, 202
Malmfors, T., 40, 40n
manias. See bubbles/manias
manipulation, market: HFT and, 331–32, 334, 335
manipulation of numbers, 283
margin
bubbles and, 15, 19
on commodities, 106
Crash of 1929 and, 106, 355
Crash of 1987 and, 106, 110, 114, 116
EMH and, 106, 110, 114, 116, 121, 124, 125
futures and, 355, 356
HFT and, 334
Housing Bubble (2007–2008) and, 124, 125
interest rates on, 19
leverage and, 355–56
LTCM debacle and, 121
Psychological Guidelines about, 357
requirments concerning, 355–56
margin of safety principle, 291
markets
disequilibrium of, 275, 276, 327, 415
lack of understanding of modern, 3
openings and closings of, 333
overreactions of, 276
timing of, 337
Marshall, Alfred, 157
mathematics
crisis in modern economics and, 156, 157–60
as heuristic, 76–77
as underlying EMH, 131, 157–60
See also statistics
May 6, 2010 (flash crash), 216, 324–27
May 18, 2010 (flash crash), 327
McDonough, William, 122
“meaningful information,” 46
Meet the Press (NBC-TV), 383
Melamed, Leo, 105
Mellon, Andrew, 15
mercantilism, 408, 409
Merck, 33
mergers and acquisitions, 150–51
Meriwether, John, 117, 119
Merrill Lynch, 188, 205, 396
Merton, Robert, 117, 118, 119, 120, 121, 123, 124, 134
Michaely, Roni, 151
Microsoft, 233–34, 409
Miller, Merton, 94
Miller, William, 180
Mirrlees, James, 159
Mississippi Bubble (1720), 17, 20, 21, 26
modern portfolio theory (MPT)
betas and, 136
characteristics of scientific hypotheses and, 131
and EMH as paradigm,
160
as failure, 101, 102, 155
popularity of, 87, 99
psychology and, 267
risk-return and, 87, 87n, 99, 135, 366
volatility and, 134, 136
money managers. See professionals, financial
money supply, 414, 415
monkeys: neuroeconomics and research on, 237–38
monopolies, 403
Montag, Thomas, 398
Montague, Read, 237, 238
Monte Carlo simulation, 304–6
Monty Python and the Holy Grail (movie), 103–5
Moody’s, 78–79, 124n, 389, 394, 395, 398, 399
Moore, Arnold, 89
Moore, Sara, 237
Morgan Stanley, 19, 99, 119, 178, 380, 388, 399–400
Morgan Stanley Capital International (MSCI), 195n
Morgenson, Gretchen, 213, 391
Morgenstern, Oskar, 89
Morningstar, 264, 321, 341, 345
Morrison, Wayne, 410
mortgage-backed securities, 124n, 125–26, 127, 394–95, 400
mortgage bonds, 125, 126, 389, 389n
mortgage originators, 124, 124n, 127, 387, 388, 389, 391
mortgages
adjustable-rate, 390
bank bailouts and, 3
credit-ratings on, 389
delinquent, 3
fixed-rate, 390
negative amortization, 389
Ninja, 389, 397
standards for, 388, 388n
See also housing; subprime mortgages; type of mortgage
Mossin, Jan, 135
Mozilo, Angelo, 390
MPT. See modern portfolio theory
MSCI EAFE index data, 344
Murphy, J. Michael, 133–34
mutual funds
in bear markets, 264–66, 341n
Bogle’s knowledge about, 3–4
contrarian strategies and, 270
during Dot-Com Bubble, 64–65
EMH and, 93–95, 133, 141–43
ETFs compared with, 339–40
flawed statistics about, 141–43
forecasting and, 192, 211
fundamental analysis and, 93–95
HFT protection and, 340–41
Jensen’s study of, 141–43
during July-August 2011, 329
performance of, 141–43
representativeness and, 64–65
risk and, 99, 133, 143, 361
sales charges for, 94
Najarian, Jon, 331
Nanex, 327–28
NASDAQ, 288
NASDAQ 100 Index, 35–39, 326
NASDAQ Composite Index, 37
NASDAQ stocks: and negative correlation of judgments of risk and benefits, 41
National Student Marketing Corporation (NSM), 24
NationsBank, 205
Neff, John, 142
neuroeconomics
Affect and, 237
cognitive psychology and, 217
contrarian strategies and, 307
dopamine study and, 236–39
event triggers and, 235, 236–37, 238
favored stocks and, 237, 238, 239
function of, 217
and investing tools, 6
IOH and, 271, 273
New Psychology and, 27
price and, 239
reevaluation of stocks and, 248
reinforcing events and, 235, 236–37, 239
rewards and, 217, 236, 237, 238–39
risk and, 217
surprises and, 217–18, 226, 235–40
tools of, 217–18
unfavored stocks and, 237, 239–40
New Century Financial Corporation, 78
The New Contrarian Investment Strategy (Dreman, 1982), 180–81, 190
New Deal, 383
“New Economy,” 20, 55
“New Era,” 20, 55
The New Normal, 55, 72
New York Federal Reserve Bank, 397, 397n
New York State: investigation of security analysts by, 189
New York Stock Exchange
average return in 1960s of, 94
Basu study of stocks on, 255
commodity exchanges link to, 107
contrarian strategies and, 288
FFJR study of stock splits on, 146–48
foreign stocks on, 345
New York Times
German World War I ad in, 215
subprime problem articles in, 391
New Yorker magazine: Fama article in, 128
Nicholson, Francis, 251–52, 258
Noussair, Charles, 237
NovaStar Financial, 78
NYSE Euronext, 332
Obama (Barack) administration, 2, 393, 409, 410, 411
O’Brien, John, 109–10
oil, 43, 62–63, 414. See also Apache Corporation
O’Malia, Scott, 332
“onetime charges,” 348
optimism
contrarian strategies and, 291
contrarian strategies within industries and, 318
forecasting and, 176–80, 197–98, 199, 212–13, 214
IOH and, 272, 274
Psychological Guidelines about, 180
of security analysts, 177–80, 197–98, 199, 212–13, 214, 219, 229, 274, 291
surprises and, 219, 229
options, 109, 110, 120, 326n, 329, 336, 337–39
outside forecasting, 207–9, 211, 212, 213, 214
outsourcing, 405–6, 407, 411, 412
overreaction hypothesis. See Investor Overreaction Hypothesis
Owens-Corning Fiberglas, 206
Pacific Rim Tigers, 407, 408, 411
packaged concept products, 357
PaineWebber, 187, 203
“paired trades,” 117–18, 121
panics
EMH and, 276
HFT and, 333–34, 335, 336
in history, 17
information and, 154
IOH and, 269, 276
during July-August 2011, 2, 329–30, 331
price-valuation relationship and, 153
short selling and, 327
See also bubbles/manias
paradigm
acceptance of new, 5
anomalies and, 160
challenges facing new, 161–63
changing from old to new, 9, 160–62, 160n, 161–63, 268–69
criticisms of, 161–63
need for new, 214
scientific method and, 160–61
Partnoy, Frank, 386
Patel, Jay, 111, 202
Paulson, Henry “Hank,” 15, 126, 174, 213, 297
pension funds, 99, 108, 109, 192, 266
Permanent Subcommittee on Investigations, U.S. Senate, 79, 399
Peterson, Mark, 270
Phelan, John, 110
Philbrick, Donna, 177–78
Philip Morris, 292–93
Phillips, Don, 66
phlogiston theory of heat, 258
Pinel, E. C., 43
piracy, 409–10, 411
Plato, 4
politics
bailouts and, 381
contrarian strategies and, 297, 298
Fannie Mae and, 297
free trade and, 412–13
U.S. budget deficit debates and, 2
Popper, Karl, 153, 163
portfolio insurance, 108–10, 111–14, 115, 122, 276, 334
portfolios
contrarian strategies within industries and, 313, 317
guidelines for constructing, 279–88
measurement of return on, 99
number of stocks in, 288
rebalancing of, 281–82, 285, 313, 317
selection of stocks for, 288–92, 320–21, 342
turnover of, 94, 281–82, 285
See also buy-and-hold strategy; diversification; modern portfolio theory; portfolio insurance
prediction. See forecasting
price
Affect and, 46–47, 49, 50, 271
bubbles and, 2
1–22, 35
cognitive heuristics as driving force behind, 60
competition and, 95
confidence and, 218
contrarian strategies within industries and, 311–16
disconnect between fundamentals and, 46–47
EMH and, 128–29, 135, 140, 141, 144, 145–49, 150, 152–53, 154, 155n, 199, 276
event triggers and, 239
fall in, 21–22
favored stocks and, 272
forecasting and, 218, 274
of housing, 388
information and, 145–49, 150, 154
insensitivity to probability and, 34, 35, 38
IOH and, 269–70, 272, 274, 275, 276
of IPOs, 346
liquidity and, 354–55
and negative correlation of judgments of risk and benefits, 41
neuroeconomics and, 239
psychology and, 27, 30, 218
randomness of, 88, 89–90, 89n, 95
rationality and, 128–29, 145n, 152, 276
surprises and, 8, 217, 218, 219–29, 230–32, 233, 234, 235, 241, 243, 248, 250, 274
Temporal Construal and, 44
unfavored stocks and, 272
valuation and, 140, 141, 152–53
See also fundamental analysis; technical analysis; volatility; specific ratio
price-to-book value ratio (P/BV)
“businessman’s risk” stocks and, 284–85
contrarian strategies within industries and, 311–16
contrarian strategy performance summary and, 301–2
examples of contrarian stocks using, 298–300
favored and unfavored stocks and, 250
fundamental analysis and, 49
as important contrarian strategy, 249
IOH and, 272, 274, 275, 277–79, 283–86, 303–4, 306
risk and, 136
selling strategies and, 347
sources for statistics about, 320, 321
and success of contrarian strategies, 258–67
surprises and, 218, 219–33, 234, 241n, 242
updating of, 292
price-to-cash flow ratio (P/CF)
contrarian strategies within industries and, 311–16
contrarian strategy performance summary and, 301–2
criticisms of contrarian strategies and, 254
and definition of cash flow, 282–83
examples of contrarian stocks using, 293, 295–98
favored and unfavored stocks using, 250, 254
as important contrarian strategy, 249
IOH and, 272, 274, 275, 277–79, 282–83, 285, 303–4, 306
and manipulation of numbers, 283
selling strategies and, 347
sources for statistics about, 320, 321
and success of contrarian strategies, 260–67
surprises and, 218, 219–33, 234, 241n, 242
updating of, 292
price-to-earnings ratio (P/Es)
accuracy as measure of subsequent market performance of, 251–53
Affect and, 37–39, 47, 48–49, 50
availability of information for, 251, 292
bubbles and, 49
calculation of, 279
and contrarian strategies as long-term game, 307
contrarian strategies within industries and, 311–16