The Complete Guide to Portfolio Construction and Management

Transcription

1 The Complete Guide to Portfolio Construction and Management Liikasz Snopek A John Wiley and Sons, Ltd, Publication

2 Contents Foreword About the Author Acknowledgements Introduction Xlll xv xvii xix PART I INVESTORS AND RISK 1 Basic Principles 1.1 Investors 1.2 Inflation 1.3 Choices for Investors in Terms of Investments 2 Measures of Risk 2.1 Volatility or Standard Deviation 2.2 Beta as a Measure of Risk 2.3 Value-at-Risk (VaR) 2.4 Investor Behaviour Towards Risk PART II ASSET CLASSES AND THEIR DEGREE OF RISK 3 Asset Classes and Associated Risks 3.1 Money Market Investments Definition Risks associated with money market investments 3.2 Bonds Definition Risks associated with bonds 3.3 Stocks Definition Risks associated with stocks

3 vi Contents 3.4 Real Estate Definition Risks associated with real estate Commodities and Metals Definition Risks associated with commodities and metals Private Equity Definition Risks associated with private equity Other Asset Classes Particular Forms of Investment within Asset Classes Hedge Funds Definition Risks associated with hedge funds Structured Products Definition Risks associated with structured products Options Definition Risks associated with options 66 5 Classification of Asset Classes According to their Degree of Risk Selected Criteria for Classification of Asset Classes Classification of the Different Asset Classes 75 PART III THE MARKET 77 6 Market Efficiency Weak Form Market Efficiency Semi-strong Form Market Efficiency Strong Form Market Efficiency Conclusion on Market Efficiency 81 7 Fundamental Analysis Discounted Cash Flow Relative Measures Price to Earnings Ratio (P/E) Price to Book Strategic Analysis The business model External analysis Internal analysis The SWOT table (Strengths, Weaknesses, Opportunities and Threats) Criticism of Fundamental Analysis 98

4 Contents vii 8 Technical Analysis The Three Fundamental Principles of Technical Analysis Prices reflect all available information Prices move in trends History repeats Criticism of technical analysis Conclusion on Technical Analysis Investment Approach Based on "Psychological Principles" 109 PART IV VALUATION OF FINANCIAL ASSETS Valuation of Money Market Investments Valuation of Bonds Valuation of Stocks Valuation of Options Valuation of Real Estate Valuation of Commodities and Metals Conclusion on Valuation 125 PART V THREE PRACTICAL APPROACHES TO SECURITY SELECTION: BUFFETT, GRAHAM AND LYNCH Warren Buffett's Value Investing Approach Benjamin Graham's Approach The Defensive Investor The Enterprising Investor Security Analysis Bond selection Stock selection The Margin of Safety Concept Peter Lynch's Approach Stock Categories Slow growers The stalwarts The fast growers Cyclicals Turnarounds The asset plays The Perfect Company According to Lynch 140

5 viii Contents 19.3 Earnings and Earnings Growth 19.4 Selection Criteria The sales percentage The P/E ratio Liquid assets Debt Dividends Hidden assets Cash flow Inventories Growth rate Gross profits 19.5 Conclusion on Peter Lynch's Approach 147 PART VI BEHAVIOURAL FINANCE Investors in Behavioural Finance Heuristics and Cognitive Biases Information Selection Availability heuristic Herding Ambiguity aversion Wishful thinking Information Processing Representation bias Confirmation bias Narrative fallacy Gambler's fallacy Anchoring Framing Probability matching Wearing blinkers Overconfidence bias Illusion of control The Use of Assets Mental accounting Disposition effect House money effect Endowment effect Home bias No go's Sunk costs Lack of control Pride and regret 159

6 Contents ix 22 Investment Approach Based on Behavioural Finance Momentum Strategy Criticism of Behavioural Finance 165 PART VII FORECASTING MARKET MOVEMENTS Investment Approach Based on Probabilities Random Walk Theory Market Timing Macroeconomic Investment Approach State Interventions Tax and fiscal policy Monetary policy The appropriate policy The Major Macroeconomic Forces Inflation Economic growth Recession Productivity and technological change Regulations and taxes Sectorial Analysis Peter Navarro's Approach Trends and stock picking Sector rotation Criticism of the Macroeconomic Approach 202 PART VIII MODELLING MARKET MOVEMENTS Suggested Investment Approach The Forces The Macroeconomic Force The Fundamental Force The Technical Force The Behavioural Force The Luck Force The Forces' Strength The Beauty of the Approach 213 PART IX PORTFOLIO CONSTRUCTION AND MANAGEMENT 215

7 x Contents 32 Modern Portfolio Theory According to Markowitz David Swensen's Approach The Capital Asset Pricing Model (CAPM) The Minimum Variance Portfolio Value-at-Risk (VaR) Discretionary Mandates The Dollar-cost Averaging Approach Our Portfolio Construction Method Basic Principles of Portfolio Construction rules for protecting your capital The 12 rules of risk management The Portfolio Construction Process The investor's life objectives The investor's life cycle and investment time horizon Choosing a reference currency Evaluating the risk profile Estimating a return target The investor's tax rate Determining the proportion of risky assets Evaluating the expected degree of liquidity (share of illiquid assets) Portfolio construction and management A Practical Example of Portfolio Construction 249 PART X ATTRACTIVENESS OF THE DIFFERENT ASSET CLASSES Asset Classes Money Market Investments Bonds Stocks Real Estate Commodities and Precious and Industrial Metals The Four Forces of the Investment Model The Macroeconomic Force The Macroeconomic Force and money market investments The Macroeconomic Force and bonds The Macroeconomic Force and stocks The Macroeconomic Force and real estate The Macroeconomic Force and commodities, precious and industrial metals The Fundamental Force 262

8 Contents xi The Fundamental Force and money market investments The Fundamental Force and bonds The Fundamental Force and stocks The Fundamental Force and real estate The Fundamental Force and commodities, precious and industrial metals The Technical Force The Technical Force and money market investments The Technical Force and bonds The Technical Force and stocks The Technical Force and real estate The Technical Force and commodities, precious and industrial metals The Behavioural Force The Behavioural Force and money market investments The Behavioural Force and bonds The Behavioural Force and stocks The Behavioural Force and real estate The Behavioural Force and commodities, precious and industrial metals Table Summarising the Different Forces A Final Example: Analysis of the Subprime Crisis 277 Conclusion 281 Bibliography 283 Index 285