Foreword xiii About the Author xv Acknowledgements xvii Introduction xix PART I INVESTORS AND RISK 1 1 Basic Principles 3 1.1 Investors 3 1.2 Inflation 3 1.3 Choices for Investors in Terms of Investments 5 2 Measures of Risk 7 2.1 Volatility or Standard Deviation 7 2.2 Beta as a Measure of Risk 11 2.3 Value-at-Risk (VaR) 13 2.4 Investor Behaviour Towards Risk 14 PART II ASSET CLASSES AND THEIR DEGREE OF RISK 17 3 Asset Classes and Associated Risks 19 3.1 Money Market Investments 19 3.1.1 Definition 19 3.1.2 Risks associated with money market investments 20 3.2 Bonds 22 3.2.1 Definition 22 3.2.2 Risks associated with bonds 26 3.3 Stocks 33 3.3.1 Definition 33 3.3.2 Risks associated with stocks 36 3.4 Real Estate 45 3.4.1 Definition 45 3.4.2 Risks associated with real estate 46 3.5 Commodities and Metals 48 3.5.1 Definition 48 3.5.2 Risks associated with commodities and metals 51 3.6 Private Equity 54 3.6.1 Definition 54 3.6.2 Risks associated with private equity 54 3.7 Other Asset Classes 56 4 Particular Forms of Investment within Asset Classes 59 4.1 Hedge Funds 59 4.1.1 Definition 59 4.1.2 Risks associated with hedge funds 60 4.2 Structured Products 63 4.2.1 Definition 63 4.2.2 Risks associated with structured products 64 4.3 Options 65 4.3.1 Definition 65 4.3.2 Risks associated with options 66 5 Classification of Asset Classes According to their Degree of Risk 71 5.1 Selected Criteria for Classification of Asset Classes 71 5.2 Classification of the Different Asset Classes 75 PART III THE MARKET 77 6 Market Efficiency 79 6.1 Weak Form Market Efficiency 79 6.2 Semi-strong Form Market Efficiency 80 6.3 Strong Form Market Efficiency 80 6.4 Conclusion on Market Efficiency 81 7 Fundamental Analysis 83 7.1 Discounted Cash Flow 83 7.2 Relative Measures 85 7.2.1 Price to Earnings Ratio (P/E) 85 7.2.2 Price to Book 85 7.3 Strategic Analysis 86 7.3.1 The business model 86 7.3.2 External analysis 88 7.3.3 Internal analysis 95 7.3.4 The SWOT table (Strengths, Weaknesses, Opportunities and Threats) 97 7.4 Criticism of Fundamental Analysis 98 8 Technical Analysis 101 8.1 The Three Fundamental Principles of Technical Analysis 101 8.1.1 Prices reflect all available information 101 8.1.2 Prices move in trends 102 8.1.3 History repeats 104 8.1.4 Criticism of technical analysis 105 8.2 Conclusion on Technical Analysis 106 9 Investment Approach Based on "Psychological Principles" 109 PART IV VALUATION OF FINANCIAL ASSETS 111 10 Valuation of Money Market Investments 113 11 Valuation of Bonds 115 12 Valuation of Stocks 117 13 Valuation of Options 119 14 Valuation of Real Estate 121 15 Valuation of Commodities and Metals 123 16 Conclusion on Valuation 125 PART V THREE PRACTICAL APPROACHES TO SECURITY SELECTION: BUFFETT, GRAHAM AND LYNCH 127 17 Warren Buffett's Value Investing Approach 129 18 Benjamin Graham's Approach 133 18.1 The Defensive Investor 133 18.2 The Enterprising Investor 134 18.3 Security Analysis 135 18.3.1 Bond selection 135 18.3.2 Stock selection 135 18.4 The Margin of Safety Concept 136 19 Peter Lynch's Approach 137 19.1 Stock Categories 138 19.1.1 Slow growers 138 19.1.2 The stalwarts 138 19.1.3 The fast growers 139 19.1.4 Cyclicals 139 19.1.5 Turnarounds 140 19.1.6 The asset plays 140 19.2 The Perfect Company According to Lynch 140 19.3 Earnings and Earnings Growth 143 19.4 Selection Criteria 144 19.4.1 The sales percentage 144 19.4.2 The P/E ratio 145 19.4.3 Liquid assets 145 19.4.4 Debt 145 19.4.5 Dividends 146 19.4.6 Hidden assets 146 19.4.7 Cash flow 146 19.4.8 Inventories 146 19.4.9 Growth rate 146 19.4.10 Gross profits 146 19.5 Conclusion on Peter Lynch's Approach 147 PART VI BEHAVIOURAL FINANCE 149 20 Investors in Behavioural Finance 151 21 Heuristics and Cognitive Biases 153 21.1 Information Selection 153 21.1.1 Availability heuristic 153 21.1.2 Herding 153 21.1.3 Ambiguity aversion 154 21.1.4 Wishful thinking 154 21.2 Information Processing 154 21.2.1 Representation bias 154 21.2.2 Confirmation bias 154 21.2.3 Narrative