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Uncommon Sense

Book Description

Question everything – and become a better investor in the process

Uncommon Sense takes readers on a four-century journey; from the dawn of public share ownership (in 1602) right up to today. But this is not simply a history book. It's a book for serious investors. Along the way it reveals the fascinating stories, the market characters and the important financial developments that have sculpted the thinking behind the value investor's craft. Blended throughout the narrative Kemp delivers an array of interesting anecdotes and rock solid logic regarding what works when investing in the stock market, what doesn't, and why.

Early in the 20th Century, Charles Dow remarked of Wall Street Operators that 'the more they actually know, the less confident they become.' Continuing in the tradition of that simple, elegant statement, this enlightening and entertaining book will have you thinking, acting and succeeding on your own in your investment endeavours.

  • Learn to question conventional wisdom at every turn and develop a healthy skepticism as you plan your own investment strategies
  • Develop a rich understanding of the stock valuation process
  • Discover the methods that have been used by successful investors from the dawn of the modern stock market (in 1602) right up to today
  • Learn how to interact simply and successfully with markets that are vastly complex and largely inexplicable

Uncommon Sense will have you questioning and doubting much that's stated about stock market investing, then developing your own winning strategy based on reason and understanding.

Table of Contents

  1. FOREWORD
  2. ABOUT THE AUTHOR
  3. ACKNOWLEDGEMENTS
  4. PART I: THE LIMITS OF REASON
    1. 0.9 START THINKING FOR YOURSELF
    2. 1 THE PIED PIPER
      1. WHY THE CONFIDENCE?
      2. DRAWING THE LINE OF CREDIBILITY
    3. 2 THE ART OF PREDICTION
      1. GAME THEORY
      2. ECONOMIC MODELLING
      3. UNLIMITED POSSIBILITIES
    4. 3 WHY ECONOMICS WILL NEVER BE A SCIENCE
      1. ‘HYPOTHESIS NON FINGO'
      2. A SOCIAL SCIENCE
      3. NOTE
    5. 4 FORECASTING THE STOCK MARKET
      1. BABSON'S BREAK
      2. EVANGELINE ADAMS
      3. JESSE LIVERMORE
      4. NOTES
    6. 5 DOES THE STOCK MARKET FORECAST THE ECONOMY?
      1. NOTES
    7. 6 CAN CHARTS PREDICT?
      1. LOUIS BACHELIER
      2. ALFRED COWLES
      3. HOLBROOK WORKING
      4. RALPH ELLIOTT AND MAURICE KENDALL
      5. HARRY ROBERTS
      6. WHAT ABOUT BULL AND BEAR MARKETS?
      7. PUTTING RANDOMNESS INTO PERSPECTIVE
      8. NOTES
    8. 7 MARKET TIMING
      1. IS IT PREDICTION OR A STUDY OF CYCLES?
      2. DOW THEORY
      3. BEN GRAHAM AND THE COMMITTEE ON BANKING AND CURRENCY
      4. BOB SHILLER'S CAPE
      5. JAMES TOBIN'S ‘Q'
      6. WARREN BUFFETT'S FAVOURITE METRIC
      7. THE COPPOCK INDICATOR
      8. MARKET TIMER OR STOCK PICKER?
      9. NOTES
    9. 8 ARE COMPUTERS THE ANSWER?
      1. ALGORITHMS
      2. HIGH FREQUENCY TRADING
      3. THOMAS PETERFFY
      4. THINGS HAVEN'T ALWAYS BEEN SO FAST
      5. HOW FAST CAN IT GET?
      6. THE TAKE-HOME MESSAGE
      7. NOTE
    10. 9 THE EFFICIENT MARKET HYPOTHESIS
      1. ORIGINS OF THE EMH
      2. EUGENE FAMA
      3. MAKING SENSE OF THE EMH
      4. NOTE
    11. 10 TRADER OR INVESTOR?
      1. JESSE LIVERMORE VS WARREN BUFFETT
      2. WHAT IS THE MARKET PRICE TELLING US?
      3. THE STOP LOSS ORDER
      4. THROWING CHARLES DOW INTO THE MIX
      5. NOTES
    12. 11 REALISTIC EXPECTATIONS OF RETURNS
  5. PART II: STOCK SCREENS AND VALUE METRICS
    1. 12 WHERE TO START: STOCK SCREEN OR TRIAD OF ANALYSIS?
      1. STOCK ANALYSIS AT THE ECONOMY LEVEL
      2. STOCK ANALYSIS AT THE BUSINESS SECTOR LEVEL
      3. FROM THE BOTTOM UP — STOCK ANALYSIS AT THE COMPANY LEVEL
      4. STOCK SCREENS
    2. 13 DON'T ACCEPT THE PE RATIO AT FACE VALUE
      1. WHAT'S WRONG WITH THE PE?
      2. USING THE PE TO SELECT STOCKS
      3. USING THE PE AS A SCREEN
      4. BOB SHILLER AGAIN
      5. USING THE PE TO CONSTRUCT A PORTFOLIO
    3. 14 EARNINGS GROWTH ISN'T ALWAYS A GOOD THING
      1. WHY MANAGEMENTS RETAIN PROFITS DESPITE DELIVERING A POOR ROE
    4. 15 WHY DO PRICE TO BOOK RATIOS VARY?
      1. WHAT IS BOOK VALUE TELLING US?
      2. RELATING BOOK VALUE PER SHARE TO MARKET PRICE
      3. WHAT IS A LOW P/B RATIO TELLING US?
      4. NOTE
    5. 16 SELECTING STOCKS BY DIVIDEND YIELD
      1. DOGS OF THE DOW
      2. RECEIVING NO DIVIDEND IS OKAY
      3. SO WHICH METRICS SHOULD YOU USE?
  6. PART III: THE GENESIS OF STOCK VALUATION
    1. 17 IT ALL STARTED IN EUROPE
      1. LEONARDO PISANO
      2. JEAN TRENCHANT
      3. JOSEPH DE LA VEGA
      4. SIR JOSIAH CHILD AND THE 17TH-CENTURY BUFFETT
      5. THOMAS BASTON AND DANIEL DEFOE
      6. ARCHIBALD HUTCHESON
      7. THOMAS MORTIMER
      8. BEFORE CROSSING THE ATLANTIC
      9. NOTE
    2. 18 TIME TO CROSS THE ATLANTIC
      1. INVESTORS OR COWBOYS?
      2. CORNELIUS VANDERBILT
      3. JAY GOULD
      4. JAMES MEDBERY
      5. UNITED STATES STEEL
      6. CHARLES DOW
      7. VALUE INVESTING BEFORE BEN GRAHAM'S SECURITY ANALYSIS
      8. BUFFETT'S PITHY ONE-LINERS
      9. NOTE
    3. 19 THE ADOPTION OF FINANCIAL REPORTING
      1. THE MATCH KING
      2. POST-CRASH WALL STREET
      3. SHIFTING EMPHASIS ON THE MEANS OF VALUATION
      4. NOTES
    4. 20 THE MODERN ERA
      1. THE 1930S
      2. FROM THE SIXTIES TO TODAY
  7. PART IV: ‘CALCULATING' VALUE
    1. 21 INTRINSIC VALUE AND MARKET PRICE
      1. WHAT'S A STOCK REALLY WORTH?
      2. CALCULATING INTRINSIC VALUE
      3. FROM CLICKS TO CHICKS
      4. SOLOMON ASCH AND SPINNING WHEELS
      5. WHAT IS MARKET PRICE?
      6. WHAT DRIVES MARKET PRICE?
      7. NOTE
    2. 22 EARNINGS AND EARNINGS GROWTH
      1. EARNINGS PER SHARE
      2. DIVIDENDS AS INPUTS
      3. GROWTH OF EARNINGS AND DIVIDENDS
      4. LINKING EARNINGS GROWTH TO RETENTION OF EARNINGS
      5. WHY COMPOUNDING IS FINITE
      6. NOTE
    3. 23 THE DISCOUNT RATE
      1. THE CAPITAL ASSET PRICING MODEL
      2. BARR ROSENBERG'S BARRA
      3. SENSITIVITY OF THE DISCOUNT RATE
      4. MORE PRACTICAL MEASURES OF RETURN AND RISK
      5. THE RISK OF BEING HUMAN
      6. FURTHER INPUTS — THE CO-STARS
      7. NOTE
    4. 24 THE FORMULAE
      1. THE POPULAR FORMULAE
      2. BEN GRAHAM'S FORMULA
      3. ‘BUFFETTOLOGY'
      4. DEALING WITH UNCERTAINTY — THE MARGIN OF SAFETY
      5. IT'S NOT THE MATHS THAT DELIVERS THE ANSWERS
  8. PART V: BEATING THE STOCK MARKET
    1. 25 THE DURANT-DORT CARRIAGE COMPANY
    2. 26 SEARCHING FOR NUMERIC CONSTANTS
      1. EXTRAPOLATING EARNINGS GROWTH — THE 1929 BULL MARKET
      2. EXTRAPOLATING RETURN ON EQUITY
      3. A CASE STUDY: FORGE GROUP
    3. 27 THE HUMAN CONSTANT
      1. IT'S ALL ABOUT HOW YOU THINK, STUPID!
      2. NOTE
    4. 28 COIN-FLIPPING ORANG-UTANS (MY FIRST TRIPS TO OMAHA)
      1. HAS BUFFETT BEATEN THE MARKET THROUGH LUCK OR SKILL?
      2. NOTES
  9. APPENDIX A: WHY BOOK VALUE DIFFERS FROM ECONOMIC VALUE
  10. APPENDIX B: DEBT ANALYSIS
  11. GLOSSARY
  12. REFERENCES
  13. BIBLIOGRAPHY
  14. INDEX
  15. ADVERT
  16. EULA