ValuFocus Investing: A Cash-Loving Contrarian Way to Invest in Stocks

Section Two

A Brief History of Investing and Modeling

Because we strongly believe that we all honestly “build on the shoulders of giants” and you should know the history behind our efforts in this book, we have provided the chapters in Section II as important background to your investing process.

This section also should help you more effectively evaluate the techniques that you currently use.

Chapter 7:	Relevant Market History of Investing
Chapter 8:	Interpreting Market History

Chapter 7: Relevant Market History of Investing

1. Modern portfolio theory led to asset pricing models of price change.

2. Since one factor, CAPM beta, seemed not to be sufficient, people added more factors.

3. Much of the research relied on earnings, instead of cash flow, balance sheet investment, and return measures relative to a cost of capital.

4. Although somewhat predictive, multifactor models tend to possess unstable parameters that shift over time in poorly understood ways. This instability can lead to inaccurate predictions of likely price change versus models based on fundamental discounted cash flow intrinsic valuations.

Chapter 8: Interpreting Market History

1. Focus on investable cash flow instead of earnings and intrinsic valuation to estimate price level before estimating price change.

2. We need a new accounting principle based on intrinsic valuation and cash economic return to replace the traditional accounting principle of matching expenses with revenues to produce periodic ...