Investment Philosophies: Successful Investment Philosophies and the Greatest Investors Who Made Them Work 1st Edition
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From the Inside Flap
To successfully implement any investment strategy, you must first adopt an investment philosophy that is consistent at its core and which matches not only the markets you choose to invest in, but your personal preferences (risk tolerance, time horizons, etc.). In Investment Philosophies: Successful Strategies and the Investors Who Made Them Work, Aswath Damodaran will help you do this by going beyond the simple explanations of traditional and alternative investment strategies, to discuss the individual underlying philosophies that support these techniques.
Investment Philosophies explores many of the time-tested investment philosophies that investors have used over the years-from value investing and growth investing to technical analysis and market timing-and discusses some of the investors who made these philosophies work. This unique book will expose you to a wide range of investment philosophies to give you a sense of what drives investors in each philosophy, how they attempt to put these philosophies into practice, and what determines ultimate success. Damodaran offers an unbiased forum for the presentation of different investment philosophies, while supplying you with the tools-the definition and measurement of risk, the notion of market efficiency and how to test for inefficiencies, the components and determinants of trading costs-and the empirical evidence to make your own judgments on the investment philosophy that fits your specific investment goals and views of how markets work.
Filled with valuable insights, useful formulas, and comprehensive charts, this book provides you with the tools to pick an investment philosophy that is right for you. With Investment Philosophies as your guide you can be more confident in the way you or your fund managers invest.
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The book is broken down into two segments. The first gives a primer in finance theory which is useful to those who are beginners as well as those with more intermediate knowledge. The first segement is essentially a mini-textbook on finance related to investments. It is extremely handy and very well laid out. The second segment of the book uses the tools developed in the first to analyze various investment philosophies. Damodaran bases nearly all his arguments on academic research. That is, he does not make any claims without backing them up.
There is little new information in this book, although there are results of a few very recent research projects. The value of this book is in the organization of information already available, and of course in the theoretical framework of the "investment philosophy" that he lays out. It is important to note that Damodaran's definition of investment philosophy is not without dispute. Most investmentment philosophies used in practice do not meet his criteria. So, he is really making an argument for looking at investment philosophies in a new way. It is my belief that this new way is superior to what is currently in use.
Professor Damodaran starts Investment Philosophies with a brief overview of the concept of risk, valuation techniques, the impact of transaction costs and taxes, and the efficient market hypothesis. After presenting these background topics, the addresses the various philosophies individually:
1. Technical Analysis: Selection of investments based on their prior price patterns.
2. Value Investing: Identifying investments whose current price is low relative either to their intrinsic values or to similar investment opportunities.
3. Growth Investing: Identifying investments whose value is likely to grow more rapidly than alternatives.
4. Trading on News: Closely monitoring corporate announcements and attempting to react rapidly to take advantage of new information.
5. Arbitrage: Attempting to minimize risk by hedging one investment against another in a manner that leaves a small but highly probable profit.
6. Market Timing: Seeking to recognize when the market is overvalued or undervalued and moving one's investments accordingly.
7. Indexing: Concluding that none of the above techniques is likely to produce results that consistently beat such market indices as the S&P500 which can be tracked by numerous Index Funds.
One tidbit of wisdom that I especially appreciated was an explanation of how to evaluate return on equity (ROE) for companies with very little equity. In these cases, any positive return can result in an astronomical ROE. Professor Damodaran's solution is to use the ratio of (Price-to-Bookvalue) to ROE.
The title, Investment Philosophies, seems a bit too abstract to me and may put off some potential readers who would enjoy and benefit from reading it. The contents are sufficiently concrete to justify a title such as "A Comparison of Alternative Investment Strategies". If you are looking for an easy to read, non-mathematical approach to this subject, this book is definitely a five star selection. If you want a bit more technical depth, start with Investment Valuation, or use it as a reference while reading Investment Philosophies.
See also Professor Damodaran's website, damodaran.com, which contains a wealth of information from his books and classes at NYU.