UNIVERSITY OF THE FREE STATE

DEPARTMENT OF ECONOMICS
REPLIMINARY WORK PROGRAM PORTFOLIO
MANAGEMENT (ECO 82208)
Lecturers:
Dr Jesse de Beer
Consultation hours: Monday Thursday 9h30-11h00 or by appointment
Office: FGG349 Tel - 051 401 3270
E-mail: debeerja@ufs.ac.za
Stock market price behavior combines economic fundamentals and investor psychology

1. GENERAL
This course is an introduction to the study of investments- including investment analysis,
asset allocation and asset pricing. We strongly encourage you to come to us with questions,
concerns etc. You can contact us via E-mail or consult us in our offices during the stated
consultation hours.

2. COURSE OBJECTIVES
A sound investment decision requires in-depth knowledge of the financial markets and rigorous analytical thinking. The objective of this course is to provide students with an
introduction to the theory and practice of investment analysis. These include the following:
To provide students with a systematic knowledge of the concepts underlying
investment decisions.
To provide students with an introduction to pricing models for equity securities
To become familiar with the investment environment
To introduce students to financial databases
On completion of the module a student should be able to:
show a systematic knowledge of the concepts underlying investment decisions.
show a systematic knowledge of, and critically evaluate, pricing models for a range of
financial securities including fixed interest securities, equities, derivatives and synthetic
securities.
solve problems, including the ability to manipulate financial and other numerical data and to
apply statistical concepts at an appropriate level.
exercise powers of inquiry, logic, and critical analysis, interpretation and evaluation of
arguments and evidence.
sustain a critical argument in writing.
Exercise initiative, self reliance and time management skills and work independently.
Appreciate alternative viewpoints.
Exercise numeracy, problem solving and computer skills.
In this course, we will address questions such as:
What makes stocks go up and down ?
-What factors drive market value and how should they be understood and analyzed ?
-Are stock prices determined by intrinsic value or market psychology ?
Why are dividends important for the valuation of companies?

Did P/E ratios indicate a huge overvaluation of companies during the now -called Internet
bubble?
Why do stocks typically deliver higher mean returns than bonds? Why have index funds
become so popular in the last few years?
Why Peter Lynch and Warren Buffet have such outstanding reputation as stock pickers?

3. LITERATURE/ PRESCRIBED TEXTBOOK

A Random Walk Down Wall Street
Burton G. Malkiel
W.W Norton & Company. New York
Analysis of Investments & Management of Portfolios
Frank K. Reilly and Keith C. Brown. 10th edition.
South Western, Cengage Learning

4. ASSESSMENT
One 3 hour exam at the end of the semester.
Assignments:
The majority of the questions from the following topics: asset price bubbles, company
valuation and technical analysis

Assignments:
1 group assignment (20% of term mark), 2 individual assignments (70% of term mark) and
one presentation (10% of term mark)
Individual Assignment 1 (25% of your term mark)
1.1.
Provide an overview of the factors that drives share returns (differentiate between
fundamentals and market or sentiment factors. This should include a brief explanation of
the relationship (or lack thereof) between economic growth and share returns, as well as
examples of the investment philosophy, process and approach of different well know
investors and fund managers
1.2 Based on this, provide an estimation of the average share returns that can be obtained
from investing in the JSE all share index over the next 10 years. Your answer must include an
explanation of the different methods that can be used to estimate expected future returns on
equities. Also refer to the advantages and disadvantages of the different methods It should
also include an overview on of the JSE all share returns for the past 10 years (2002-2011),
including a brief analysis of the performance of the major sectors (eg. Industrial, financial,
gold, resources).
Individual Assignment 2: Portfolio management project (50% of your final mark)
This project is intended to give you the opportunity to put into practice the tools and
techniques that we will be examining this semester. In other words, you are required to
construct and manage a portfolio of investments, according to your risk profile and
investment objectives report, giving an overview of your investment holdings, as well as an
overview of the returns and variability in value of the portfolio over the trading period. Thus,
it should include the following elements:
Literature review and investment plan.
Details of every security transaction engaged upon and the rationale behind the transaction.
Brief market, industry and company analysis.

Performance evaluation.
You can also include a post-mortem of your performance as a portfolio manager, in other
words, given what you know at the end of the trading period, what you would do differently.
It is very important that you start working on your dissertation as soon as possible. The most
important aspects are to start thinking about your portfolio composition, in other words
which shares you will buy (6-12 shares).. You must buy shares to the value of R100 000 (but
remember to allow for transaction costs).
More specific information about the requirements of this project is available on Blackboard.
Group Assignment Company analysis (20% of your term mark)
Provide a company of your choice (must be part of the Top 100 JSE companies), using the
CFA global challenge template.

PRESENTATIONS: Group presentation of either company or industry analysis (5%

of your term mark)

5. LECTURES
Class time is primarily devoted to lectures and discussion. It will be beneficial in some cases,
and imperative in others, to do the required reading before class. The readings are designed to
encourage questions and discussions about the points raised in class, but more importantly to
facilitate understanding of the course material, which may otherwise be very difficult. If,
while reviewing the material before class, you find yourself bewildered or stunned, make a
note of this before class and ask about it during class.

6. COURSE POLICIES
1. I strongly encourage you to come to me with questions, concerns, etc. during office hours.
2. Plagiarism is using another persons words or ideas as your own, whether you are writing
or speaking. Plagiarism is not acceptable. When you use the ideas of another, you must give
that person credit. This means that proper quoting and referencing is always necessary. Even
when you have group work (reports or presentations) the group as a whole must not
plagiarize, and each person is responsible for the groups work! Generally, information used
directly from the internet constitutes plagiarism, especially if credit is not given.
3. Late Work: Missed or late appointments in the corporate world lose business. Late work is
not acceptable. The best policy you can follow is to plan ahead and plan on having difficulty
with computers , printers, Internet, etc, so that you give yourself several days or a week slack
time! It is assumed that ALL WORK (assignments) is completed professionally (completed
on a computer and printed neatly with spelling and grammar checked and pages numbered).

INTERESTING WEBSITES TO VISIT:

moneyweb.co.za
iafrica.com
stringfellow.co.za
assetbase.co.za
sanlamitrade.co.za
fin24.com

etfsa.co.za
fanews.co.za
www.galileocapital.co.za

WORK SCHEDULE
INTRODUCTION 1
(APPROACHES TO THE INVESTMENT PROCESS)
STUDY OBJECTIVES/ FOCUS AREAS
To provide an overview of the investment philosophy, and investment process of some
successful investors and how they respond to the investment environment.

Reading Material (Folder Introductory)

The Seven Immutable Laws of Investing James Montier March 2011 GMO White paper
Was It All Just A Bad Dream? Or, Ten Lessons Not Learnt James Montier February 2011 GMO White
paper
Eight lessons from the lost decade. Jeffrey S. Molito. Vanguard International Investor Group
In Defense of the Old Always James Montier GMO White paper December 2010
James Montier: Mind Matters.The tao of investing: the ten tenets of my investment creed. February 2009
The Flaws of Finance James Montier GMO White paper. May 2012
Pavlovs Bulls Jeremy Grantham GMO Quarterly Letter January 2011
Wise men talk because they have something to say; fools, because they have to say something. Mark
Seymour. Alphen Angle. June 2010.
James Montier Global Equity Strategy The folly of forecasting: Ignore all economists, strategists, &
analysts. August 2005
James Montier. Global Equity Strategy. Part man, part monkey. November 2002
James Montier. Mind Matters. The psychology of bear markets. December 2008.
James Montier. Mind Matters. An admission of ignorance: a humble approach to investing. October 2008
SEVERAL LETTERS FROM HOWARD MARKS (Oaktree Capital)
(Folder: intro)
It Is What It Is March. 2006
Its All Good. July 2007
Its All GoodReally ?
Now Its All Bad? September 2007
Doesnt Make Sense. July 2008
Dejavu Alll oOver Again. March 2012
Everyone Knows. April 2007.
The Happy Medium. July 2004
Hemlines. September 2010.
Hindsight First, Please (or, What Were They Thinking?) . Ocotber 2005.
How Quickly They Forget. May 2011.
Whats behind the downturn. September 2011
What can we do for you ? January 2012
Its all a big mistake. June 2012

The long view. January 2009.

B1.2 BUBBLES
STUDY OBJECTIVES/ FOCUS AREAS:
Definition an asset price bubble
Well know historical asset price bubbles
Factors that can contribute to the forming of asset price bubbles, including the MinskyKindleberger framework for the analysis of asset price bubbles.

Reading Material
Malkiel chapters 3 and 4
Malkiel Chapter 3: Stock valuation from the sixties to the nineties
Note the overriding lesson of this chapter: madness of the crowds, stock market bubbles
Also note the important lessons form the different case studies
p. 65 Performance investing took hold of Wall Street: potential for unit trust investors to lose money
Concept stocks (1960's) and biotechnology stocks (1980's): can you identify similar bubbles in the SA stock
market
p. 69 The nifty fifty: an investor can pay too much for a good company
p. 73 New valuation methods for companies with no current earnings developed for biotechnology stocks during
1980's. Compare that with p. 94: Valuation methods for IT stocks developed during 1990's.
p. 75 ZZZBest.: Investors can put too much emphasis on management. Companies run by genius and
spectacular successful businessman
SA examples: Brainware and Businessbank
p. 76-77 What does it all mean ? Lessons from history
p. 77 Stock market bubble in Japan: the importance of market analysis (and common sense)
Malkiel shows how traditional valuation ratios are often used by analysts, brokers, etc. to justify irrationally
high stock prices
Malkiel chapter 4: The biggest bubble of them all: surfing the Internet
Look specifically at the following:
.His description of the irrational nature of the market/ the role of market sentiment
The relation to the castles- in-the air theory
P. 86 How even leading new Economy stocks ruined investors (note the huge losses)
p. 86 The insanity that gripped the market
p. Security analysts speak up / How analysts failed investors
p. 95 Analysts did what they often do- they lowered their standards
p. 101 Should we have known the dangers ?
P. 102 According to Malkiel the key to investing is not how much the industry will affect society, but its ability
to make profit
Evaluate this statement. What does it imply for successful industry analysis ?
Note: although Malkiel acknowledge the role of market sentiment and the fact that markets are often irrational,
bubbles occur, etc he still believes in efficient markets.

Additional reading material

Forever blowing bubbles: moral hazard and melt-up Societe Generale Global strategy research June 2009
James Montier
Look at the Minsky/Kindleberger bubble framework and the role of behavioral factors
The Road To Revulsion by James Montier
Letters to the Investment Committee XVII*. Part 2: On the Importance of Asset Class Bubbles for Value
Investors and Why They Occur

Look at Jeremys views on market efficiency, why bubbles occur, and how investors can take advantage of
bubbles
The Absolute Return Letter July 2012 Looking for Bubbles
B2 INTRODUCTION 2
Introducing share valuation
STUDY OBJECTIVES/ FOCUS AREAS:
-The concept of intrinsic value and how it is determined
-Compare and contrast the P/E ratio model and present value analysis
-Explain how an investor in common stocks can reconcile the large variability in stock returns, and the big drops
that have recently occurred, with taking a prudent position in owning a portfolio of financial assets.
-The concept of required return.
-Outline the rationale for passive investment strategies
-Describe the different active strategies involving common stocks
Concept of sector rotation
-Identify, differentiate two traditional approaches to analyzing, selecting common stocks.
Bottom-up vs top-down approach to fundamental analysis
-Relationship between fundamental analysis and intrinsic value
-Implications of efficient market hypothesis for investors

Reilly and Brown chapter 1: An Overview of the Investment process

Makiel chapters 1,10
Look specifically at the following:
Reilly and Brown chapter 1
What is an investment?
Measures of return and risk
Determinants of required rates of return
Relationship between risk and return
Malkiel chapter 1
Investing vs. speculation
Importance of strategies to maintain real purchasing power
The firm foundation and castles in the air theory
Malkiel chapter 10
Reaping reward by increasing risk
See worksheet
A2: ASSET ALLOCATION, INVESTMENT ALTERNATIVES AND INDIRECT
INVESTING
Required reading:
Reilly and Brown Chapter 2, 3 and 12 pp 349 - 359
Malkiel chapter 12 and 13 and 14
Look specifically at the following:
Reilly and Brown Chapter 2: the Asset Allocation Decision
Individual investor life cycle
Portfolio management process
Importance of asset allocation
Reilly and Brown Chapter 3: the global market investment decision
The case for global investment
Global investment choices

Reilly and Brown Chapter 12: Macroanalysis and Microvaluation of the stock market
The components of market analysis
Macromarket analysis
Malkiel Chapter 12: A fitness manual for random walkers (Investment alternatives and way
to go)
Know your investment objectives
Also look at the sleeping scale of major investments
Malkiels viewpoint on investing in gold
Malkiel chapter 13: A primer in understanding and projecting returns from stocks and bonds
This is a very important chapter.
Malkiel Chapter 14: Life cycle guide to investing
Reading Material
TEXT BOOK: Malkiel Chapter 5 Reilly and Brown Chapter 11
Malkiel Chapter 5: The firm foundation theory (Fundamental analysis)
Look specifically at the following:
p. 113 Two important caveats (limitations of Fundamental analysis)
p. 115 How different assumptions can influence/ affect Gordon calculations
p.119 In conclusion: what is left from fundamental analysis ?
There is a yardstick for value, but one that is most flexible and undependable.
p. 121 Both views of security pricing tell us something about actual market behavior. The question is how you
can use these theories to develop useful investment strategies.
Reilly and Brown Chapter 11 an Introduction to Security Valuation principles
A good overview of the work. Look specifically at the following :
p. 311 Does the 3-step process work ?
P. 318 Approaches to equity valuation
discounted cash flow vs relative valuation techniques
Problems, limitations
p. 319Why and when to use this techniques
p. 329 Implementing relative valuation techniques
p. 334 Estimating expected dividend growth: from fundamentals, based on history
Reilly and Brown Chapter 12: Macro analysis and micro valuation of the stock market
Look specifically at the following :
p. 349 Components of market analysis
p. 350 Macromarket analysis
p. 359 Microvaluation analysis

B3. MARKET ANALYSIS AND INDUSTRY ANALYSIS

STUDY OBJECTIVES/ FOCUS AREAS:
-The importance of market analysis
-Discuss the business cycle approach to investment timing
-Approaches to industry analysis
-Explain the importance of market analysis in analyzing industries in relation to the business
cycle

Reading material

TEXT BOOK
Reilly and Brown chapter 13 and 14
Look specifically at the following:
Reilly and Brown Chapter 13: Industry analysis
p. 396 Why do industry analysis ?
p. 3999 The business cycle and industry sectors
p. 405 Analysis of industry competition

p. 417 Industry analysis using relative valuation

General principles of market, industry analysis and descriptions of investment

philosophies
B3.1. THE 2013 INVESTMENT ENVIRONMENT(Folder: 2012Environment)
STUDY ONJECTIVES/ FOCUS AREAS
What are the major trends in the global economy. How will this impact on SA investors
_Exchange rate of the Rand
-Economic growth, employment opportunities and spending power of consumers
-Commodity prices.
How this in turn should impact on earnings of companies in :
Resources sector
Financial sector
Retail sector

Reading Material Market environment 2013 (Folder Market analysis 2013)

Equity market commentary April and May 2013. Cadiz asset management
Bedlam Investment bulletin: global equity strategy. March 2013, April 2013 and May 2013
Global investment review First Quarter 2013.
Slow turn ahead ? 2013 Investment outlook. Blackrock asset management
RE-VIEW RE:CM Investment Insights October 2011
The Dangers, Pitfalls and Opportunities of Investing in Cyclical Businesses p. 4
Mind the Gap! P. 12 On the dangers of buying ETFs
The Fat Pitch p. 18 The Seven Immutable laws of investing
Listed Stock Exchanges Bubbles & Busts
Picking Asset Managers, Avoiding Mistakes p. 31
Crazy Mr. Market notes (cannon asset management)
No 1: is Mr. Price worth more than the SA construction sector ? Ocotber 2012
No 2 What shares are driving our market up ?
No 3 Which JSE sector has enjoyed the best earnings growth over the last 5 years ?
NO 4 Are investors missing the elephant in the boardroom ?
Imara Investing Stocks n Strategy South Africa. March 2013 and May 2013.
PSG Asset management. Angles and Perspectives. Q2 2013
Look specifically at p. 1-9

RCI Newsletter. End April 2013.

Old Mutual Investment group. Market dynamics. April 2013 and May 2013.
RECM Investment Strategy in 2013 and Beyond
Piet Viljoen, Chairman
RECM April 2013: The real thing (analysis of investment opportunities in Japan)
The cost of income
Schroders Economic and Strategy Viewpoint 30 April 2013
Investment outlook July 2013

Robeco asset management. July 2013 Monthly Outlook

Tectonic shifts in the world economy
Morgan Stanley blue paper June 2013. Emerging Markets What If the Tide Goes Out?
Bad Omens By Louis Gave & Charles Gave July 2013
Interesting viewpoint on the current investment environment and specifically the impact of
QE tapering comments
Present and Emerging Risks to the Gold Trade
Amit Bhartia and Matt Seto GMO Emerging Thoughts April 2013
2013 Industry analysis reading material (Folder Industry analysis 2013)
RE:CM Steel Schmaltz Analysis of steel industry and company analysis of Arcelor Mittal
RE:CM Chasing Yield down a Hole Analysis of the gold mine industry in SA

Reading material: older market reprots

Bedlam asset Management Global Investment Review Fourth Quarter 2011
Look specifically at the following
Section 1: Correlations (or lack of) between economic growth and equity market returns 2-5
What is the nature of the correlation ? (look both at the longer term correlations for developed nations and the
shorter periods for selected emerging countries ) Possible reasons for this. Also look: why you should treat scuh
comparisons with caution
Section 2: China. A new banking crisis 5-7
The problem with official statistics in China. Banking system very thinly capitalized
Section 3: Gold. What price money? 7-9
The drivers of the gold price
Section 4: Equity market outlook
How the global economic and political situation relate to equity valuations and returns
The reasons for the market volatility in June 2011
Earnings expectations and their role in stock prices
PIMCO Equity focus November 2011: Know unknowns
This is a general reflection on the value of forecasts and how one should evaluate a particular prediction
GMO Commentary April 2011: Force Fed by Ben Inker
Explain how the actions of the Fed influence the attractiveness of different asset classes .
Please note: Force Fedis the last 2 pages of the file starting with My Sisters Pension Assets and Agency
Problems
Allan Gray Quarterly Commentary Q3 September 2011
An era of high global earnings p. 7-10
Some reasons why corporate profits are currently so high in SA (relative to historical averages)
The outlook for corporate profits and why
What this imply for valuation levels
Arjun Divecha GMO Emerging thoughts January 2011
Ruminations on China and India
Look specifically at the following:
The relationship between corporate profitability (and share returns) and economic growth and the quality of
government polices
Also: how these relationships differ between India and China
Note: social welfare is not equal to private welfare

In India. bad government policies in the past has led to high profits (but is it sustainable ?)
In India, growth happens when government gets out of the way
In China growth happens when government gets it right
GMO White pear Chinas red flags by Edward Chancellor
Look at the characteristics of most bubbles and how China fits in with this picture
Also: the good fundamentals in China
PSG Asset Management Quarter 4 December 2011 Angles and Perspectives
This provides examples of approaches to stock pickling and features SA examples
Are equities a default class simply because interest rates are low ?
Are current low interest rates sustainable? How are industrials priced relative to cash? Overpaying for
industrials is unrewarding irrespective of
interest rates
What kind of companies do we invest in?
At PSG Asset Management, we typically split our investments
into two categories
Group A: High compound returns
(Compounding Returns or CR) Group B: Reversion to a long-term mean
(Mean Reversion or MR) Recent examples of potentially undervalued compounding
return stocks
When do you sell a good company?
We are careful to balance our quantitative assumptions with qualitative facts. The fair value of a company is not
an exact number, it is an estimate
2. Profit growth rate depends on return on capital, competitive position and management
RE-VIEW RE:CM Investment Insights October 2011
The Dangers, Pitfalls and Opportunities of Investing in Cyclical Businesses p. 4
Mind the Gap! P. 12 On the dangers of buying ETFs
The Fat Pitch p. 18 The Seven Immutable laws of investing
Listed Stock Exchanges Bubbles & Busts
Picking Asset Managers, Avoiding Mistakes p. 31
RE-VIEW RE:CM Investment January 2012
Discovery: Proving the Power of Incentives p. 19 Example of company analysis- why they like Discovery
Resisting the Lure of the Siren Song Glamour Versus Value Stocks p. 25 A good introduction to the differences
between glamour and values tocks and the behavioral reason why investors are attracted to glamour stocks
p. 30 Japan: A Stock Pickers Dream Example of market analysis and consider both reasons why investing in
Japan is attractive and why investing in Japan is not attractive
RECM Review 16, April 2011
p. 5-15: This gives you an idea of the investment approach and process followed by RE: CM
p. 5 some thoughts on the investment process
Approach to asset allocation, top down vs. bottom-up approach and general thoughts on the investment process
Regarding capital Management: Review 10 October 2009
p. 10 rational framework for making investment decisions Good, cheap and fast
p. 11 How we think about quality
Regarding capital Management: Review July 2008
p. 13-18 Investment philosophy (buy cheap, quality stocks). Description of their philosophy very similar to p.
10-11 in the October 2009 issue, but this time they also illustrate the application of this philosophy- an analysis
of returns when you bought ABSA during different economic circumstances and different valuation levels.
RECM Review April 2009
p. 4-7 Price versus value
Approach to investing: Value investing, index investing
p. 25 Rules of engagement with investors (Warren Buffet and Citigroup)

RECM Review 16, April 2011

p. 19-40: Examples of industry and company analysis
p. 19: Simmer & jack (focus on mistakes made in the investment process- when to buy and sell a stock that you
own)
p. 23 Construction Company, Murray& Roberts
p. 23 Oil companies- Sasol and BP (how to compare the investment merits of two companies in the same
industry)
p. 36 Mustek and Brait (emphasis on the impact of management decisions)
Regarding capital Management: Review January 2011
Look specifically at p. 11-13: RE: CM Flexible equity fund
Their view on the SA share market
Some comments on individual shares- Naspers, Imperial.
p. 16 20 South Africa joins the BRICs a buy signal Market analysis, current view on the overall investment
merits of shares listed on the JSE
p. 25 - 31Price Aberrations in Global l Cement. Example of company analysis
Regarding capital Management: Review vol 10 October 2009
p. 17-19 Buying hope or buying value? Some thoughts on market valuation and the relationship between macro
economic conditions and share returns. Also look specifically at the components of expected returns-(table 1
on p. 19)
p. 20-24: Industry analysis (and company analysis): Food retailers
Regarding capital Management: Review July 2008
p. 21- 24: Some thoughts on the impact of financial leverage on company quality (especially in the context of
the global financial crisis)
p. 25-27: How market expectations about a firm can change and how it impacts on PE ratios and thus price
changes (returns)
p. 28-32: Industry analysis: SA banking sector
RECM Review April 2009
p. 11 Alternatives to present value analysis
p. 14-18 Company analysis- Old Mutual
RECM Review April 2010The use of enterprise value as valuation technique (comparison of Telkom and
Telstar
p. 16-20 Company analysis: looking at the long term competitive advantage of a company
p. 21-25 Construction industry and Murray and Roberts
p. 26-30 Global fertilizer industry and Omnia
RECM Review July 2009
p. 7-16 Review of performance of different funds and portfolio diagnostics. Top 10 positions and reasons for
choosing certain stocks- an example of motivation for stock picking.
p. 19-23: Industry analysis: SA retailers
p. 24-27: Industry analysis Commodities
p. 34-36 Company analysis of Swatch: example of how share price can disconnect from fundamentals from time
to time.
The Absolute Return Letter May 2011 The Case for Human Ingenuity
This article argues that commodity prices will not continue to increase and in fact, that the oil price will
decrease in the future. Compare and contrast this with the September 2009 letter The hamster on the wheel
(that is essentially the peak oil argument. ) Viewpoint on the outlook for the oil price and commodity prices in
general P. 2 Why financial investors love commodities p. 5 Two opposing views on commodity prices
p. 8 His conclusion

The Absolute Return Letter October 2011 Point of Maximum Pessimism?

p. 1 Despite the negative economic outlook in Europe, some European companies are doing very well. Several
investors fail to recognize this because of recency bias
p. 3 The meaning of structurally bearish on equities
relative valuation levels between Europe and US
behavioral and political factors at play here- investors tend to focus on problems in EU, which is highly
publicized. Expectation in USA that Fed actions will support share prices
The Absolute Return Letter February 2012 The Unlikely Bull Market
Description of the debt crisis in Europe and how it impacts on the investment environment. His conclusion: We
are still in a risk-on / risk-off environment where investors blow hot and cold. One of the fallouts of the crisis of
the past 3-4 years is a shortening of investors time horizon.
3.2. MARKET TIMING

Reading material
Funds on Friday 03 July 2009 Market timing and rebalancing TAMAS KULCSAR GLACIER
RESEARCH
Market timing at home and abroad
By Kenneth L. Fisher And Meir Statman February 2005
The best of times, the worst of times. ACI South Africa. 2008
Risks associated with market timing under different market conditions
Marc Dumont de Chassarta, Colin Firerb; Omega 32 (2004) 201 211
PLEXUS PLATFORM MARKET TIMING COULD COST YOU DEARLY. Nov 2004
Timing is Everything A Comparison and Evaluation of Market Timing Strategies
Chris Brooks, Apostolos Katsaris and Gita Persand
MARKET TIMING IN REGRESSIONS AND REALITY
Kenneth L. Fisher and Meir Statman. The Journal of Financial Research Vol. XXIX, No. 3 Pages 293304
Fall 2006

MARKET ANALYSIS QUESTIONS TO BE DISCUSSED IN CLASS

-Use the Gordon dividend discount model to show the impact of changes in interest rates and
economic growth on share prices in general
-Explain why economic growth is relevant for share prices
-Discuss your preferred asset allocation strategy in an environment of: high interest rates
and low interest rates
-Explain the impact of changes in interest rates on the earnings of companies in different
industries
B4 COMPANY ANALYSIS
STUDY OBJECTIVES/ FOCUS AREAS:
Reading material
Text book:
Reilly and Brown Chapter 14, Malkiel chapter 8
Look specifically at the following:
Reilly and Brown Chapter 15: company analysis and stock valuation
p. 438 Company analysis vs valuation of stock
p 440 Economic, industry and structural links
p. 444 Some lessons from Lynch and Buffet
p 445 Estimating intrinsic value. A summary of the different techniques
p 446 Present value techniques
p 445 Relative valuation techniques

p. 458 Estimating company earnings per share

p. 470 Making the investment decision
p. 472 Additional measures of relative valuation
p. 477 Analysis of growth companies, especially The real world: p. 587
p. 483 Measures of value added
Recommended reading:
Reilly and Brown Chapter 10 Analysis of Financial Statements
This chapter will be especially useful for the portfolio management project
Look specifically at the following :
Quality of financial statements
the value of financial statement analysis
Malkiel chapter 8
P. 173 Views from academics and Wall Street.
Are security analysts fundamentally clairvoyant?
How security analysts make earnings forecasts
How successful/ accurate are their earnings estimates ?
P. 176-185 Why the crystal ball is clouded
p. 179-180 Dubious accounting practices
p. 180-181 Tendency of companies to report pro forma earnings: any implications for
fundamental analysis?
P. 193 Verdict on market timing
Malkiels viewpoint
Historical asset allocation (cash vs equities) of mutual funds
P. 197-198 Malkiels personal viewpoint: middle of the road
The reasons why prices move in a random walk. Do you agree ?

Other articles

State of the Markets: A Minsky Review By Ed Easterling April 19, 2005

Rowing vs. The Rollercoaster By Ed Easterling January 26, 2007
Zen lessons in market analysis. John P. Hussmann (Word document)
Is the stock market short-term oriented?Paul Johnson Columbia University Graduate
School of Business
James Montier. Mind Matters. Hidden gems, maximum pessimism and the hope of growth. April 2009.
A historical perspective
Credit Suisse Global investment returns yearbook 2012.
When Do Stock Market Booms Occur? The Macroeconomic and Policy
Environments
of 20th Century Booms Michael D. Bordo and David C. Wheelock. 2006
Several Alphen Angle articles:
Small wonder SA Investors have given up on Offshore, but they are making the same old mistake
Earnings growth eagerly awaited
Risk on or risk off? Thank the macro managers for the opportunity for equity returns
Are Equities Cheap? Well, that depends

ADDITIONAL READING MATERIAL (REQUIRED)

GENERAL
Valuation Approaches and Metrics: A Survey of the Theory and Evidence
Aswath Damodaran Stern School of Busines. November 2006
Mind Matters The dangers of DCF. September 2008. James Montier
Ten badly explained topics in most Corporate Finance Books Pablo Fernndez IESE Business School
The Case for Going Global Is Stronger Than Ever John Mauldin August 2011
The Endgame Headwinds If Something Cant Happen. John Mauldin. April 2011
Muddle Through, or Crisis? The Endgame, Part 2.John Mauldin. May 2011
Car Wreck, Traffic Jam, or Freeway? John Mauldin (file name: secularbearmarkets). This provides a
description of secular bear markets
John Mauldin. Does Unreal GDP Drive Our Policy Choices?
Caveat Emptor: Capital Rules and Deleveraging Can Make Bargain Banks Expensive Richard P.
Mattione GMO White paper. May 2012.
Valuing Equities in an Economic Crisis or How I Learned to Stop Worrying about the Economy
and Love the Stock Market Ben Inker
Some word documents, containing several articles on company analysis:
Names of files: The investment case
Company info
SAAlphaAPT
Company analysis
Heineken a premium brand
Look at the different valuation metrics they use and how they compare SABmiller and Heineken
CRH a potential one for the patient
A good company is not necessarily a good investment
Exampe of a company that has recently underperformed and is facing difficult conditions. However, they are of
the opinion that it is a good investment. Look at the reasons they state in this regard.
Also an example fo the interaction between market and company analysis.
PSG Angle : Banks could be a case of nice from far but far from nice!
This is an example of industry analysis. Despite low valuation levels (for global abnks and SA banks) they have
certain concerns with regard to income growth and also balance sheet issues (the latter more with regard to
international banks).
PSG Angle : PSG Asset Management favours higher quality companies where expectations are low
South African industrials: Quo vadis earnings?
This article is an example of how market analysis and industry analysis interacts. The period 1999-2008 was a
golden period for SA industrials. This is mainly due to 3 key macro variables. This scenario (and the good
performance of the industrials) is unlikely to be repeated. Currently, SA industrials face several challenges:
increased foreign competition, and an unfavorable macro environment- slow economic growth, high
unemployment and rising inflation.
PSG Angle: Where to find value on the JSE a view from above
Provide PE and DY figures for different sectors on the JSE
PSG Angle: Intrinsic Value Its not about macro events and newspaper headlines

-The majority of information available to investor is nothing but noise.

The intrinsic value of a business changes very little form one year to the next
The JSE All Share Index, the rand and commodity prices (Read this before you take any more money offshore)
They argue that the JSE still offers god returns, based on recent performance and SAs exquisite positioning
with regard to commodities
Valuation of gold
Emerging Thoughts: Emerging Consumers Drive Gold Prices: Who Knew?
Amit Bhartia and Matt Seto GMO White paper January 2012
All that glitters. Howard Marks. Memo to Oaktree Capital clients.
DIVIDENDS
Several articles by MillerHoward Investments:
Alpha hiding in plain sight ?
The human face of dividends
Will my money lasts as long as I do ?
James Montier. 2010. A man form a different time.
RCI newsletter July 2009. Riivere of dividends
RCI newsletter May 2010. Its the diovidend growth that really counts over the medium term.
RCI newsletter February 2010. Are shares cheap or expensive ? dividend yields gives us a clue
Vermeulen and Smit 2011: Dividend payout and future earnings growth: A South African study
S.Afr.J.Bus.Manage.2011,42(4)
Look specifically at the following
Introduction and literature review p. 1-4 What is the expected relationship between dividend payouts and
earnings growth and why.
p. 11-14: Factors that impact on earnings growth in the SA context and why
THE ROLE OF EARNINGS GROWTH
The Dash To Trash And The Grab For Growth Mind Matters 15 January 2008 by James Montier
Look specifically at the following:
The concepts of earnings risk and valuation risk, what he means by dash to trash and grab for growth,
p. 3 The use of cyclically adjusted PE ratios
Quote on p. 6: "Observation over many years has taught us that the chief losses to investors come from the
purchase of low-quality securities at times of favourable business conditions.
p. 10 Importance of dividends
Beyond The Horizon: The EPS Cycle By Ed Easterling April 23, 2007
Growth and Value: Past growth, predicted growth and fundamental growth
Aswath Damodaran Stern School of Business June 2008
Look specifically at the following: p. 7 growth as a story (Compare this with the James Montier article- grab
for growth)
p. 8 Growth adjusted multiples
p. 12 Why earnings increases is not equal to revenue increases
p. 19 Growth forecasts- different sources of forecast (analysts, management and market implied) and empirical
evidence on the accuracy of these growth forecasts
p. 27 Determinants of growth- new investments and efficiency improvements
p. 34 How long does growth lasts?
p. 37 Value creating vs. value destroying growth

What Goes Up Must Come Down! James Montier GMO White Paper March 2012
PE RATIOS
The P/E Report: Quarterly Review Of The Price/Earnings Ratio
By Ed Easterling September 30, 2009
Advisors Perspectives. How high are todays P/E ratios ?

RETURN EXPECTATIONS
Jones, CP, Wilson, JW and Lundsrum, LL (2002): Estimating stock returns; should investors expect less in the
future ? The Journal of Portfolio management. Fall pp 40-50.
Campbell, JY and Shiller, RJ. 2001. Valuation Ratios and the Long-Run Stock Market Outlook: An Update.
Cowles Foundation Discussion paper no. 1295.
What Are Reasonable Long-Run Rates of Return to Expect on Equities?
John B. Shoven, Professor of Economics Stanford University
July 20, 2001
Sources of equity returns
Howard Marks. Returns and How They Get That Way. Memo to Oaktre cleints. November 2002.
The Components of Equity Market Returns Matthew De Wet. Funds on Friday. October 2009.
Profits for the Long Run: Affirming the Case for Quality Chuck Joyce and Kimball Mayer. GMO White
paper. June 2012.
Value investing
Bierig, RF (2000) The evolution of value investing: from Benjamin Graham to Warren Buffet Research
paper, Duke University, Durham North Carolina
Brown, CH (2000) Value investing and behavioral finance. Presentation to Columbia Business school
Graham and Dodd Value investing lecture series November 15.
Value versus Growth Investing Paul Johnson Columbia University Graduate School of Business

2. TECHNICAL ANALYSIS
STUDY OBJECTIVES/ FOCUS AREAS:
-The rationale for technical analysis
-Differentiate between fundamental and technical analysis
-Theory of contrary opinion: rationale
different contrarian indicators
-Explain use of relative strength analysis
Moving averages in technical analysis
Required reading:
Reilly and Brown chapter 16 Technical analysis
Malkiel Chapters 6 and 7
Look specifically at the following:
Malkiel
P. 127 Technical vs fundamental analysis
According to Malkiel, Technical analysis is 90% psychological and 10% logical and
fundamental analysis is 10%psychological and 90% logical
p. 133 Reasons why technical analysis might work
Explanation for support and resistance levels
p. 134 Why charting may fail to work
p. 140 Why fundamental analysis might fail to work
p. 142 using fundamental and technical analysis together
especially rule 3 p. 143

Malkiel Chapter 7 (Recommended, not required reading)

p. 165 Why technical analysts are still hired
p. 167 Counterattack. Why can you expect a random walk ?
Analogy of drunken man.
New fundamental information unpredictable.
Reilly and Brown
p. 626 Underlying assumptions of technical analysis
p. 627 Advantages of technical analysis
p. 629-629 Challenges to technical analysis