The Conceptual Foundations of Investing A Short Book of Need-to-Know Essentials

The need-to-know essentials of investing

This book explains the conceptual foundations of investing to improve investor performance. There are a host of investment mistakes that can be avoided by such an understanding. One example involves the trade-off between risk and return. The trade-off seems to imply that if you bear more risk you will have higher long-run average returns. That conclusion is false. It is possible to bear a great deal of risk and get no benefit in terms of higher average return.

Understanding the conceptual foundations of finance makes it clear why this is so and, thereby, helps an investor avoid bearing uncompensated risks. Another choice every investor has to make is between active versus passive investing. Making that choice wisely requires understanding the conceptual foundations of investing.

•    Instructs investors willing to take the time to learn all of the concepts in layman’s terms

•    Teaches concepts without overwhelming readers with math

•    Helps you strengthen your portfolio

•    Shows you the fundamental concepts of active investing

The Conceptual Foundations of Investing is ultimately for investors looking to understand the science behind successful investing.

BRADFORD CORNELL is a Visiting Professor of Financial Economics at Caltech and a Senior Consultant and Advisory Committee member at Compass Lexecon. He is also the founder and President of SMBP, a private hedge fund.

SHAUN CORNELL is a Vice President and portfolio manager at SMBP. He focuses on the application of fundamental valuation to develop derivative strategies.

ANDREW CORNELL is Vice President and investment analyst at SMBP. He focuses on the application of technology to investment valuation.

Preface vii

1 Returns 1

2 The Economic Structure of Investment Markets 23

3 Bonds and Inflation 53

4 RiskandReturn 97

5 Fundamental Analysis and Valuation 121

6 Transaction Costs, Fees, and Taxes 159

7 Can History Be Trusted? 175

8 Can Behavioral Anomalies Be Exploited? 193

9 Alternative Investments 209

10 Investment Suggestions and Postscript 227

Index 237

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