Observation of investment practices reveal they are more haphazard than investors and researchers would have us believe, and a new paradigm of equity investment is required. New Principles of Equity Investment
completes a trilogy that applies the scientific method to equity investing, and proposes a paradigm of equity investment that is grounded in field evidence, explains behavioural puzzles, and is consistent with empirically validated theory.
To make the task of equity investment manageable, this book strips it back to ranking candidate firms, and sets aside the complex yet separate job of allocating an investment portfolio between asset classes. In the paradigm proposed here, equity prices have four components related to intrinsic value, size and setting of the transaction, optionality, and extrinsic value, which is crowdsourced through feedback between investors’ decisions.
By accepting the limited foresight of investors, and limiting their horizon to a reasonably foreseeable next year, this book provides a coherent, workable theory of equity prices that can be actioned by equity investors, and explains logical investor behaviours that have previously been thought of as biases.