The management of equity investments : capital markets, equity research, investment decisions and risk management with case studies

The Management of Investments is based on an extensive research project done by the author in 2003 and 2004, in the United States, England, Germany, France, Italy and Switzerland. The author outlines the rules behind the able management of investments by private individuals, banks, and institutional investors. These rules are examined within the perspective of each entity's goals and challenges. Based on research results and on his own experience, the author demonstrates that shareholder value is usually being paid lip service. As far as investment results are concerned, there are serious risks associated to leveraging, near-sighted management, obsolescence of skills and dubious deals. But there are also investment rules which, when observed, help in avoiding the slippery path which ends with investors losing their capital. To help in explaining these rules, the book outlines the way capital markets work, equity research is done, and risks associated to biases. It also pays attention to forces propelling economic growth or downturn. Growth is usually dictated by the customer, but the customer is influenced by market psychology, liquidity, volatility, and prospects of the product or financial instrument he contemplates to buy. Case studies on instruments in the book examine equities, interest rates and exchange rates. The text also analyzes the role played by hedge funds and their strategies, as well as risks associated to alternative investments. * Explains the benefits provided by sound investment management * Suggests ways and means to gain investor confidence * Includes lessons which can be learned from the market bubble of the late 1990s, the long 2000-2003 market depression and the starting recovery in 2004 The Management of Equity Investments......Page 2 Contents......Page 6 Foreword......Page 10 Preface......Page 12 Abbreviations......Page 16 One The art of investing......Page 20 1.1 Introduction......Page 22 1.2 Asset classes of investing......Page 25 1.3 Investors,speculators,risk and return......Page 29 1.4 Savings down the drain:the Eurotunnel .asco......Page 31 1.5 Understand the difference between investing,trading and speculating......Page 34 1.6 Caveat emptor and human nature......Page 38 1.7 A golden rule for private investors,but not necessarily for all professionals......Page 41 1.8 Income,growth and control of exposure......Page 44 2.1 Introduction......Page 49 2.2 Investments through private banking......Page 51 2.3 Betting on the challenger and learning to diversify......Page 55 2.4 Increasing the visibility of one ’s investments......Page 58 2.5 The 5 percent rule about assets at risk......Page 62 2.6 Challenges faced by pension funds......Page 66 2.7 Are mutual funds a good alternative?......Page 70 Two Capital markets and their players......Page 76 3.1 Introduction......Page 78 3.2 Securities and their legal protection......Page 80 3.3 Investment banking and underwriting......Page 83 3.4 Investment bankers and primary dealers......Page 86 3.5 Correspondent banks......Page 89 3.6 The globalized securities market......Page 91 3.7 Risk of global contagion......Page 95 4.1 Introduction......Page 98 4.2 Equities,stock exchanges and over-the-counter operations......Page 99 4.3 Basic facts about equities:common and preferred stock......Page 102 4.4 Convertible bonds de .ned......Page 105 4.5 The funding competition between capital markets and commercial banks......Page 108 4.6 Stock markets and equity prices......Page 112 4.7 Stock market indices:Dow Jones,S&P and NASDAQ......Page 115 4.8 European market indices......Page 121 4.9 Appendix:The Paper Ships Index......Page 124 5.1 Introduction......Page 126 5.2 Role of a regulatory authority......Page 127 5.3 Self-regulation by the exchanges and con .icts of interest......Page 130 5.4 Role of specialists in a stock exchange......Page 133 5.5 Bid,ask,large blocks and the third market......Page 136 5.6 Cash and margin accounts......Page 139 5.7 Short sales and reverse/forward splits......Page 142 Three Performance criteria and quoted equities......Page 148 6.1 Introduction......Page 150 6.2 Fundamental analysis de .ned......Page 152 6.3 Technical analysis de .ned......Page 156 6.4 Theory behind the art of charting......Page 158 6.5 The bolts and nuts of charting......Page 161 6.6 Financial analysis and future price of a commodity......Page 165 6.7 Learning how to detect and analyze market trends......Page 168 6.8 The role of rocket scientists......Page 171 6.9 Appendix:Microsoft ’s 2004 Huge Dividend......Page 173 7.1 Introduction......Page 175 7.2 An equity ’s valuation and need for stress tests......Page 177 7.3 Equity as an option and dividend discount model......Page 181 7.4 Earnings per share and creative accounting solutions......Page 185 7.5 Earnings before interest,taxes,depreciation,and amortization......Page 187 7.6 Price to earnings ratio and its challenges......Page 190 7.7 Using return on equity as a guide......Page 194 7.8 Appendix:the Tobin Q-ratio......Page 197 8.1 Introduction......Page 199 8.2 Goals of transparent .nancial reporting......Page 200 8.3 Transparency role of an audit committee......Page 204 8.4 Transparency and corporate governance......Page 208 8.5 Forward-looking statements......Page 210 8.6 Virtual balance sheets and risk management......Page 213 8.7 Compliance with the Sarbanes-Oxley Act......Page 216 8.8 Appendix:the European Union ’s version of the Sarbanes-Oxley Act......Page 219 9.1 Introduction......Page 221 9.2 Investing in large caps versus small caps......Page 223 9.3 A prudent policy for investors:equities versus bonds......Page 228 9.4 Data analysis is at the core of the investor ’s homework......Page 230 9.5 Investors should always consider the contrarian ’s advice......Page 234 9.6 Value stocks,growth stocks and intrinsic value......Page 238 9.7 Importance of the investment horizon......Page 240 9.8 Factors affecting return on investment......Page 243 Four Execution risk and damage control......Page 248 10.1 Introduction......Page 250 10.2 Risk management requires a lot of homework......Page 251 10.3 The importance of rigorous risk management standards......Page 255 10.4 Investors should never hesitate to cut losses......Page 259 10.5 Damage control through limits and pro .t targets......Page 262 10.6 Flexibility is one of the investor ’s best friends......Page 266 10.7 Using mathematical tools and appreciating they are not fail-safe......Page 269 11.1 Introduction......Page 274 11.2 The bottleneck is at the top of the bottle......Page 275 11.3 Legal risk in equity research and analysis......Page 277 11.4 Quality of corporate governance affects investors and the companies themselves......Page 281 11.5 Can independent research be an effective solution?......Page 284 11.6 Very often,analysts ’pickings are mediocre......Page 286 11.7 Buy-side asymmetries in the experts advice......Page 289 12.1 Introduction......Page 293 12.2 Volatility,volume of transactions,and volatility index......Page 295 12.3 The concept of implied volatility and its use......Page 298 12.4 Solvency and liquidity feed upon one-another......Page 302 12.5 Liquidity management and risk control......Page 306 12.6 Risks associated with multiply-connect leverage......Page 310 13.1 Introduction......Page 315 13.2 Rethinking the metrics which we use......Page 316 13.3 New measures for judging equity performance......Page 320 13.4 Business risk and brand name......Page 322 13.5 A new method for measuring business risk......Page 326 13.6 Fair value accounting and its impact on equities......Page 330 13.7 Globalization increases the complexity of evaluating equity performance......Page 333 Five Case studies in investments......Page 338 14.1 Introduction......Page 340 14.2 Risk management,damage control,and hedging......Page 342 14.3 Two technology companies:Cisco Systems and IBM......Page 345 14.4 Investors ’appetite for Internet stocks......Page 348 14.5 Old-established companies,too,can be highly volatile......Page 352 14.6 Equity values of service .rms also plunge......Page 356 15.1 Introduction......Page 360 15.2 Parmalat as a speculative hedge fund......Page 361 15.3 A bird ’s-eye view of Parmalat ’s scam......Page 364 15.4 Taxpayers,investors,and the control of malfeasance......Page 367 15.5 Mr Fixit and the challenges of a turnaround......Page 370 15.6 It is not easy to get out of bankruptcy unscathed......Page 373 15.7 The banks of Parmalat......Page 376 15.8 Conflicts of interest and reputational risk......Page 380 15.9 Management accountability......Page 383 15.10 Parmalat bites back banks and auditors......Page 386 15.11 Epilog......Page 387 Acknowledgements......Page 390 Index......Page 414 "The Management of Equity Investments is based on an extensive research project undertaken by the author in 2003 and 2004, in the United States, England, Germany, France, Italy and Switzerland. The author outlines the rules behind the able management of investments by professionals working for banks and institutional investors as well as by knowledgeable private individuals. These rules are examined within the perspective of each entity's goals and challenges." "Based on research results and on his own experience, the author demonstrates that shareholder value is usually being paid lip service. As far as investment results are concerned, there are serious risks associated with leveraging, near-sighted management, obsolescence of skills and dubious deals."--BOOK JACKET