Investment-management

This is the only book that covers all of the aspects of performance management in banking : 1. the analysis of performance measurement is very good even though, the coverage of financial data is overweight with respect to the rest of the book 2. the project approach is excellent and the various "pitfalls" described are so true that the people that wrote it necessarily had a good project experience, only problem is that the system architectures described did not evolve with the new edition (the word "data warehouse" is evoked once or twice) 3. As usual with this type of books, the "using the information" chapters are a bit a dry, even thought some interesting ideas are described regarding "customer information" In summary, a must read for any person trying to implement a performance indicators or Balanced Scorecard systm in its bank ("financial institutions" in the title is actually retail or commercial banking) PS : I am not an E & Y employee ... so this is not an advertising review

Jacobs and Levy have assembled a body of work here centering on their stock picking techniques as well as their long-short portfolio construction techniques. Most of the chapters have their origins in various finance journals, though the articles themselves are not very heavy on mathematics. Overall, the book was interesting, though somewhat repititious. In retrospect I'd suggest that those familiar with long-short portfolios and the various market anomolies should just read chapter 2 about "Disentangling Equity Return Regularities" since that is where Jacobs & Levy's original work is outlined.

Chapter 2 focuses on the use of regression analysis to "disentangle" various stock market anomalies. The authors claim that simple rules such as "Buy low-P/E stocks" are appealing, but oversimplify the true source of stock returns. For example, low P/E stocks tend to have higher rates of return, as do small-capitalization stocks. But if a small capitalization stocks also tend to have low P/E's, then how much of their return is due to the low-P/E effect by itself, and how much is due to the small-capitalization effect by itself? Jacobs & Levy have done the analyses, and show which effects are genuine, and which effects are merely proxies for other effects. The effects that turn out to be the strongest when "disentangled" include low P/E, Earnings trend, Earnings Surprise, Residual Reversal, and Relative Strength.

The introductory chapters in the book make some interesting points. They argue that the stock market is not random, but then again it is also not simple. Although simple rules are appealing to humans, they oversimplify the complexity of the market. To gain an edge, one must use sophisticated, objective, multi-factor statistical computer models that capture the complex interactions in the market. Of course the authors are saying this to advocate the techniques they use, but nevertheless, they have some good points.

Finally, the second half of the book focuses on the construction of long-short portfolios, though there is not much fresh material here. They point out some of the logistical details of running a long-short portfolio, and give some examples. Also, they introduce the concept of "alpha-transport." That is, one can construct a long-short market neutral portfolio, then by buying buy an index (using SP500 futures, for example) one "transports" the gains from the long-short portfolio onto the gains/losses of the index position. Thus, if the stock picking for the long-short portfolio is done correctly, the total portfolio will beat the index picked. To me, this seemed like an obvious technique; I'm surprised they decided to focus on it and give it a fancy name ("alpha transport")

Overall, I found the book interesting, though somewhat repetitious. I was familiar with much of what was covered, however I did find that Chapter 2 was worth reading, since I wasn't familiar with Jacobs & Levy's work in detail.

As a critic once said of Henry James, Jacobs and Levy have chewed more than they bit off. There is (as another reviewer points out) no follow-up on how their factors have behaved in the decade or more since they did some of the pioneering work on factor models. Overall, the book has about 10% as much information useful to a practitioner as appears in Grinold & Kahn's authoritative text.

This book is great for people who want an overview of the opportunities available in numerical evaluation of stocks. However to say that this is a book on quantitative techniques is probably not the mest description. There is extensive use of regression analysis but more hard-core 'quant' people will probabliy be disappointed. It is clear that the book is written by investment professionals focusing a lot on traditional evaluations parameters such as P/E, P/B etc. Interesting points include purification of return signals, and an extensive discussion of long-short techniques.