- Hardcover: 352 pages
- Publisher: McGraw-Hill Companies; 1st edition (March 24, 2000)
- Language: English
- ISBN-10: 0071354611
- ISBN-13: 978-0071354615
- Product Dimensions: 9.3 x 6.3 x 1.4 inches
- Shipping Weight: 1.6 pounds
- Average Customer Review: 4.0 out of 5 stars See all reviews (21 customer reviews)
- Amazon Best Sellers Rank: #1,187,147 in Books (See Top 100 in Books)
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Valuing Wall Street: Protecting Wealth in Turbulent Markets Hardcover – March 24, 2000
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"Most books about the stock market tell you how to make money. This one ... will show you how to avoid losing it," begins this smart, blunt, cautionary tale based on Nobel laureate James Tobin's 1969 "q ratio," which posits, among other things, that no matter how bullish a market gets, it's bound to snap back into place at some point--and those who don't brace for the reversal will feel its sting. The authors, one a prominent asset-allocation adviser and the other a former head of macroeconomic forecasting for the Bank of England, warn that it's only a matter of time before the overexuberant market of the early 21st-century topples like its counterparts in 1929 and 1968. Here they set out to show why and how this will happen--as well as to tell stockholders what they should and should not do if they want to emerge intact.
After making a cogent new argument in defense of the still-controversial q ratio, the authors show how it plays into principles of stock-market risk and return, how it has determined the value of Wall Street in the past and will continue to do so, and how to apply it as a practical investing tool. They do a neat job of parsing the good and bad news about stocks as a sound investment for the future, and of what to do and not do with one's money come the inevitable bear market. From there, they get down to the nitty-gritty of valuing the stock market, providing four key tests for any indicator of value and explaining how to fold in such factors as the dividend yield, the price-earnings ratio, the adjusted price-earnings multiple, yield ratios, and yield differences. They wrap up with a look at what they call "the q debate" among both economists and stockbrokers, and finally, they apply the q ratio specifically to the U.S. economy, rebuking Alan Greenspan's Federal Reserve for its role in what they see as the coming U.S. bubble burst.
With its plain English, helpful illustrated charts, vivid examples from history, and even the occasional employment of the likes of Alice in Wonderland to prove its points, Valuing Wall Street should be accessible to those with a working understanding of the market and economic principles. All told, this book is not so much a how-to as it is a theoretical forecast whose tidings investors might want heed as we near what Smithers and Wright warn are rough years ahead. --Timothy Murphy
Analysts also believe the debate over stock market valuation will intensify in the weeks ahead thanks to the recent publication of two highly respected books that both forecast a coming bear market.
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Top Customer Reviews
Smithers and Wright use as a measure of valuation for stocks a statistic called "q" (or Tobin's q, named after Nobel laureate and Shiller colleague James Tobin). q represents the value of equities divided by the cost of replacing the underlying capital stock. So you might expect the stock market to be worth somewhere near q=1, where companies are worth what it cost to build them; historically, the average value of q is near 1.
Smithers and Wright show that changes in q and equity prices are almost identical, since the cost of replacing the capital stock changes so little. They also show that high values of q are associated with terrible subsequent returns. They show how a simple strategy of selling when q rises to 1.5 and buying again when q falls below 1 * trounces * a buy-and-hold strategy. And they top it all off by showing that today's level of q, around 2.5, is unprecedented. So SELL!
The reason the book is so much better than Shiller's is that Smithers and Wright give a coherent, fact- and theory-based argument for why q should be used to value stocks, not just P/E, stock earnings yield compared to bond earnings yield, or other popular measures. Shiller just used P/E and told us to sell due to today's high P/E; he did not even consider, not to mention try to debunk, other theories of valuation.
Smithers and Wright point out, for example, that in the early '30s, P/E was very high due to the depressed depression-era profits of companies, but that q was very low, providing the buy signal of a lifetime that would have been missed by looking at P/E alone.
The only negatives of this otherwise excellent book are: (1) Like most finance books, this one would gain from adding computations of after-tax returns, which shift us away from fancy trading strategies and towards buy-and-hold in taxable accounts. (2) They should admit that there are significant differences between today's economy and economies of the past. For example, in an economy such as ours where intellectual property is paramount and provides barriers to entry, firms' values may stay above the cost of replacing capital.