The practical guide to finding value and opportunity in large-cap stocks using investor behavior Large-Cap is an abbreviation of the term "large market capitalization" and refers to the stock of publicly traded companies with market capitalization values of roughly more than $10 billion, like Walmart, Microsoft, and Ford. Because of their size, the conventional view is that these companies do not present investors with an ability to be opportunistic. The Large-Cap Portfolio + Website argues that, contrary to popular perceptions, significant opportunities exist in these stocks. Written with a fluency that both the savvy amateur and professional investor will understand, the book fills a void in the market by offering the practitioner a methodology to identify and approach the major assumptions that underlie valuation, with an emphasis on issues that are more relevant to the analysis of large-cap stocks.
* Full of useful information on how to reap the rewards of stocks that most investors avoid * Presents essential insights into understanding stock valuation * Includes an actionable chapter devoted to portfolio management Packed with timely instruction, Large-Cap Portfolio gives readers invaluable insights and examples of how to build portfolios that will out-perform broad market benchmarks.
Thomas Villalta, CFA, is the lead portfolio manager for the Jones Villalta Opportunity Fund, and the Chief Investment Officer for Jones Villalta Asset Management. Having worked for twenty years in investment analysis and having taught university courses for seven years, Mr. Villalta brings a unique perspective that bridges theory with real-world application. In addition to having appeared numerous times on Fox Business, CNBC, AOL DailyFinance, and TheStreet.com, he has been frequently quoted in the Wall Street Journal, Barron's, Bloomberg Businessweek, CNN, and many other media outlets.
Acknowledgments xi Preface xiii PART I: THE LARGE-CAP OPPORTUNITY AND CHALLENGE CHAPTER 1 Trends in Large-Cap Investing and the Opportunities They Present 3 Defi ning a Large-Cap Stock 4 Understanding the S&P 500 Index 8 Examining the Growth of Indexed Equities 10 Defi ning Active Management 13 So What Does This Mean for Investors? 25 Two Additional Considerations 28 Finally, Something Timely 29 Conclusions 31 Notes 31 CHAPTER 2 Risk and Uncertainty 35 Financial Measures of Risk 37 Accounting Measures of Risk 41 Differentiating between Certain and Uncertain Cash Flows 43 Conclusions 48 Notes 49 PART II: MARKET INEFFICIENCY CHAPTER 3 An Introduction to Market Efficiency 53 The Basis for Market Effi ciency 55 Effi cient Markets Hypothesis 58 Empirical Support for the Efficiency of Markets 59 Conclusions 60 Notes 61 CHAPTER 4 Evidence of Ineffi ciency in Investor Behavior and Market Behavior 63 Closed-End Fund Discounts and Premiums 64 Market Bubbles and Market Crashes 68 Investors vs. Their Investment ... or Investors vs. Themselves 73 Book-to-Market Effects and Other Value Criteria 76 Conclusions 78 Notes 79 CHAPTER 5 Individual Decision Making 81 That Thing about Our Being Rational ... 84 Bayesian, Non-Bayesian What Does This Mean? 87 Great Companies Always Make Great Stocks 90 Representative Sequences 93 Now That You Put It That Way ... 96 Dropping an Anchor in a Sea of Information 105 Conclusions 110 Appendix: Utility Theory and Prospect Theory 112 Notes 116 CHAPTER 6 Correlated Mistakes and the Failure of Arbitrage 119 Herding and Why We re Predisposed to Correlated Mistakes 120 Evidence of Herding in Securities Markets and in the Analysis of Common Stocks 123 Feedback Mechanisms and Mood Contagions 126 Smart Arbitrageurs Will Save Us! Won t They? 129 Some Related Considerations in Approaching the Active Management of Investments 133 Conclusions 135 Notes 136 CHAPTER 7 Conventional Views on Sources of Market Inefficiencies 139 Structural Impediments to Market Effi ciency 143 Pertinence to Large-Cap Universe 150 Conclusions 154 Appendix: Underexplained Market Phenomena 155 Notes 158 PART III: RESEARCH AND PORTFOLIO MANAGEMENT CHAPTER 8 Identifying Large-Cap Stock Opportunities and Optimizing Research Processes 163 Identifying Large-Cap Stock Opportunities 164 Filters and Relative Assessments of Value 165 Subjective Identifi cation of Overoptimism and Overpessimism 173 Overconfi dence, Information Overload, and the Structure of Investment Firms 177 Conclusions 180 Notes 181 CHAPTER 9 Approaching Growth in Large-Cap Stock Research 183 Are We Good at Predicting Growth? 185 Equity Valuation Basics 187 Limitations to Estimating Long-Term Growth Rates 190 Abnormal Growth Magnitude and Abnormal Growth Duration 190 Traditional Methods for Determining Growth 196 Perversions of Growth Estimates in Large-Cap Stocks 199 Recognizing that Markets Are Effi cient over the Long Term: A Refresher on Microeconomic Theory 214 Some Further Considerations When Predicting Growth Rates 227 Solutions 228 Conclusions 231 Notes 233 CHAPTER 10 Hewlett-Packard Company Case Study 235 A Look at HPQ s Historical Performance and Operations 236 Behavioral Biases and Evidence of Analyst Overreaction 241 Evaluating the Market s Assessment of HPQ s Growth Prospects 243 Pulling It All Together 251 Appendix: Calculating Underlying Assumptions Relevant to the Valuation of HPQ 253 Notes 258 CHAPTER 11 The Challenges of Managing Large-Cap Common Stock Portfolios 259 Understand Your Universe and Benchmark 260 Off-Benchmark Securities 264 Position Sizes 269 Turnover 271 Commodity-Oriented Holdings in the Large-Cap Portfolio 272 Macroeconomics and Portfolio Management 276 Conclusions 279 Notes 280 What s on the Companion Website 281 About the Author 282 Index 283