by David Dreman
contrarian strategy performance summary and, 301–2
Dot-Com Bubble and, 37–39
Dreman paper about, 162
early evidence of success of low, 251–56
EMH and, 253, 257
examples of contrarian stocks using, 292–95
favored and unfavored stocks using, 250, 270
foreign investing and, 344
as important contrarian strategy, 249
insensitivity to probability and, 37–39
IOH and, 273, 274, 275, 277–82, 285, 303–5, 306
neuroeconomics and, 237, 238
representativeness and, 62
return on investments and, 136, 253, 254, 255
risk and, 253, 255
selection of contrarian stocks and, 289–92
sell strategies and, 347, 348–49
sources for statistics about, 320
and success of contrarian strategies, 257–67
surprises and, 218, 219–33, 234, 240–42, 270
updating of, 292
price-to-industry strategy, 249, 250, 275. See also industries
price-to-value strategy, 249, 250, 260, 261–62, 275. See also specific strategy
price-volume systems, 91
probability
disregard of prior, 68–70
insensitivity to, 33, 34–39, 46–47
representativeness and, 61
risk and, 350
of success using IOH, 302–6
See also base rate
Procter & Gamble, 345
professionals, financial
accuracy of, 180–84
Affect and, 46–47, 48–50
bond investing by, 80
confidence of, 172–75
contrarian strategies and, 8, 285
contrarian strategies within industries and, 318
Crash of 1987 and, 110, 115
decision-making by, 65–67, 77, 79, 80
and disconnect between fundamentals and price, 46–47
EMH and, 100–101, 104, 128–29, 171
favorite stocks/industries of, 171, 180–84
flash crashes and, 324, 334
forecasting and, 190, 192, 192n, 194–95
foreign investing and, 345
fundamental analysis and, 93–95
heuristic math and, 77
“hot” analysts as, 65–67
information overload and, 75
information processing by, 169, 170, 171–75
layoffs of, 104
as learning from experiences, 177
LTCM debacle and, 122
mutual funds and, 340
performance of, 3–4, 93–96, 171–75, 180–84
price-to-value methods of, 152–53, 155n
and probability of success using IOH, 307
public perceptions of, 16
risk concept and, 100, 350
professors. See academics; specific person
program trading. See index arbitrage
“prudent-man” rule, 359–60, 361
Prudential Securities, 205
Psychological Guidelines
about Affect, 50
about buy-and-hold strategy, 309
about contrarian strategies, 248, 266, 284, 285
about contrarian strategies within industries, 315
about correlations, 176
about disregard of prior probabilities, 70
about forecasting, 174–75, 176, 180, 184, 195, 196, 202, 204, 211, 213
about heuristic math, 77
about “hot” analysts, 67
about information processing, 174–75, 184
about IOH, 284, 285
about leverage, 355, 356, 357
about liquidity, 355, 357
about optimism, 180
purpose of, 50
about representativeness, 64
about return on investments, 77, 366–67
about risk, 355, 356, 357, 366–67, 373, 374
about security analysis, 50
about selling, 346–47
about shortcuts in decision-making, 59, 64, 67, 70, 77
about speculation, 284
about surprises, 224, 229–30, 242–43
about unnecessary trading, 285
psychology
benefits of, 168
buy-and-hold strategy and, 309
contrarian strategies and, 5, 8, 10, 27, 248–49, 267, 307, 317, 318
contrarian strategies within industries and, 317, 318
crisis in modern economics and, 163
and early development of New Psychology, 26–28
EMH and, 4, 100, 153, 155, 267, 275–76
errors and, 168–70
forecasting and, 206–8, 211–12
investor confidence and, 413
as investor’s greatest enemy, 322
IOH and, 271, 272, 273, 275–76
leverage and, 355
MPT and, 267
as new set of tools, 417
paradigm change and, 163
pitfalls of, 6
price and, 218
rationality and, 4
reevaluation of stocks and, 248–49
risk and, 373
role in investment decisions of, 5, 10, 29–30
security analysis and, 49
sell strategies and, 346–47
Psychology and the Stock Market (Dreman), 254
psychology students: personality write-up experiment with, 69–70
Ptolemaic epicycles, 7, 130–32, 140, 155
Purchase, I.F.H., 40, 40n
purchasing power, 407
Putnam, Samuel, 359, 360, 361
puts, 325, 336, 337–39, 358
Qualcomm, 25
quarterly performance: focus on, 318
“quote stuffing,” 327–28
quotes, stock: overexposure to, 374
Rand, Ayn, 382, 403
Rand Corporation, 212–13
random walk hypothesis, 88, 90, 91–92, 97
randomness
forecasting and, 201–2
of price, 88, 89–90, 89n, 95
Rankine, Graeme, 148
rating agencies. See credit-rating agencies; specific agency
rational-analytic system, 30–31, 32, 33, 42, 47, 48, 49, 50, 128, 169
rationality
Affect and, 6
bubbles and, 128–29
contrarian strategies and, 307
Crash of 1987 and, 108, 114, 115, 116
crashes and, 128–29
crisis in modern economics and, 156–63
EMH theory and, 4, 101, 108, 114, 115, 116, 129, 133, 144, 156–57, 168, 177, 275, 276
forecasting and, 200
information processing and, 171
IOH and, 276–77
and negative correlation of judgments of risk and benefits, 41
portfolio insurance and, 108
price and, 128–29, 145n, 152, 276
psychology and, 4
risk and, 132–33, 138, 155–56, 366, 392–93
subprime mortgage crisis and, 392–93
valuation and, 128, 152–53
Raymond James, 203
RBS, 396
Reagan, Ronald, 382, 384, 403
real estate, 354, 373, 374, 413, 416
real estate bubbles, 22, 23, 354, 388–90
real estate investment trusts (REITs), 388
RealD, 266
recency, 54–55, 56, 58–59, 60
recessions: forecasting of, 196–98, 199
Recognition Equipment, 14
Red Hat stock, 30
regression to the mean, 70–73, 76, 272, 273, 274
regulation/regulators
of banks, 382, 383, 394
Crash of 1987 and, 116
debate about, 167
of derivatives, 385–86
flash crashes and, 326, 327
of futures trading, 105, 106
Greenspan views about, 382, 383, 384, 385, 386, 392, 403
&n
bsp; HFT and, 327, 328, 330, 331–32, 335–36
market casinos and, 380
subprime mortgages and, 78, 387, 391–94
See also specific agency
Reid, Kenneth, 257
reinforcing events, 230, 233–35, 236–37, 239, 242, 274
relative-strength methods, 90
“relative value” trades, 117–18
Renaissance Technologies LLC, 330
representativeness, 6, 61–65, 70, 76, 79, 80, 171
residential mortgage-backed securities (RMBS), 124, 124n, 125, 395, 396
Resolution Trust Corporation, 299, 354
return on investments
information availability and, 145–46, 149
and NYSE average return in 1960s, 94
stock splits and, 148
surprises and, 240
volatility and, 119, 129, 132, 133, 136, 137, 138–39, 140, 142, 176
See also capital asset pricing model; long-term return; modern portfolio theory; short-term return; specific strategy or topic
reversals, trade, 326, 332–33, 335
Reynolds American, 232
RGM Advisors, 325
Ricardo, David, 404, 405, 406, 413
risk
better theory of, 350–75
Boot Hill of stocks and, 250, 251
concerns about modern theory of, 7, 350–51, 352
contrarian strategies and, 144, 162, 249, 259, 260, 284–85
crashes and, 7
crisis in modern economics and, 156
definition of, 359, 367, 368, 371–72
EMH and, 6–7, 99–100, 116–21, 123, 124, 124n, 127, 131–43, 145, 154–55, 156, 162, 253, 259, 260, 275, 276, 351, 354–55, 358
flawed statistics about, 141–43
in foreign investing, 343–44
Glass-Steagall Act and, 385
Greenspan views about, 383, 392–93
HFT and, 336
inflation and, 359–60, 361, 362–64, 367, 368, 371, 372, 373
information availability and, 145
investment objective and, 366
IOH and, 275, 276, 284–85
long-term versus short-term return and, 351, 366–74
measurement of, 99, 141–43, 351, 358, 367–75
Murphy review of research about, 133–34
negatively correlated judgments of benefit and, 33, 39–43, 40n, 47
probability and, 350
“prudent-man” rule and, 359–60, 361
Psychological Guidelines about, 355, 356, 357, 366–67, 373, 374
rationality and, 132–33, 138, 156, 366, 392–93
return and, 40, 41, 42, 87n, 96–97, 133–34, 135–36, 138, 139, 142, 145, 155, 259, 260, 352
taxes and, 360, 361, 364–65, 364n, 367, 368, 370–71, 372, 373
uncertainty distinguished from, 359, 374
volatility and, 6–7, 96–97, 116, 119, 127, 131, 132–35, 276, 351, 352, 358, 366–67, 373, 374
See also specific topic
Ritter, Jay, 57–58, 59
Rockefeller, John D., 15
Rohatyn, Felix, 386
Roll, Richard, 94, 115, 146–48, 148n
Roosevelt, Theodore, 383, 403
Rosenberg, Barr, 135, 257, 258
Rosenthal, Peter, 119
Rottenstreich, Yuval, 34
Royal Dutch Shell, 294, 345
Rubin, Robert, 384, 385, 396
Rubinstein, Mark, 109
Rukeyser, Louis, 107
rumors, 15, 21
Russell, Frank, 260
Russia, 2, 121, 414, 415
S&P. See Standard & Poor’s
saliency, 54, 56, 58–59, 60
Salomon Brothers, 119, 187, 205
Salomon Smith Barney, 188
Samuelson, Paul, 88n, 156, 157, 159, 161
Saunders, Edward Jr., 153
savings accounts, 360, 361, 373, 374, 414
Savings and Loan (S&L) Crisis (mid-1980s), 22
Schapiro, Mary, 332
Scholes, Myron, 94, 101, 109, 117, 118, 119, 121, 123, 124, 149
Schultz, Wolfram, 237, 238
Schwab, Charles, 99
scientific method, 131, 139–40, 153, 160–61
secondary offerings, 149–50
Securities and Exchange Commission, U.S. (SEC)
conflict of interest cases and, 401
Crash of 1987 and, 116
as EMH supporter, 110
flash crashes and, 216, 324, 325, 327, 328, 332
forecasting by security analysts and, 174
Goldman Sachs settlement with, 400
HFT and, 324, 325, 327, 328, 331–32, 334, 335
investigation of security analysts by, 188, 189
mission of, 335
Mozilo settlement with, 390
study of performance of financial professional by, 93
securitization, 389n, 394–95n
Security Analysis (Graham and Dodd), 46, 48, 317, 358, 416
security analysts/analysis
abandonment of, 289
accuracy of, 7, 180–84, 185–214, 229, 241, 274, 302
Affect and, 45–46, 47, 48–49, 50
“All-Star,” 187, 189, 190, 204, 206
“bottom-up” estimates of, 178
career pressures on, 202–6
confidence of, 186, 212–14, 219
consensus forecasting by, 193–95, 198–99, 220, 274
contrarian strategies and, 8
favorite stocks/industries of, 171, 180–84
forecasting by, 169, 171, 176–84, 185–214, 217, 220, 229, 274
hero worship of, 188
heuristic math and, 77
information processing by, 169
as learning from experiences, 177, 200
long-term records of, 190–92
narrow focus of modern, 270
optimism of, 177–80, 197–98, 199, 212–13, 214, 219, 229, 274, 291
Psychological Guideline about, 50
reaction to surprises by, 233
revision of earnings estimates by, 233
salaries/compensation of, 187, 203–4
SEC and state investigations of, 188, 189
sell recommendations of, 204–6
as special, 200–206
surprises and, 190–92, 217
See also fundamental analysis; technical analysis
selection of stocks, 288, 289–92, 320–21, 342
sell-at-the-market orders, 336
sell recommendations, 204–6
sell strategies, 346–49, 347n, 356, 414
Senate, U.S., 79, 399
service industry, 408
Seyhun, H. Nejat, 59
Seymour, Tim, 331
shark attacks, 51, 54
Sharpe, William, 94, 135, 138
Shearson Lehman, 66
Shiller, Robert, 34, 110–11, 152
Shiv, Baba, 75
Shleifer, Andrei, 260
short-term return
regression to the mean and, 73
risk and, 351, 366–75
Temporal Construal and, 43–45
shorting
Crash of 2007–2009 and, 399
of derivatives, 397
EMH and, 108, 108n, 113, 120, 121, 122
futures, 359
HFT and, 332–33, 336–37
LTCM debacle and, 120, 121, 122
options, 120
panic and, 327
risk and, 359
Treasury bonds, 339, 339n
shorting against the box, 337
Siegel, Jeremy, 416
Simon & Schuster, 16
Simon, Herbert, 74–75, 171
Sinquefield, Rex, 72
Siris, Peter, 206
Slovic, Paul, 31, 39, 41, 45–46, 170
small-capitalization: three-factor model and, 137
Smith, Adam, 402, 403, 404, 408, 413
Smith Barney, 205–6
Smith, Vernon, 27
Social Security, 405, 407
Sony, 345
Soros, George, 385–86
Sotheby’s, 372
South Korea, 408–9, 414
South Sea bubble (1720s), 16–17, 20, 21, 25, 26
Southern Company, 300–301
Sparks, Daniel, 398
speculation, 20, 56, 106, 107, 284, 343, 357, 359, 390
Spitzer, Eliot, 189
splits, stock, 95, 146–48
Stalin, Joseph: toppling of statues of, 352
Standard & Poor’s
as credit-rating agency, 389, 394, 395, 395n
downgrading of U.S. Treasuries by, 2, 395n
rating scale of, 124n, 125
and subprime mortgage crisis, 78–79
taxonomy used by, 195n
value index introduced by, 260
See also specific index
Standard & Poor’s 100 Index, 107
Standard & Poor’s 500 Financial Select Sector (SPDR), 297
Standard & Poor’s 500 Index
abandoning of winning strategy and, 308
availability heuristic and, 57
circuit breakers and, 326n
commodities trading and, 106–7
contrarian strategies and, 290, 291
contrarian strategies within industries and, 317
Crash of 1987 and, 114–16, 355
derivatives and, 111
ETFs and, 339, 341–42
favorite stocks/industries and, 181, 182
flash crash and, 1, 327
forecasting and, 178–79, 182, 190, 193
foreign investing and, 344
futures on, 105–6, 107–8, 108n, 109, 112, 113, 114–16, 134, 325n, 326, 327, 328, 333, 334, 355
and HFT protective measures, 341
law of small numbers and, 64–65
leverage and, 355
LTCM debacle and, 123
measurement of return on portfolios and, 99
risk and, 355
selection of stocks and, 320–21
volatility and, 96, 329, 338
Standard & Poor’s Global Industry Classification Standard (GICS), 195n, 311
Standard & Poor’s Oil & Gas Exploration & Production ETF, 340
State Street Global Advisors, 342n
statistics
EMH and, 141–44
“flash,” 67–68
flawed, 143–44
forecasting and, 208–9, 212
instant government, 67–68
revisions to, 67
sources for, 320–21
See also specific ratio
Stattman, Dennis, 257, 258
Stern, Mitchell, 219
Stice, Earl, 148
Stiglitz, Joseph, 158, 159
“stock done” report, 203
stockbrokers: military draft exemptions for, 16
stocks
inflation and, 362–64
investing in bonds or T-bills versus, 286–87, 361–74, 374n
return over time of, 286–87, 361–74, 374n, 413, 415–16
risk and, 361–74, 374n
taxes and, 364–65
Stocks for the Long Run (Siegel), 416
stop-loss orders, 109, 336
strategies
abandoning of winning, 308–9