Quantitative Value, + Web Site: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors

Quantitative Value, + Web Site: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors

by Tobias E. Carlisle, Wesley R. Gray
Released December 2012
Publisher(s): Wiley
ISBN: 9781118328071

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Book description

A must-read book on the quantitative value investment strategy

Legendary investment gurus Warren Buffett and Ed Thorp represent different ends of the investing spectrum: one a value investor, the other a quant. While Buffett and Thorp have conflicting philosophical approaches, they agree that the market is beatable. In Quantitative Value, Wesley Gray and Tobias Carlisle take the best aspects from the disciplines of value investing and quantitative investing and apply them to a completely unique and winning approach to stock selection. As the authors explain, the quantitative value strategy offers a superior way to invest: capture the benefits of a value investing philosophy without the behavioral errors associated with "stock picking." To demystify their innovative approach, Gray and Carlisle outline the framework for quantitative value investing, including the four key elements the investment process:

1) How to avoid stocks that can cause a permanent loss of capital: Learn how to uncover financial statement manipulation, fraud, and financial distress.

2) How to find stocks with the highest quality: Learn how to find strong economic franchises, and robust financial strength. Gray and Carlisle look at long term returns on capital and assets, free cash flow, and a variety of metrics related to margins and general financial strength.

3) The secret to finding deeply undervalued stocks: Does the price-to-earnings ratio find undervalued stocks better than free cash flow? Gray and Carlisle examine the historical data on over 50 valuation ratios, including some unusual metrics, rare multi-year averages, and uncommon combinations.

4) The five signals sent by smart money: The book uncovers the signals sent by insiders, short sellers, shareholder activists and institutional investment managers.

After detailing the quantitative value investment process, Gray and Carlisle conduct a historical test of the resulting quantitative value model. Their conclusions are surprising and counter-intuitive.

The book includes a companion website that offers a monthly-updated screening tool to find stocks using the model outlined in the book, an updated back-testing tool, and a blog about recent developments in quantitative value investing. For any investor who wants to make the most of their time in today's complex marketplace, they should look no further than Quantitative Value.

Table of contents

  1. Cover
  2. Series
  3. Title Page
  4. Copyright
  5. Dedication
  6. Preface
  7. Acknowledgments
  8. Part 1: The Foundation of Quantitative Value
    1. Chapter 1: The Paradox of Dumb Money
      1. VALUE STRATEGIES BEAT THE MARKET
      2. HOW QUANTITATIVE INVESTING PROTECTS AGAINST BEHAVIORAL ERRORS
      3. THE POWER OF QUANTITATIVE VALUE INVESTING
      4. NOTES
    2. Chapter 2: A Blueprint to a Better Quantitative Value Strategy
      1. GREENBLATT'S MAGIC FORMULA
      2. IT'S ALL ACADEMIC: IMPROVING QUALITY AND PRICE
      3. STRATEGY IMPLEMENTATION: INVESTORS BEHAVING BADLY
      4. NOTES
  9. Part 2: Margin of Safety—How to Avoid a Permanent Loss of Capital
    1. Chapter 3: Hornswoggled! Eliminating Earnings Manipulators and Outright Frauds
      1. ACCRUALS AND THE ART OF EARNINGS MANIPULATION
      2. PREDICTING PROBMs
      3. NOTES
    2. Chapter 4: Measuring the Risk of Financial Distress: How to Avoid the Sick Men of the Stock Market
      1. A BRIEF HISTORY OF BANKRUPTCY PREDICTION
      2. IMPROVING BANKRUPTCY PREDICTION
      3. HOW WE CALCULATE THE RISK OF FINANCIAL DISTRESS
      4. SCRUBBING THE UNIVERSE
      5. NOTES
  10. Part 3: Quality—How to Find a Wonderful Business
    1. Chapter 5: Franchises—The Archetype of High Quality
      1. THE CHAIRMAN'S SECRET RECIPE
      2. HOW TO FIND A FRANCHISE
      3. NOTES
    2. Chapter 6: Financial Strength: Foundations Built on Rock
      1. THE PIOTROSKI FUNDAMENTAL SCORE (F_SCORE)
      2. OUR FINANCIAL STRENGTH SCORE (FS_SCORE)
      3. COMPARING THE PERFORMANCE OF PIOTROSKI'S F_SCORE AND OUR FS_SCORE
      4. CASE STUDY: LUBRIZOL CORPORATION
      5. NOTES
  11. Part 4: The Secret to Finding Bargain Prices
    1. Chapter 7: Price Ratios: A Horse Race
      1. THE HORSES IN THE RACE
      2. RULES OF THE RACE
      3. THE RACE CALL
      4. A PRICE RATIO FOR ALL SEASONS
      5. THE OFFICIAL WINNER
      6. NOTES
    2. Chapter 8: Alternative Price Measures—Normalized Earning Power and Composite Ratios
      1. NORMALIZED EARNING POWER
      2. COMPOUND PRICE RATIOS: IS THE WHOLE GREATER THAN THE SUM OF ITS PARTS?
      3. NOTES
  12. Part 5: Corroborative Signals
    1. Chapter 9: Blue Horseshoe Loves Anacott Steel: Follow the Signals from the Smart Money
      1. STOCK BUYBACKS, ISSUANCE, AND ANNOUNCEMENTS
      2. INSIDER TRADERS BEAT THE MARKET
      3. ACTIVISM AND CLONING
      4. SHORT MONEY IS SMART MONEY
      5. NOTES
  13. Part 6: Building and Testing the Model
    1. Chapter 10: Bangladeshi Butter Production Predicts the S&P 500 Close
      1. SUSTAINABLE ALPHA: A FRAMEWORK FOR ASSESSING PAST RESULTS
      2. WHAT'S THE BIG IDEA?
      3. RIGOROUSLY TEST THE BIG IDEA
      4. THE PARAMETERS OF THE UNIVERSE
      5. NOTES
    2. Chapter 11: Problems with the Magic Formula
      1. GLAMOUR IS ALWAYS A BAD BET
      2. IMPROVING THE STRUCTURE OF A QUANTITATIVE VALUE STRATEGY
      3. OUR FINAL QUANTITATIVE VALUE CHECKLIST
      4. NOTES
    3. Chapter 12: Quantitative Value Beats the Market
      1. RISK AND RETURN
      2. ROBUSTNESS
      3. A PEEK INSIDE THE BLACK BOX
      4. MAN VERSUS MACHINE
      5. BEATING THE MARKET WITH QUANTITATIVE VALUE
      6. NOTES
  14. Appendix: Analysis Legend
  15. About the Authors
  16. About the Companion Website
  17. Index

Product information

  • Title: Quantitative Value, + Web Site: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors
  • Author(s): Tobias E. Carlisle, Wesley R. Gray
  • Release date: December 2012
  • Publisher(s): Wiley
  • ISBN: 9781118328071