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Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, + Web Site

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, + Web Site

Wesley R. Gray, Tobias E. Carlisle

ISBN: 978-1-118-41655-6

Nov 2012

288 pages



A must-read book on the quantitative value investment strategy

Warren Buffett and Ed Thorp represent two spectrums of investing: one value driven, one quantitative. Where they align is in their belief that the market is beatable. This book seeks to take the best aspects of value investing and quantitative investing as disciplines and apply them to a completely unique approach to stock selection. Such an approach has several advantages over pure value or pure quantitative investing. This new investing strategy framed by the book is known as quantitative value, a superior, market-beating method to investing in stocks.

Quantitative Value provides practical insights into an investment strategy that links the fundamental value investing philosophy of Warren Buffett with the quantitative value approach of Ed Thorp. It skillfully combines the best of Buffett and Ed Thorp—weaving their investment philosophies into a winning, market-beating investment strategy.

  • First book to outline quantitative value strategies as they are practiced by actual market practitioners of the discipline
  • Melds the probabilities and statistics used by quants such as Ed Thorp with the fundamental approaches to value investing as practiced by Warren Buffett and other leading value investors
  • A companion Website contains supplementary material that allows you to learn in a hands-on fashion long after closing the book

If you're looking to make the most of your time in today's markets, look no further than Quantitative Value.

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Preface xi

Acknowledgments xiii

PART ONE The Foundation of Quantitative Value 1

CHAPTER 1 The Paradox of Dumb Money 3

Value Strategies Beat the Market 9

How Quantitative Investing Protects against Behavioral Errors 23

The Power of Quantitative Value Investing 30

Notes 32

CHAPTER 2 A Blueprint to a Better Quantitative Value Strategy 35

Greenblatt’s Magic Formula 36

It’s All Academic: Improving Quality and Price 45

Strategy Implementation: Investors Behaving Badly 54

Notes 59

PART TWO Margin of Safety—How to Avoid a Permanent Loss of Capital 61

CHAPTER 3 Hornswoggled! Eliminating Earnings Manipulators and Outright Frauds 63

Accruals and the Art of Earnings Manipulation 64

Predicting PROBMs 72

Notes 79

CHAPTER 4 Measuring the Risk of Financial Distress: How to Avoid the Sick Men of the Stock Market 81

A Brief History of Bankruptcy Prediction 83

Improving Bankruptcy Prediction 85

How We Calculate the Risk of Financial Distress 86

Scrubbing the Universe 89

Notes 91

PART THREE Quality—How to Find a Wonderful Business 93

CHAPTER 5 Franchises—The Archetype of High Quality 95

The Chairman’s Secret Recipe 96

How to Find a Franchise 99

Notes 112

CHAPTER 6 Financial Strength: Foundations Built on Rock 113

The Piotroski Fundamentals Score (F_SCORE) 114

Our Financial Strength Score (FS_SCORE) 119

Comparing the Performance of Piotroski’s F_SCORE and Our


Case Study: Lubrizol Corporation 123

Notes 126

PART FOUR The Secret to Finding Bargain Prices 127

CHAPTER 7 Price Ratios: A Horse Race 129

The Horses in the Race 130

Rules of the Race 133

The Race Call 134

A Price Ratio for All Seasons 141

The Offi cial Winner 142

Notes 143

CHAPTER 8 Alternative Price Measures—Normalized Earning Power and Composite Ratios 145

Normalized Earning Power 147

Compound Price Ratios: Is the Whole Greater than

the Sum of Its Parts? 150

Notes 163

PART FIVE Corroborative Signals 165

CHAPTER 9 Blue Horseshoe Loves Anacott Steel: Follow the Signals from the Smart Money 167

Stock Buybacks, Issuance, and Announcements 169

Insider Traders Beat the Market 173

Activism and Cloning 176

Short Money Is Smart Money 179

Notes 182

PART SIX Building and Testing the Model 185

CHAPTER 10 Bangladeshi Butter Production Predicts the S&P 500 Close 187

Sustainable Alpha: A Framework for Assessing Past Results 189

What’s the Big Idea? 191

Rigorously Test the Big Idea 196

The Parameters of the Universe 206

Notes 208

CHAPTER 11 Problems with the Magic Formula 211

Glamour Is Always a Bad Bet 216

Improving the Structure of a Quantitative Value Strategy 218

Our Final Quantitative Value Checklist 222

Notes 228

CHAPTER 12 Quantitative Value Beats the Market 229

Risk and Return 231

Robustness 239

A Peek Inside the Black Box 249

Man versus Machine 257

Beating the Market with Quantitative Value 262

Notes 264

Appendix: Analysis Legend 265

About the Authors 267

About the Companion Website 269

Index 271