Tuesday, December 11, 2007

Reilly-Brown- Investment Analysis and Portfolio Management-1

I use this book for the course I teach.

This book has good discussion of forecasting the variables required for analysis. Still, I feel a lot more detail needs to be added to the topic to make it useful to the reader. Also the treatment has to refer to books with more detail.

My complaint about the books of security analysis is that they are not written to provide a methodology which can be used by an aspiring investor or aspiring analyst subsequent to the study of the book.

As I identified some of these gaps, I did put in some efforts from my side to supplement the texts in my classes.

I teach Graham-Rao Method and Piotroski Methods as two methods which are totally based on past data. That gives an idea of analysis without any ambiguity. Analysis of an equity share that results in the decision to buy or not to buy.

This understanding then will be extended to DCF methods especially dividend discount model. This requires forecasting future performance of the company and here the descriptions in various books of security analysis is very limited. The methods are not clearly described and the empirical proof that the methods works with an accuracy, sufficient for investment decisions is not given. If well known and accomplished professors and scientists are not able to give an adequate treatment, there must be strong reasons. The reason could the random walk nature of corporate profits. But still it would be better, if the books contain the detailed descriptions of methods being used in practice (they must have been proposed by somebody at some point of time) along with the position of the empirical tests, that are not able to support them. But still we have to invest using some method, because we have to invest to produce things for tomorrow for ourselves. This is the risk in risky securities.

Target prices are now being given by many analysts. But as yet target price is not discussed in security analysis textbooks. I try to discuss target price methods in the class.

Technical analysis methods are more clear because they use past data and make a future prediction of trend. Once again, the empirical support may be lacking. But still the methods are more clear and there are many persons around who claim to be using them and making money in short term trading in the market. Security analysis textbooks still contain only one chapter on technical analysis. May be this allocation needs to change.

In this blog, in the posts related to the book, I plan to provide important points to remember and refresh frequently in various chapters of the book. I shall also post my comments on various issues in the chapters. I found from my experience that I do some improvements over the period, on various shortcomings that I identify at a point in time. Of course, we have to be ready to change our opinion also. Every can make a mistake in reasoning. Whenever it is pointed out, accepting the error should be a very normal response. Learning is change in behaviour. So only by accepting that the current method is inefficient or faulty, that we decide to change our behaviour and learn new behaviour.

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