Based on a foundation of academic research, The Little Book of Stock Market Profits explains how to build long-term wealth in the equity markets. The book focuses on investment strategies that will help an investor prudently navigate the market regardless of its level of volatility. Each chapter focuses on a specific means of selecting stocks that can potentially generate alpha, or the value that a professional investor adds to a fund’s return. Alpha is the white whale of the investment business. It is what professional investors devote their careers to discovering. Quite simply, the search for alpha is a quest to find a means of selecting stocks that will generate performance greater than the level of risk borne. The search for alpha is not so much trying to find a free lunch in the equity markets, as much as it is the art of using statistics to identify groups of stocks that will beat the market.
The Little Book of Stock Market Profits identifies and analyzes the major methods documented by finance researchers that can be used by investors to generate alpha. My book draws upon the survey of over 650 research papers published over the past 20 years that are summarized in The Handbook of Equity Market Anomalies also published by John Wiley & Sons (2011). In The Little Book of Stock Market Profits, I synthesize, explain, and interpret the cutting-edge academic research relevant to equity investing and combine it with my own insight gained as a portfolio manager. If implemented correctly, the information in this book could help you beat the market. Here is a breakdown of what’s discussed in each chapter:
- Chapter 1 examines how best to use sell-side analyst recommendations in an investment process. The answer is counterintuitive, but nonetheless powerful.
- Chapter 2 asks whether it makes sense to tilt a portfolio toward smaller cap stocks. The results are not what conventional wisdom indicates.
- Chapter 3 explains how earnings estimates can generate alpha. I have been using earnings estimate revisions as a source of alpha for more than a decade and a half and am a firm believer in their efficacy.
- Chapter 4 looks at whether price momentum can be used to identify stocks that will outperform the market. New research indicates that if you are not entering a recession, price momentum can be a very effective tool.
- Chapter 5 is about piggybacking. We look into whether piggybacking on the trades of insiders can help increase returns. It seems reasonable that if the CEO of a company is buying his own stock, that perhaps you should as well.
- Chapter 6 covers the signaling effects of net stock issuance activity. Hopefully, by the end of this chapter you will agree with Groucho Marx and pass on the next IPO offered to you but embrace a company engaging in a stock buy-back.
- Chapter 7 shows that excess returns may be generated by focusing on the quality of earnings a company generates. The biggest challenge is whether the results have already been arbitraged away by professional investors.
- Chapter 8 illustrates the importance of using valuation metrics in trying to find stocks with positive alpha. It appears that Graham and Dodd’s insights were eerily prescient.
- Chapter 9 focuses on a phenomenon called post-earnings announcement drift and illustrates how an investor can use earnings surprises to generate returns that are higher than one would expect, given the risk being taken.
- Chapter 10 looks into whether seasonal timing strategies can beat the market. Generally, I tend to discount market-timing strategies, but the results may be very interesting to futures traders.
- Chapter 11, the last chapter, examines the creation of multi-factor models that can generate excess returns. One of the multiple-factor models works better among growth stocks, while the other is more appropriate for value investing.
- The Crystal Ball of Wall Street
- Size Matters
- Once More Unto the Breach
- The Big Mo
- The Inside Story
- Song of the Shares
- Cash Is King
- It’s Worth What?!
- Earnings Surprises: The Gift that Keeps on Giving
- A Time to Plant and a Time to Reap
- The More the Merrier
The Little Book of Stock Market Profits: The Best Strategies of All Time Made Even Better By Mitch Zacks pdf