Preface xiii

PART ONE – What the Future Holds

CHAPTER 1 – Introduction: Range-Bound Markets Happen

Fasten Your Seat Belts and Lower Your Expectations 3
Let’s Identify the Animal 4
Secular versus Cyclical 4
Distinction Between Secular Bull, Bear, and Range-Bound
Markets 6
Is 100 Years Long Enough? 7
Stocks Carried the Torch in the Long-Run Marathon 8
International Stocks were Bright Lights, Too 10
Will Gold Shine Again? 11
Gold’s Recently Emerged Competition 13
The Deception of the Long Run (Marathon) 14
Range-Bound Markets Erode Bull Market Returns 15
The Long Run for us May be Shorter Than We Think 17

CHAPTER 2 – Emotions of Secular Bull, Bear, and Range-Bound Markets

Bull Market Euphoria 23
Bear Market Doldrums 25
What Does a Secular Range-Bound Market Feel Like? 29
Volatility of Bull and Range-Bound Markets 31

CHAPTER 3 – Stock Market Math

Sources of Capital Appreciation: Earnings Growth 38
Sources of Capital Appreciation: Price to Earnings 48
Why Range-Bound Markets Follow Bull Markets 61
It Is Not Over Until It Is Over 62

CHAPTER 4 – Bonds: A Viable Alternative?

Why Not Bonds? 67
Asset Allocation Role is Diminished
in Range-Bound Markets 69

PART TWO – Active Value Investing


Introduction to Analytics: The Quality, Valuation, and Growth Framework

CHAPTER 5 – The ‘‘Q’’—Quality

Competitive Advantage 79
Management 82
Predictable Earnings 89
Strong Balance Sheet 91
Significance of Free Cash Flows 95
High Return on Capital 102
Conclusion 102

CHAPTER 6 – The ‘‘G’’—Growth

Sources of Growth: Earnings Growth and Dividends 103
Past Has Passed 111
Future Engines of Growth 112
Dividends 114
Growth Matters—a Lot! 117

CHAPTER 7 – The ‘‘V’’—Valuation

Tevye the Milkman’s Approach to Valuation 119
Review of Relative Valuation Tools 128
Absolute Valuation Tools—Discounted Cash Flow Analysis 132
Relative versus Absolute Tools 134
Absolute Models Overview 136
The False Precision of Math 137
Absolute P/E Model 139
Discount Rate Model 148
Margin of Safety Model 151
The Marriage of Absolute P/E and Margin of Safety 155
Bring Out the Toolbox 155
The P/E Compression and How to Deal with it 157

CHAPTER 8 – Let’s Put It All Together

The Added Clarity 165
One Out of Three is Not Enough 165
Two Out of Three Is Better, But Is It Enough? 167
Conclusion 174


Introduction to Strategy: The Value of Process and Discipline

CHAPTER 9 – Buy Process—Fine-Tuning

The Value of the Process and Discipline 179
Think Long-Term, Act Short-Term 181
Meet Your New Best Friend—Volatility 182
Time Stocks, Not the Market 183
Cash Is King 185
Be Ready to Strike When the Time Comes 186

CHAPTER 10 – Buy Process—Contrarian Investing

Contrarian is the Name of the Game 187
You Don’t Have to Own It 189
Be a Myth Buster 190
Quantify Everything and Be a Contrarian Headline Investor 191
Time Arbitrage 192
Finding New Ideas 193
Do In-Depth Primary (Your Own) Research and
Document It 200

CHAPTER 11 – Buy Process—International Investing

The World Has Flattened: Hola, Bonjour, Guten Tag, Buon
Giorno to the Rest of the World 201
Same Difference 202
Location of Corporate Headquarters Abroad May Not
Constitute a Foreign Company 203
You Are Exposed to More Foreign Political Risk Than
You Realize 204
What About the United States? 205
Pick Your Comfort Zone and Go from There 206
Don’t Confuse A Fast-Growing Economy
and A Good Investment 207
Currency Risk 207
How Much Is Too Much? 208
Conclusion 209

CHAPTER 12 – Sell Process—Make Darwin Proud

Selling When Stock Price Has Gone Up 212
Selling When Fundamentals Have Deteriorated 215
Conclusion 221


Introduction to Risk and Diversification

CHAPTER 13 – A Different View of Risk

What Is Risk? 227
Properties of Randomness 228
The Crocodile Hunter, Randomness, and Investing 229
Understand the Linkage Between and Inside QVG
Dimensions 234
Identify Impact of Randomness on Value Creators 235
The Cost of Being Wrong 238
Conclusion 239

CHAPTER 14 – A Different View of Diversification

Don’t Bet the Farm! 242
Too Many Eggs or Too Many Baskets 243
Mental Accounting and Diversification 244
Mental Accounting and Randomness in a Stock Portfolio 246
Randomness Could Be Your Friend 248

CHAPTER 15 – Conclusion and Implication

I Could Be Wrong, But I Doubt It 251
Bull Markets 252
Bear and Range-Bound Markets 253
Bonds? 255
No, I Am Not Wrong 256

Appendix—Years to Bull Market 257


Notes 273

Index 277

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