Table of Contents
Preface xiiiPART ONE What the Future Holds
CHAPTER 1 Introduction: Range-Bound Markets Happen 3
Fasten Your Seat Belts and Lower Your Expectations 3
Let’s Identify the Animal 4
Secular versus Cyclical 4
Distinction between Secular Bull, Bear, and Range-Bound Markets 6
Is 100 Years Long Enough? 7
Stocks Carried the Torch in the Long-Run Marathon 8
International Stocks Were Bright Lights, Too 10
Will Gold Shine Again? 11
Gold’s Recently Emerged Competition 13
The Deception of the Long Run (Marathon) 14
Range-Bound Markets Erode Bull Market Returns 15
The Long Run for Us May Be Shorter Than
We Think 17
CHAPTER 2 Emotions of Secular Bull, Bear, and Range-Bound Markets 23
Bull Market Euphoria 23
Bear Market Doldrums 25
What Does a Secular Range-Bound Market Feel Like? 29
Volatility of Bull and Range-Bound Markets 31
CHAPTER 3 Stock Market Math 37
Sources of Capital Appreciation: Earnings Growth 38
Sources of Capital Appreciation: Price to Earnings 48
Sources of Dividend Yield 57
Why Range-Bound Markets Follow Bull Markets 61
It Is Not Over Until It Is Over 62
CHAPTER 4 Bonds: A Viable Alternative? 67
Why Not Bonds? 67
Asset Allocation Role Is Diminished in Range-Bound Markets 69
PART TWO Active Value Investing
ANALYTICS
Introduction to Analytics: The Quality, Valuation, and Growth Framework 77
CHAPTER 5 The ‘‘Q’’—Quality 79
Competitive Advantage 79
Management 82
Predictable Earnings 89
Strong Balance Sheet 91
Significance of Free Cash Flows 95
High Return on Capital 102
Conclusion 102
CHAPTER 6 The ‘‘G’’—Growth 103
Sources of Growth: Earnings Growth and Dividends 103
Past Has Passed 111
Future Engines of Growth 112
Dividends 114
Growth Matters—A Lot! 117
CHAPTER 7 The ‘‘V’’—Valuation 119
Tevye the Milkman’s Approach to Valuation 119
Review of Relative Valuation Tools 128
Absolute Valuation Tools—Discounted Cash Flow Analysis 132
Relative versus Absolute Tools 134
Absolute Models Overview 136
The False Precision of Math 137
Absolute P/E Model 139
Discount Rate Model 148
Margin of Safety Model 151
The Marriage of Absolute P/E and Margin of Safety 155
Bring Out the Toolbox 155
The P/E Compression and How to Deal with It 157
CHAPTER 8 Let’s Put It All Together 165
The Added Clarity 165
One Out of Three Is Not Enough 165
Two Out of Three Is Better, But Is It Enough? 167
Conclusion 174
STRATEGY
Introduction to Strategy: The Value of Process and Discipline 177
CHAPTER 9 Buy Process—Fine-Tuning 179
The Value of the Process and Discipline 179
Think Long-Term, Act Short-Term 181
Meet Your New Best Friend—Volatility 182
Time Stocks, Not the Market 183
Cash Is King 185
Be Ready to Strike When the Time Comes 186
CHAPTER 10 Buy Process—Contrarian Investing 187
Contrarian Is the Name of the Game 187
You Don’t Have to Own It 189
Be a Myth Buster 190
Quantify Everything and Be a Contrarian Headline Investor 191
Time Arbitrage 192
Finding New Ideas 193
Do In-Depth Primary (Your Own) Research and Document It 200
CHAPTER 11 Buy Process—International Investing 201
The World Has Flattened: Hola, Bonjour, Guten Tag, Buon Giorno to the Rest of the World 201
Same Difference 202
Location of Corporate Headquarters Abroad May Not Constitute a Foreign Company 203
You Are Exposed to More Foreign Political Risk Than You Realize 204
What About the United States? 205
Pick Your Comfort Zone and Go from There 206
Don’t Confuse a Fast-Growing Economy and a Good Investment 207
Currency Risk 207
How Much Is Too Much? 208
Conclusion 209
CHAPTER 12 Sell Process—Make Darwin Prouvéd 211
Selling When Stock Price Has Gone Up 212
Selling When Fundamentals Have Deteriorated 215
Conclusion 221
RISK AND DIVERSIFICATION
Introduction to Risk and Diversification 225
CHAPTER 13 A Different View of Risk 227
What Is Risk? 227
Properties of Randomness 228
The Crocodile Hunter, Randomness, and Investing 229
Understand the Linkage Between and Inside QVG Dimensions 234
Identify Impact of Randomness on Value Creators 235
The Cost of Being Wrong 238
Conclusion 239
CHAPTER 14 A Different View of Diversification 241
Don’t Bet the Farm! 242
Too Many Eggs or Too Many Baskets 243
Mental Accounting and Diversification 244
Mental Accounting and Randomness in a Stock Portfolio 246
Randomness Could Be Your Friend 248
CHAPTER 15 Conclusion and Implication 251
I Could Be Wrong, But I Doubt It 251
Bull Markets 252
Bear and Range-Bound Markets 253
Bonds? 255
No, I Am Not Wrong 256
Appendix—Years to Bull Market 257
Acknowledgments 267
Notes 273
Index 275
