• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 1. Introduction > Deconstructing an Investment Story

Deconstructing an Investment Story

Every investment story outlined in this book has been around for decades. Part of the reason is that each story has a kernel of truth in it. Consider, for example, the rationale for buying stocks that trade at low multiples of earnings. They are more likely to be cheap, you will be told. This makes sense to investors, not only because it is intuitive, but also because it is often backed up by evidence. Over the last seven decades, for instance, a portfolio of stocks with low PE ratios would have outperformed a portfolio of stocks with high PE ratios by almost 7% a year. Given the claims and counterclaims that make investing so confusing, it is important that you take each story apart methodically, looking at both its strong and weak points. In this section, the steps in the process that will be adopted in each chapter to analyze each story are laid out.

I. Theoretical Roots: Isolating the Kernel of Truth

Most investment storytellers claim to have contempt for theorists. They believe that theory is for academics and other ivory tower residents, who do not have to make investment choices for a living. The irony is that every investment story that has survived in the long term has done so because it is firmly rooted in financial theory. After all, you can use a valuation model to illustrate why stocks that trade at low multiples of earnings may be cheap and why companies with good management should trade at much higher values.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint