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The Inefficient Market

The Inefficient Market. What Pays Off and Why Part 2: Why. Prentice Hall 1999 Visit our web-site at HaugenSystems.com. Why. The Topography of the Stock Market. True Abnormal Profit.

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The Inefficient Market

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  1. The Inefficient Market What Pays Off and Why Part 2: Why Prentice Hall 1999 Visit our web-site at HaugenSystems.com

  2. Why.

  3. The Topography of the Stock Market

  4. True Abnormal Profit • Best estimate (using all relevant information and state-of-the-art analysis) of the risk adjusted, present value of a firms future abnormal profits.

  5. under-priced stock The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Growth Stocks Priced Abnormal Profit Value Stocks

  6. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line will produce excess return Growth Stocks Priced Abnormal Profit Value Stocks over-priced stock

  7. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line will produce excess return Growth Stocks Priced Abnormal Profit Value Stocks will produce deficient return

  8. Imprecision

  9. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Priced Abnormal Profit

  10. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Priced Abnormal Profit

  11. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Priced Abnormal Profit

  12. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Priced Abnormal Profit

  13. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Priced Abnormal Profit

  14. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Priced Abnormal Profit

  15. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Priced Abnormal Profit

  16. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Priced Abnormal Profit

  17. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line PricedAbnormal Profit

  18. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line PricedAbnormal Profit

  19. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line PricedAbnormal Profit

  20. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line PricedAbnormal Profit

  21. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line PricedAbnormal Profit

  22. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line PricedAbnormal Profit

  23. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line IMPRECISION: Different prices for stocks with the same TRUE Abnormal Profit PricedAbnormalProfit Available assets

  24. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line IMPRECISION: Stocks with the same price have different TRUE abnormal profit PricedAbnormalProfit Available assets

  25. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormalProfit high B/P decile or low E/B decile

  26. Bias

  27. The Market Over-reacts to Success and Failure

  28. Mean-reversion in Relative ProfitabilityHow Fast? Fuller, Huberts, and Levinson 1973 - 1990

  29. Relative Subsequent Growth in Highest, High, Low and Lowest Quintiles of E/P Ratio 8 Years ahead Lowest E/P(Growth) 7 Years ahead Number of Years After Ranking Low E/P High E/P 6 Years ahead Highest E/P (Value) 5 Years ahead 4 Years ahead 3 Years ahead 2 Years ahead 1 Year ahead -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% Growth in Earnings per Share Relative to Middle Quintile

  30. Is the Market Surprised by the Speed of Mean-reversion? La Porta, Lakonishok, Shleifer, & Vishny 1971-1992

  31. Value Growth -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% Three day rate of return Returns of Growth and Value Stocks Around Earnings Announcement Dates Fifth year following ranking Fourth year following ranking Third year following ranking Second year following ranking First year following ranking

  32. Implications for Market’s Topography

  33. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  34. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  35. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  36. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  37. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  38. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  39. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  40. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  41. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  42. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  43. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  44. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line low B/P decile or high E/B decile PricedAbnormal Profit high B/P decile or low E/B decile

  45. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit BIAS: Overreaction to Abnormal Profit Efficient Market Line over-priced Priced low B/P decile or high E/B decile True high B/P decile or low E/B decile PricedAbnormal Profit under-priced

  46. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Growth investors head North PricedAbnormal Profit Value investors head West

  47. Available assets The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line will under perform GARP Pure Growth will outperform market PricedAbnormal Profit

  48. The Relative Positions of The Deciles

  49. The Position of Portfolios in Abnormal Profit Space True Abnormal Profit Efficient Market Line Super Stocks PricedAbnormal Profit Stupid Stocks

  50. What’s Behind the Payoff to Profitability? Imprecision - you can buy more profitable companies without having to pay more expensive prices.

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