Equity Management: Quantitative Analysis for Stock Selection [Hardcover]

Bruce I. Jacobs (Author), Kenneth N. Levy (Author), Harry M. Markowitz (Foreword)

Book Description

ISBN-10: 0071346864 | ISBN-13: 978-0071346863 | Publication Date: January 5, 2000 | Edition: 1

Two pioneers and innovators in the money management field present their choice of groundbreaking, peer-reviewed articles on subjects including portfolio engineering and long-short investment strategy. More than just a collection of classic review pieces, however, Equity Management provides new material to introduce, interpret, and integrate the pieces, with an introduction that provides an authoritative overview of the chapters. Important and innovative, it is destined to become the "Graham and Dodd" of quantitative equity investing.

Editorial Reviews

From the Publisher

“Equity Management: Quantitative Analysis for Stock Selection” includes a foreword by Harry M. Markowitz, recipient of the Nobel Prize in Economic Sciences for his pioneering work developing modern portfolio theory.

Praise for “Equity Management”

“’Equity Management’ should be mandatory reading for any equity investor interested in quantitative techniques.” - Richard Bernstein, Chief Quantitative Strategist, Merrill Lynch & Co.

“Demonstrates how investors can combine economic and company fundamentals and qualitative factors successfully in the investment process.” - Jon A. Christopherson, Research Fellow, Frank Russell Company

“A book that every serious student of stock selection and portfolio management should read and devour.” - David K. Whitcomb, Professor Emeritus of Finance, Rutgers University and Founder and CEO, Automated Trading Desk, Inc.

“This insightful book demonstrates how the exceptional investor can profit by taking advantage of the cognitive errors of normal investors.” - Meir Statman, Glenn Klimek Professor of Finance, Santa Clara University

“The thoroughness and originality of Jacobs and Levy’s thinking should inspire and challenge every investment manager.” - Wayne H. Wagner, Chairman, Plexus Group, Inc.

“Jacobs and Levy combine rigorous academic research with valuable insights into the real world of investment practice.” - Edward M. Miller, Research Professor of Economics and Finance, University of New Orleans

"An abundant source of ideas for any investor interested in winning stock selection techniques." - Brian Bruce, Editor, “The Journal of Investing”

“A virtual encyclopedia of techniques and strategies to outperform the market, it's destined to take its place among the classics.” - Frank J. Fabozzi, Adjunct Professor of Finance, Yale University, and Editor, “The Journal of Portfolio Management”

From the Inside Flap

Bruce Jacobs and Ken Levy have long been recognized as pioneers in quantitative equity management. As principals of Jacobs Levy Equity Management, a leading-edge quantitative money manager, Jacobs and Levy have devoted over 12 years to state-of-the-art research into security pricing, portfolio construction, and sophisticated trading techniques. Their groundbreaking work on "disentangling" return regularities, "engineering" portfolios to performance benchmarks, and "long-short" investing has been featured at professional forums such as the Institute of Chartered Financial Analysts’ Continuing Education seminars and in the pages of Institutional Investor and the Wall Street Journal.

In the 1980s, Jacobs and Levy began to publish a series of articles in the peer-reviewed Financial Analysts Journal, Journal of Portfolio Management, and Journal of Investing. These articles are based on the authors’ own research into and experience with detecting and exploiting the recurring profit opportunities available in a supposedly "efficient" marketplace. They changed the course of modern money management by giving active investment management the tools needed to beat the market consistently. Equity Management assembles these articles for the first time ever. The book groups these 15 articles, from 1988’s "Disentangling Equity Return Regularities" through 1999’s "Alpha Transport with Derivatives," into three parts that cover the range of Jacobs and Levy’s investment philosophy and strategies, from selecting securities to managing portfolios to expanding opportunities with short-selling and derivatives. New introductory material provides a perspective on the articles, placing each within the broader context of the authors’ whole body of knowledge. The end result is a fascinating review of the concepts that form the foundation of modern active equity management, and the contributions the authors’ works have made to that foundation.

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Product Details

• Hardcover: 400 pages
• Publisher: McGraw-Hill; 1 edition (January 5, 2000)
• Language: English
• ISBN-10: 0071346864
• ISBN-13: 978-0071346863
• Product Dimensions: 9.3 x 6.2 x 1.3 inches
• Shipping Weight: 1.8 pounds
• Average Customer Review: 3.2 out of 5 stars  See all reviews (5 customer reviews)
• Amazon Best Sellers Rank: #1,266,854 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

22 of 25 people found the following review helpful:

5.0 out of 5 stars A Potent, Authoritative Guide to Successful Stock Selection, May 22, 2000

By A Customer

This review is from: Equity Management: Quantitative Analysis for Stock Selection (Hardcover)

The most important thing that I (an individual mutual fund investor) came away with was an understanding of the reasons why actively managed mutual funds cannot consistently beat their underlying benchmarks if they take a "stock picking" approach. Since this is the approach taken by most mutual fund managers, it is not surprising that more than 50% (often much more than 50%) do not beat their benchmarks. I also found it interesting how with sufficient breath and depth, engineered portfolios offer higher return and lower risk than the S&P 500.

It is easy to see how "alpha transport", when properly used, can also help maximize returns while minimizing risk. However, I imagine there have been, more often than not, improper use of alpha transport which did just the opposite (minimize return and maximize risk). Obviously not included in the text is the "proper usage" or algorithms for "disentangling equity return regularities". I imagine the authors keep such information close to their chest and constantly update them as old algorithms become part of the efficient market.

The work provides a guide to modern methods of equity management, and for those interested in the state-of-the-art, I highly recommend this book.

32 of 42 people found the following review helpful:

2.0 out of 5 stars Still Just a Collection of Journal Articles, April 26, 2000

By 

Marc Levitt (Silicon Valley, CA) - See all my reviews
(REAL NAME)   

This review is from: Equity Management: Quantitative Analysis for Stock Selection (Hardcover)

The Good: It is a collection of some of the great papers by the authors over the years that have appeared in Journal of Portfolio Mgt., Journal of Investing and the Financial Analysts Journal. If you do any work in quant equity management you should know and have these papers. Buy the book and save time hunting down the papers.

The Bad: It is a collection of some of the great papers by the authors over the years that have appeared in Journal of Portfolio Mgt., Journal of Investing and the Financial Analysts Journal. If you do any work in quant equity management you know and have these papers. The introductions and "new" material that ties it all together is not worth the expense. What sort of got under my skin is that none of the work has been updated or brought current, even by using appendicies. Since some of their most interesting quant work was published 12 years ago we have no updates as to how the factors are doing. This would have been a great value to this reader.

Overall its a great body of work but nothing new.

5 of 5 people found the following review helpful:

3.0 out of 5 stars One good chapter, but slightly repetitive & not much new, October 9, 2003

By 

Christopher Hefele (Lawrenceville, NJ United States) - See all my reviews
(REAL NAME)   

This review is from: Equity Management: Quantitative Analysis for Stock Selection (Hardcover)

Jacobs and Levy have assembled a body of work here centering on their stock picking techniques as well as their long-short portfolio construction techniques. Most of the chapters have their origins in various finance journals, though the articles themselves are not very heavy on mathematics. Overall, the book was interesting, though somewhat repititious. In retrospect I'd suggest that those familiar with long-short portfolios and the various market anomolies should just read chapter 2 about "Disentangling Equity Return Regularities" since that is where Jacobs & Levy's original work is outlined.

Chapter 2 focuses on the use of regression analysis to "disentangle" various stock market anomalies. The authors claim that simple rules such as "Buy low-P/E stocks" are appealing, but oversimplify the true source of stock returns. For example, low P/E stocks tend to have higher rates of return, as do small-capitalization stocks. But if a small capitalization stocks also tend to have low P/E's, then how much of their return is due to the low-P/E effect by itself, and how much is due to the small-capitalization effect by itself? Jacobs & Levy have done the analyses, and show which effects are genuine, and which effects are merely proxies for other effects. The effects that turn out to be the strongest when "disentangled" include low P/E, Earnings trend, Earnings Surprise, Residual Reversal, and Relative Strength.

The introductory chapters in the book make some interesting points. They argue that the stock market is not random, but then again it is also not simple. Although simple rules are appealing to humans, they oversimplify the complexity of the market. To gain an edge, one must use sophisticated, objective, multi-factor statistical computer models that capture the complex interactions in the market. Of course the authors are saying this to advocate the techniques they use, but nevertheless, they have some good points.

Finally, the second half of the book focuses on the construction of long-short portfolios, though there is not much fresh material here. They point out some of the logistical details of running a long-short portfolio, and give some examples. Also, they introduce the concept of "alpha-transport." That is, one can construct a long-short market neutral portfolio, then by buying buy an index (using SP500 futures, for example) one "transports" the gains from the long-short portfolio onto the gains/losses of the index position. Thus, if the stock picking for the long-short portfolio is done correctly, the total portfolio will beat the index picked. To me, this seemed like an obvious technique; I'm surprised they decided to focus on it and give it a fancy name ("alpha transport")

Overall, I found the book interesting, though somewhat repetitious. I was familiar with much of what was covered, however I did find that Chapter 2 was worth reading, since I wasn't familiar with Jacobs & Levy's work in detail.