Chapter 3

1. Identification of inefficiencies

2. Specialization in expoitation of that particular inefficiency

3. definition of portfolio management methodolgy

1. top-down approach -> explicit asset allocation decision

2. bottum-up approach -> pure security selection (asset allocation is result of pure security selection)

Belief in trends in macroeconmic patterns

-> outperformance by over-/ underweighting asset classes

-> more capital intensive than stock picking -> places only few but large bets on market

1. asymmetric success rate required -> due to transaction costs market timer need significantly more than 50% success rate

2. Return asymmetry in stock market -> large proportion in long-term stock return is concentrated in only a few days

3. High transactions costs

1. superior information processing (all participants have same information) -> better models, faster data processing & deeper understanding

2. Behaviroal edge -> overreaction of bad news & underreacting of good news (in the market)

top down approach

1. economic & market analysis

2. Investment committee

3. model portfolio (stock/ bonds -> over/underweighted)

4. Client Portfolio

Stock Picking

-> specialized in identifying and analyzing growth companies

Belief: belief in pricing anomalies with respect to growth stocks & capabilities to forecast the end on above-averae earnings growth

1. identifiying growth opportunities ahead of the market

2. Mean-reversion sensitivity

3. Independence from analyst consensus

4. disciplined valuation

1. Conflict of interest for analysts of Investment Banks (want to sell M&A, capital increases, debt emission etc.)

2. Extrpolation of the past

3. Asymmetric career risk

4. Confirmation bias -> conection to company if you work for long enough with the firm

stock picker

-> identifying and analyzing out-of-favor stocks with low valuation

Belief:

1. Pricing anomalies which are neglected so the stock is undervalued

2. identification of difference between low valuation that are justified or not

3. market will correct misvaluations in the long-term

1. Value trap recognition-> low valuation that are justified or not

2. long-time horizon (revaluation takes time)

3. deep FSA (hidden reserves, off-balance sheet risks etc.)

4. Intrinsic value estimation -> using own valuation models

Invests according to price-history of stocks

(f.ex. with chart-reading or more sophisticated quanitative techniques)

classification / charcterization of investment mehtodologies of active managers

3 categories:

1. investment philosophy (tactiacal asset allocation, growh, blend, value, technical, other)

2. fund size

3. method of analysis (fundamental, quant, technical)

1. Fundamental research -> anaylsis of economic facts of company with traditional methods (industry, products, stategy, competition, balance sheet, P&L etc.)

2. Technical research -> investment decisions from price histories of stocks (traditional chart reading and similar methods)

3. Quantitative research -> using sophisticated quantitative techniques (valuation, etc.)

Unterscheidung alternative 1 & 2

1. buy-side research

2. portfolio construction

3. trading

4. client communication