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Uncommon Sense
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Uncommon Sense
by Scott Pape, Michael Kemp
Uncommon Sense
FOREWORD
ABOUT THE AUTHOR
ACKNOWLEDGEMENTS
PART I: THE LIMITS OF REASON
0.9 START THINKING FOR YOURSELF
1 THE PIED PIPER
WHY THE CONFIDENCE?
DRAWING THE LINE OF CREDIBILITY
2 THE ART OF PREDICTION
GAME THEORY
ECONOMIC MODELLING
UNLIMITED POSSIBILITIES
3 WHY ECONOMICS WILL NEVER BE A SCIENCE
‘HYPOTHESIS NON FINGO'
A SOCIAL SCIENCE
NOTE
4 FORECASTING THE STOCK MARKET
BABSON'S BREAK
EVANGELINE ADAMS
JESSE LIVERMORE
NOTES
5 DOES THE STOCK MARKET FORECAST THE ECONOMY?
NOTES
6 CAN CHARTS PREDICT?
LOUIS BACHELIER
ALFRED COWLES
HOLBROOK WORKING
RALPH ELLIOTT AND MAURICE KENDALL
HARRY ROBERTS
WHAT ABOUT BULL AND BEAR MARKETS?
PUTTING RANDOMNESS INTO PERSPECTIVE
NOTES
7 MARKET TIMING
IS IT PREDICTION OR A STUDY OF CYCLES?
DOW THEORY
BEN GRAHAM AND THE COMMITTEE ON BANKING AND CURRENCY
BOB SHILLER'S CAPE
JAMES TOBIN'S ‘Q'
WARREN BUFFETT'S FAVOURITE METRIC
THE COPPOCK INDICATOR
MARKET TIMER OR STOCK PICKER?
NOTES
8 ARE COMPUTERS THE ANSWER?
ALGORITHMS
HIGH FREQUENCY TRADING
THOMAS PETERFFY
THINGS HAVEN'T ALWAYS BEEN SO FAST
HOW FAST CAN IT GET?
THE TAKE-HOME MESSAGE
NOTE
9 THE EFFICIENT MARKET HYPOTHESIS
ORIGINS OF THE EMH
EUGENE FAMA
MAKING SENSE OF THE EMH
NOTE
10 TRADER OR INVESTOR?
JESSE LIVERMORE VS WARREN BUFFETT
WHAT IS THE MARKET PRICE TELLING US?
THE STOP LOSS ORDER
THROWING CHARLES DOW INTO THE MIX
NOTES
11 REALISTIC EXPECTATIONS OF RETURNS
PART II: STOCK SCREENS AND VALUE METRICS
12 WHERE TO START: STOCK SCREEN OR TRIAD OF ANALYSIS?
STOCK ANALYSIS AT THE ECONOMY LEVEL
STOCK ANALYSIS AT THE BUSINESS SECTOR LEVEL
FROM THE BOTTOM UP — STOCK ANALYSIS AT THE COMPANY LEVEL
STOCK SCREENS
13 DON'T ACCEPT THE PE RATIO AT FACE VALUE
WHAT'S WRONG WITH THE PE?
USING THE PE TO SELECT STOCKS
USING THE PE AS A SCREEN
BOB SHILLER AGAIN
USING THE PE TO CONSTRUCT A PORTFOLIO
14 EARNINGS GROWTH ISN'T ALWAYS A GOOD THING
WHY MANAGEMENTS RETAIN PROFITS DESPITE DELIVERING A POOR ROE
15 WHY DO PRICE TO BOOK RATIOS VARY?
WHAT IS BOOK VALUE TELLING US?
RELATING BOOK VALUE PER SHARE TO MARKET PRICE
WHAT IS A LOW P/B RATIO TELLING US?
NOTE
16 SELECTING STOCKS BY DIVIDEND YIELD
DOGS OF THE DOW
RECEIVING NO DIVIDEND IS OKAY
SO WHICH METRICS SHOULD YOU USE?
PART III: THE GENESIS OF STOCK VALUATION
17 IT ALL STARTED IN EUROPE
LEONARDO PISANO
JEAN TRENCHANT
JOSEPH DE LA VEGA
SIR JOSIAH CHILD AND THE 17TH-CENTURY BUFFETT
THOMAS BASTON AND DANIEL DEFOE
ARCHIBALD HUTCHESON
THOMAS MORTIMER
BEFORE CROSSING THE ATLANTIC
NOTE
18 TIME TO CROSS THE ATLANTIC
INVESTORS OR COWBOYS?
CORNELIUS VANDERBILT
JAY GOULD
JAMES MEDBERY
UNITED STATES STEEL
CHARLES DOW
VALUE INVESTING BEFORE BEN GRAHAM'S SECURITY ANALYSIS
BUFFETT'S PITHY ONE-LINERS
NOTE
19 THE ADOPTION OF FINANCIAL REPORTING
THE MATCH KING
POST-CRASH WALL STREET
SHIFTING EMPHASIS ON THE MEANS OF VALUATION
NOTES
20 THE MODERN ERA
THE 1930S
FROM THE SIXTIES TO TODAY
PART IV: ‘CALCULATING' VALUE
21 INTRINSIC VALUE AND MARKET PRICE
WHAT'S A STOCK REALLY WORTH?
CALCULATING INTRINSIC VALUE
FROM CLICKS TO CHICKS
SOLOMON ASCH AND SPINNING WHEELS
WHAT IS MARKET PRICE?
WHAT DRIVES MARKET PRICE?
NOTE
22 EARNINGS AND EARNINGS GROWTH
EARNINGS PER SHARE
DIVIDENDS AS INPUTS
GROWTH OF EARNINGS AND DIVIDENDS
LINKING EARNINGS GROWTH TO RETENTION OF EARNINGS
WHY COMPOUNDING IS FINITE
NOTE
23 THE DISCOUNT RATE
THE CAPITAL ASSET PRICING MODEL
BARR ROSENBERG'S BARRA
SENSITIVITY OF THE DISCOUNT RATE
MORE PRACTICAL MEASURES OF RETURN AND RISK
THE RISK OF BEING HUMAN
FURTHER INPUTS — THE CO-STARS
NOTE
24 THE FORMULAE
THE POPULAR FORMULAE
BEN GRAHAM'S FORMULA
‘BUFFETTOLOGY'
DEALING WITH UNCERTAINTY — THE MARGIN OF SAFETY
IT'S NOT THE MATHS THAT DELIVERS THE ANSWERS
PART V: BEATING THE STOCK MARKET
25 THE DURANT-DORT CARRIAGE COMPANY
26 SEARCHING FOR NUMERIC CONSTANTS
EXTRAPOLATING EARNINGS GROWTH — THE 1929 BULL MARKET
EXTRAPOLATING RETURN ON EQUITY
A CASE STUDY: FORGE GROUP
27 THE HUMAN CONSTANT
IT'S ALL ABOUT HOW YOU THINK, STUPID!
NOTE
28 COIN-FLIPPING ORANG-UTANS (MY FIRST TRIPS TO OMAHA)
HAS BUFFETT BEATEN THE MARKET THROUGH LUCK OR SKILL?
NOTES
APPENDIX A: WHY BOOK VALUE DIFFERS FROM ECONOMIC VALUE
APPENDIX B: DEBT ANALYSIS
GLOSSARY
REFERENCES
BIBLIOGRAPHY
INDEX
ADVERT
EULA
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FOREWORD
CONTENTS
FOREWORD
ABOUT THE AUTHOR
ACKNOWLEDGEMENTS
PART I: THE LIMITS OF REASON
0.9 START THINKING FOR YOURSELF
1 THE PIED PIPER
WHY THE CONFIDENCE?
DRAWING THE LINE OF CREDIBILITY
2 THE ART OF PREDICTION
GAME THEORY
ECONOMIC MODELLING
UNLIMITED POSSIBILITIES
3 WHY ECONOMICS WILL NEVER BE A SCIENCE
‘HYPOTHESIS NON FINGO'
A SOCIAL SCIENCE
NOTE
4 FORECASTING THE STOCK MARKET
BABSON'S BREAK
EVANGELINE ADAMS
JESSE LIVERMORE
NOTES
5 DOES THE STOCK MARKET FORECAST THE ECONOMY?
NOTES
6 CAN CHARTS PREDICT?
LOUIS BACHELIER
ALFRED COWLES
HOLBROOK WORKING
RALPH ELLIOTT AND MAURICE KENDALL
HARRY ROBERTS
WHAT ABOUT BULL AND BEAR MARKETS?
PUTTING RANDOMNESS INTO PERSPECTIVE
NOTES
7 MARKET TIMING
IS IT PREDICTION OR A STUDY OF CYCLES?
DOW THEORY
BEN GRAHAM AND THE COMMITTEE ON BANKING AND CURRENCY
BOB SHILLER'S CAPE
JAMES TOBIN'S ‘Q'
WARREN BUFFETT'S FAVOURITE METRIC
THE COPPOCK INDICATOR
MARKET TIMER OR STOCK PICKER?
NOTES
8 ARE COMPUTERS THE ANSWER?
ALGORITHMS
HIGH FREQUENCY TRADING
THOMAS PETERFFY
THINGS HAVEN'T ALWAYS BEEN SO FAST
HOW FAST CAN IT GET?
THE TAKE-HOME MESSAGE
NOTE
9 THE EFFICIENT MARKET HYPOTHESIS
ORIGINS OF THE EMH
EUGENE FAMA
MAKING SENSE OF THE EMH
NOTE
10 TRADER OR INVESTOR?
JESSE LIVERMORE VS WARREN BUFFETT
WHAT IS THE MARKET PRICE TELLING US?
THE STOP LOSS ORDER
THROWING CHARLES DOW INTO THE MIX
NOTES
11 REALISTIC EXPECTATIONS OF RETURNS
PART II: STOCK SCREENS AND VALUE METRICS
12 WHERE TO START: STOCK SCREEN OR TRIAD OF ANALYSIS?
STOCK ANALYSIS AT THE ECONOMY LEVEL
STOCK ANALYSIS AT THE BUSINESS SECTOR LEVEL
FROM THE BOTTOM UP — STOCK ANALYSIS AT THE COMPANY LEVEL
STOCK SCREENS
13 DON'T ACCEPT THE PE RATIO AT FACE VALUE
WHAT'S WRONG WITH THE PE?
USING THE PE TO SELECT STOCKS
USING THE PE AS A SCREEN
BOB SHILLER AGAIN
USING THE PE TO CONSTRUCT A PORTFOLIO
14 EARNINGS GROWTH ISN'T ALWAYS A GOOD THING
WHY MANAGEMENTS RETAIN PROFITS DESPITE DELIVERING A POOR ROE
15 WHY DO PRICE TO BOOK RATIOS VARY?
WHAT IS BOOK VALUE TELLING US?
RELATING BOOK VALUE PER SHARE TO MARKET PRICE
WHAT IS A LOW P/B RATIO TELLING US?
NOTE
16 SELECTING STOCKS BY DIVIDEND YIELD
DOGS OF THE DOW
RECEIVING NO DIVIDEND IS OKAY
SO WHICH METRICS SHOULD YOU USE?
PART III: THE GENESIS OF STOCK VALUATION
17 IT ALL STARTED IN EUROPE
LEONARDO PISANO
JEAN TRENCHANT
JOSEPH DE LA VEGA
SIR JOSIAH CHILD AND THE 17TH-CENTURY BUFFETT
THOMAS BASTON AND DANIEL DEFOE
ARCHIBALD HUTCHESON
THOMAS MORTIMER
BEFORE CROSSING THE ATLANTIC
NOTE
18 TIME TO CROSS THE ATLANTIC
INVESTORS OR COWBOYS?
CORNELIUS VANDERBILT
JAY GOULD
JAMES MEDBERY
UNITED STATES STEEL
CHARLES DOW
VALUE INVESTING BEFORE BEN GRAHAM'S
SECURITY ANALYSIS
BUFFETT'S PITHY ONE-LINERS
NOTE
19 THE ADOPTION OF FINANCIAL REPORTING
THE MATCH KING
POST-CRASH WALL STREET
SHIFTING EMPHASIS ON THE MEANS OF VALUATION
NOTES
20 THE MODERN ERA
THE 1930S
FROM THE SIXTIES TO TODAY
PART IV: ‘CALCULATING' VALUE
21 INTRINSIC VALUE AND MARKET PRICE
WHAT'S A STOCK REALLY WORTH?
CALCULATING INTRINSIC VALUE
FROM CLICKS TO CHICKS
SOLOMON ASCH AND SPINNING WHEELS
WHAT IS MARKET PRICE?
WHAT DRIVES MARKET PRICE?
NOTE
22 EARNINGS AND EARNINGS GROWTH
EARNINGS PER SHARE
DIVIDENDS AS INPUTS
GROWTH OF EARNINGS AND DIVIDENDS
LINKING EARNINGS GROWTH TO RETENTION OF EARNINGS
WHY COMPOUNDING IS FINITE
NOTE
23 THE DISCOUNT RATE
THE CAPITAL ASSET PRICING MODEL
BARR ROSENBERG'S BARRA
SENSITIVITY OF THE DISCOUNT RATE
MORE PRACTICAL MEASURES OF RETURN AND RISK
THE RISK OF BEING HUMAN
FURTHER INPUTS — THE CO-STARS
NOTE
24 THE FORMULAE
THE POPULAR FORMULAE
BEN GRAHAM'S FORMULA
‘BUFFETTOLOGY'
DEALING WITH UNCERTAINTY — THE MARGIN OF SAFETY
IT'S NOT THE MATHS THAT DELIVERS THE ANSWERS
PART V: BEATING THE STOCK MARKET
25 THE DURANT-DORT CARRIAGE COMPANY
26 SEARCHING FOR NUMERIC CONSTANTS
EXTRAPOLATING EARNINGS GROWTH — THE 1929 BULL MARKET
EXTRAPOLATING RETURN ON EQUITY
A CASE STUDY: FORGE GROUP
27 THE HUMAN CONSTANT
IT'S ALL ABOUT HOW YOU THINK, STUPID!
NOTE
28 COIN-FLIPPING ORANG-UTANS (MY FIRST TRIPS TO OMAHA)
HAS BUFFETT BEATEN THE MARKET THROUGH LUCK OR SKILL?
NOTES
APPENDIX A: WHY BOOK VALUE DIFFERS FROM ECONOMIC VALUE
APPENDIX B: DEBT ANALYSIS
GLOSSARY
REFERENCES
BIBLIOGRAPHY
INDEX
ADVERT
EULA
List of Tables
Chapter 13
Table 13.1
Chapter 14
Table 14.1
Chapter 16
Table 16.1
Table 16.2
Chapter 26
Table 26.1
Table 26.2
Chapter 28
Table 28.1
Guide
Cover
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