Management of Equity Investments (eBook)

Cover 1
Contents 5
Foreword 9
Preface 11
Abbreviations 15
One The art of investing 19
1 Golden rules of investing 21
1.1 Introduction 21
1.2 Asset classes of investing 24
1.3 Investors,speculators,risk and return 28
1.4 Savings down the drain:the Eurotunnel .asco 30
1.5 Understand the difference between investing,trading and speculating 33
1.6 Caveat emptor and human nature 37
1.7 A golden rule for private investors,but not necessarily for all professionals 40
1.8 Income,growth and control of exposure 43
2 The area where professional asset managers and private investors meet 48
2.1 Introduction 48
2.2 Investments through private banking 50
2.3 Betting on the challenger and learning to diversify 54
2.4 Increasing the visibility of one ’s investments 57
2.5 The 5 percent rule about assets at risk 61
2.6 Challenges faced by pension funds 65
2.7 Are mutual funds a good alternative? 69
Two Capital markets and their players 75
3 Capital markets and the securities industry 77
3.1 Introduction 77
3.2 Securities and their legal protection 79
3.3 Investment banking and underwriting 82
3.4 Investment bankers and primary dealers 85
3.5 Correspondent banks 88
3.6 The globalized securities market 90
3.7 Risk of global contagion 94
4 The trading of equities 97
4.1 Introduction 97
4.2 Equities,stock exchanges and over-the-counter operations 98
4.3 Basic facts about equities:common and preferred stock 101
4.4 Convertible bonds de .ned 104
4.5 The funding competition between capital markets and commercial banks 107
4.6 Stock markets and equity prices 111
4.7 Stock market indices:Dow Jones,S& P and NASDAQ
4.8 European market indices 120
4.9 Appendix:The Paper Ships Index 123
5 Regulation and operation of the exchanges 125
5.1 Introduction 125
5.2 Role of a regulatory authority 126
5.3 Self-regulation by the exchanges and con .icts of interest 129
5.4 Role of specialists in a stock exchange 132
5.5 Bid,ask,large blocks and the third market 135
5.6 Cash and margin accounts 138
5.7 Short sales and reverse/forward splits 141
Three Performance criteria and quoted equities 147
6 Technical and fundamental analysis 149
6.1 Introduction 149
6.2 Fundamental analysis de .ned 151
6.3 Technical analysis de .ned 155
6.4 Theory behind the art of charting 157
6.5 The bolts and nuts of charting 160
6.6 Financial analysis and future price of a commodity 164
6.7 Learning how to detect and analyze market trends 167
6.8 The role of rocket scientists 170
6.9 Appendix:Microsoft ’s 2004 Huge Dividend 172
7 Quantitative criteria for equity performance 174
7.1 Introduction 174
7.2 An equity ’s valuation and need for stress tests 176
7.3 Equity as an option and dividend discount model 180
7.4 Earnings per share and creative accounting solutions 184
7.5 Earnings before interest,taxes,depreciation,and amortization 186
7.6 Price to earnings ratio and its challenges 189
7.7 Using return on equity as a guide 193
7.8 Appendix:the Tobin Q-ratio 196
8 Transparency in .nancial statements and reputational risk 198
8.1 Introduction 198
8.2 Goals of transparent .nancial reporting 199
8.3 Transparency role of an audit committee 203
8.4 Transparency and corporate governance 207
8.5 Forward-looking statements 209
8.6 Virtual balance sheets and risk management 212
8.7 Compliance with the Sarbanes-Oxley Act 215
8.8 Appendix:the European Union ’s version of the Sarbanes-Oxley Act 218
9 A private investor ’s self-protection 220
9.1 Introduction 220
9.2 Investing in large caps versus small caps 222
9.3 A prudent policy for investors:equities versus bonds 227
9.4 Data analysis is at the core of the investor ’s homework 229
9.5 Investors should always consider the contrarian ’s advice 233
9.6 Value stocks,growth stocks and intrinsic value 237
9.7 Importance of the investment horizon 239
9.8 Factors affecting return on investment 242
Four Execution risk and damage control 247
10 Investors ’responsibility in risk management 249
10.1 Introduction 249
10.2 Risk management requires a lot of homework 250
10.3 The importance of rigorous risk management standards 254
10.4 Investors should never hesitate to cut losses 258
10.5 Damage control through limits and pro .t targets 261
10.6 Flexibility is one of the investor ’s best friends 265
10.7 Using mathematical tools and appreciating they are not fail-safe 268
11 Independent equity research and management risk 273
11.1 Introduction 273
11.2 The bottleneck is at the top of the bottle 274
11.3 Legal risk in equity research and analysis 276
11.4 Quality of corporate governance affects investors and the companies themselves 280
11.5 Can independent research be an effective solution? 283
11.6 Very often,analysts ’pickings are mediocre 285
11.7 Buy-side asymmetries in the experts advice 288
12 Volatility,liquidity,leverage,and their impact on investments 292
12.1 Introduction 292
12.2 Volatility,volume of transactions,and volatility index 294
12.3 The concept of implied volatility and its use 297
12.4 Solvency and liquidity feed upon one-another 301
12.5 Liquidity management and risk control 305
12.6 Risks associated with multiply-connect leverage 309
13 Methods for judging quoted equities 314
13.1 Introduction 314
13.2 Rethinking the metrics which we use 315
13.3 New measures for judging equity performance 319
13.4 Business risk and brand name 321
13.5 A new method for measuring business risk 325
13.6 Fair value accounting and its impact on equities 329
13.7 Globalization increases the complexity of evaluating equity performance 332
Five Case studies in investments 337
14 Case studies on equity values 339
14.1 Introduction 339
14.2 Risk management,damage control,and hedging 341
14.3 Two technology companies:Cisco Systems and IBM 344
14.4 Investors ’appetite for Internet stocks 347
14.5 Old-established companies,too,can be highly volatile 351
14.6 Equity values of service .rms also plunge 355
15 Parmalat:a case study on leveraging corporate assets 359
15.1 Introduction 359
15.2 Parmalat as a speculative hedge fund 360
15.3 A bird ’s-eye view of Parmalat ’s scam 363
15.4 Taxpayers,investors,and the control of malfeasance 366
15.5 Mr Fixit and the challenges of a turnaround 369
15.6 It is not easy to get out of bankruptcy unscathed 372
15.7 The banks of Parmalat 375
15.8 Conflicts of interest and reputational risk 379
15.9 Management accountability 382
15.10 Parmalat bites back banks and auditors 385
15.11 Epilog 386
Acknowledgements 389
Index 413