The Inefficient Stock Market What Pays Off and Why by Robert A' Haugen

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The Inefficient Stock MarketWhat Pays Off and
WhybyRobert A. Haugen

• CHAPTER 1
• INTRODUCTION

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Haugen in 1999

• This book is third of a triology of books
  published by Robert A. Haugen in 1999. The three
  titles are
• THE NEW FINANCE The case against efficient
  markets.
• BEAST ON WALL STREET How stock volatility
  devours our wealth.
• THE INEFFICIENT STOCK MARKET What pays off and
  why
• The book chosen for this course is the third of
  the threeit does address the evolution of
  Modern Finance and presents a concise argument
  refuting efficient marketsand then goes on to
  propose a new approach to measuring and
  predicting stock market returns.

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Haugen in 1999 ...

• In your course outline I have given you the title
  and ISBN for the second of the triology.in years
  to come I recommend that you read that bookBEAST
  ON WALL STREET
• in this second book, Haugen raises serious
  concerns about the destructive and negative
  impacts caused by price driven volatility on
  stock marketsmajor correctionsAsian flueetc.
  are very destructive to investor confidencethis
  volatility is unnecessaryit finds it origins in
  investor psychology not in fundamental
  determines of appropriate stock prices.

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Haugen in 1999 ...

• I certainly hope that you enjoy this book.
• It is written in a style that is informal and
  quite confrontational. (Some may see it as
  defensive.) Hopefully this will be a nice change
  to the dry approach taken by most texts.
• It is very relevant to the field of investments
  and portfolio management. It hopefully will give
  you a new perspective on what it is that you have
  been learning.
• I hope that you will read and reflect on the
  content of this book. Question it. Question
  what you are learning from the course, your other
  courses, from your other texts and your other
  readings.
• You now have some experience investing in the
  marketsreflect on all of this in the context of
  your experience. Live and learn. Enjoy!

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Chapter 1 - Introduction

• Obviously, this is where the author tries to
  capture your attentionhe may be doing this
  through slight hyperboleover exaggeration. What
  do you think?
• And what about the one million MBAs who went to
  business school to learn about investing and
  running a business?
• They should ask for their money back.

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Chapter 1 - Introduction

• You are introduced to the logical conclusions
  that have been drawn, based on the unfettered
  belief in efficient markets.
• Invest in index fundsactive portfolio management
  cant add net value to the portfolio, and
  superior stock picking is not possible over the
  long-term
• investors see through accounting conventions to
  determine economic earningsso accounting
  methods/conventions dont matter
• it doesnt matter how you finance the firmor
  when.the market always prices your firm
  correctly
• Haugen suggests that everyone dances to the
  efficient market drummer is this true?

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Chapter 1 - Introduction

• Evolution of Academic Finance
• I like this sectionit is a good summary
  (although certainly with the personal taste/slant
  that is Haugens) of how the field has evolved
  over the years.
• Graham and Dodd deserve mention
• Harry Markowitz, of course
• Modigliani and Miller yes
• Famaand the genesis of the fair game model and
  the EMH.
• and then were the anomalies!
• None of these sources of information should
  surprise you. I have spoken about all of this in
  your prerequisite courseswhat is nice here is to
  see it all summarized as an overview.

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Chapter 1 - Introduction

• Unfortunately, many of the modern professors
  havent learned the craft themselves.
• quite an indictment!
• With such statementswhy do you think I would
  require that you read such stuff?
• Why You Need to Read this Book

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Chapter 1 - Introduction

• Why You Need to Read this Book
• well, I hope by now, you are learning to never to
  believe everything you read in the newspapers.
• what I mean by that is, always be wary when
  someone makes a claim to set you straightthat
  they have the goodsthat they have all the
  answersand you need look no further..
• Why do I provide you with this word of caution?
  Well, because, in my experience, if someone
  really had all the answers, they would keep the
  answers to themselves and make a million, or a
  billion if you have a partial truth then that
  is truly marketable. In that case you write a
  bookto get that million!
• Despite the foregoing, I still think it is
  worthwhile to hear Haugen out. Please enjoy!

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Chapter 1 - Introduction

• Important Things to Learn from this Chapter
• Haugen hopes to turn the discipline of finance
  back into a craft(a skill that students can
  acquire), rather than teaching it as a belief
  system (religion).
• The foundation of OLD FINANCE was accounting and
  law
• The foundation for MODERN FINANCE was financial
  economics (use of model buildinghypothesis
  creation and testing)
• The foundation for NEW FINANCE is statistics,
  econometrics and psychology.

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Chapter 1 - Introduction

• Important Terms
• Survival bias (including in a study, only those
  firms that have survived the study
  periodignoring those firms that went bankrupt)
• Look-ahead bias (using earnings numbers that may
  have not been publicly available at the time they
  bought the stock)
• Data mining (spinning the computer through many
  thousands of iterations until the research
  obtains an interesting result)
• Anomaly (evidence of behaviour that contradicts
  accepted theoretical prediction)