30. I.M.D. Little and A. C. Rayner, Higgledy Piggledy Growth Again (Oxford, Eng.: Basil Blackwell, 1966).

31. See, for example, Joseph Murray, Jr., "Relative Growth in Eamings per Share-Past and Future," Financial Analysts Joumal 22 (November-December, 1966), pp. 73-76.

32. Richard A. Brealey, An Introduction to Risk and Retum fmm Common Stocks (Cambridge, Mass.: MIT Press, 1968).

33. Frangois Degeorge, Jayendu Patel and Richard Zeckhauser, "Eamings Manipulation to Exceeds Thresholds," Working Paper, 1997.

34. John Dorfman, "Analysts Devote More Time to Selling As Firms Keep Scorecard on Performance," Wall Street Joumal, October 29, 1991, p. 1.

35. Ibid. See also Amitabh Dugar and Siva Nathan, "Analysts Research Reports: Caveat Emptor," Joumal of Investing 5, (Winter, 1996), pp. 13-22.

36. Michael Siconolfi, "Incredible Buys: Many Companies Press Analysts to Steer Clear of Negative Ratings," Wall Street Joumal, July 19,1995, p. Al.

37. Ibid, p. 3; and Debbie Gallant, "The Hazards of Negative Research Reports," Institutional Investor, July 1990.

38. Ibid

39. E. S. Browning, "Please Dont Talk to the Bearish Analyst," Wall Street Joumal, May 2, 1995, p. Cl.

40. Dugar and Nathan, op. cit.

41. Siconolfi, "Incredible Buys: Many Companies Press Analysts to Steer Clear of Negative Ratings," p. Al.

42. Debbie Gallant, "The Technology Trap," Institutional Investor, May 1994, p. 122.

43. Ibid

44. Amos Tversky, "The Psychology of Decision Making," in A. Wood (ed.). Behavioral Finance and Decision Theory in Investment Management, ICFA Continuing Education series, 1995, pp. 2-6.

45. Ibid.

46. Ibid., p. 6.

47. Ibid

48. Baruch Fischhoff, "Debiasing," in Judgment Under Uncertainty: Heuristics and Biases, D. Kahneman, P. Slovic, and A. Tversky (eds.) (New York: Cambridge University Press, 1982).

49. D. Kahneman and A. Tversky, "On the Psychology of Prediction, Psychological Review 80 (1973), pp. 237-251.

50. D. Kahneman and D. Lovallo, "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science 39 (January, 1993), pp. 1-16.

51. Jeff Cole, "10-9-8 . . . Privatized Space Program Is Near," Wall Street Joumal, 1, 1996, p. BI.

52. A. Cooper, C. Woo, and W. Dunkleberg, "Entrepreneurs Perceived Chances for Success," Joumal of Business Venturing 3 (1988), pp. 97-108.

53. E. Merrow, K. Phillips, and C. Myers, Understanding Cost Growth and Performance Shortfalls in Pioneer Process Plants (Santa Barbara, Calif.: Rand Corp., 1981).

54. J. Arnold, "Assessing Capital Risk: You Cant Be Too Conservative," Harvard Business Review 64 (1986), pp. 113-121.

55. S. Taylor & J. Brown, "Illusion and Weil-Being: A Social Psychological Perspecdve on Mental Healdi," Psychological Bulletin 103 (1988), 193-210.

CHAPTER 6 Nasty Surprises

1. For the definitions and a discussion of these measurements see chapter 3.

2. For greater detail, see David Dreman and Michael Berry, "Overreaction, Underreaction, and the Low-P/E Effect," Financial Analysts Joumal 51 (July-August 1995), 21-30; David Dreman, "Nasty Surprises," Forbes, July 19, 1993, p. 246.

3. We formed the portfolios at the end of the first quarter, and measured eamings surprises thereafter.

4. Compustat, provided by Standard & Poors, is one of the largest stock data bases available providing price, eamings and other information on nearly 19,000 stocks. The studies reported here use the largest 1,500 companies in the Compustat database, traded on die NYSE, AMEX, and NASDAQ exchanges, as measured by the total market value of all shares outstanding at the beginning of each calendar year. (This sample is referred to here as the "Compustat 1500.") We use the Compustat tapes for all price and accounting information. Annual items, such as cash flows, are available in a 20-year moving window. We also used the "back data annual" tapes, which provide an additional 20 years of coverage extending back well before the earliest date in these studies. The Monthly file, which contains all the necessary price, dividend and eamings data, begins in 1962. We have also included all companies that were subsequently deleted from the Compustat files due to mergers, acquisitions, bankruptcies, liquidations, etc.

5. To control for negative eamings, we delete companies with no eamings or negative eamings. We also delete P/E multiples above 45, to control for stocks with nominal eamings, as a result of poor quarters. In doing so we also unfortunately lose some of the most highly favored issues.

6. Jennifer Francis and Donna Philbrick, "Analysts Decisions as Products of a Multi-Task Environment," Journal of Accounting Research 31 (Autumn, 1993), pp. 216-30.

7. The t-statistics show that the probability is less than 1 in 1,000, often much less, that these results are just chance.

8. Jeffrey Abarbanell and Victor Bemard, "Tests of Analysts Overreac-tion/Underreaction to Eamings Information as an Explanation for Anomalous Stock Price Behavior," Journal of Finance Al (July, 1992), pp. 1181-1208; andV. Bemard andJ. K. Thomas, "Evidence that Stock Prices

Do Not Fully Reflect the Implications of Current Earnings for Future Eamings," Journal of Accounting and Economics 13 (1990), pp. 305-340. 9. Eric Lufkin and I came up with findings similar to those of Abarbanell and Bemard. We also discovered that after the surprise quarter, stocks in the high, low, and middle P/E groupings (with positive surprises in that quarter) outperformed those stocks in the same groups without positive surprises, for the next three quarters. (The same was also true with price-to-book value and price-to-cash flow measures.) This seems to be caused by additional positive surprises, if the inidal surprise was posiuve-or negative surprises if the initial surprise was negative-in the three succeeding quarters. Again indicating that analysts forecasts do not adjust to changing conditions quickly.

CHAPTER 7 Contrarian Investment Strategies

1. Francis Nicholson, "Price-Earnings Ratios in Relation to Investment t-sulxs," Financial Analysts Joumal, January/February 1968, pp. 105-109.

2. All fiscal years in the study were between September 30 and January 31. All companies studied had positive eamings. The number of such companies increased from 110 in the former year to 334 in the latter. (Paul F. Miller, Jr., Drexel Harriman, and Ripley, Inc., Report, October, 1966.)

3. Francis Nicholson, in an earlier test that eliminated companies with nominal eamings, measured the performance of high and low P/E stocks in the chemicals indusuy between 1937 and 1954. The results strongly favored tile low P/E stocks. James Mc Williams used a sample of 900 stocks from the S&P Compustat tapes in the 1953 to 1964 period and found strong corroboration of the better performance of low P/E stocks. McWilliams further discovered that while stocks having the highest individual appreciation in any given year appeared to be randomly distributed, those with the greatest dechnes were in the high P/E group. William Breen used the 1,400 companies on the Compustat tapes for the 1953 to 1966 period. He eliminated all stocks with less than 10% eamings growth and then set up portfolios of 10 stocks with the lowest P/Es relative to the market, comparing them witii a series of randomly selected portfolios of 10 stocks in each year. See Francis Nicholson, "Price/Earnings Ratios," Financial Analysts Joumal 16 (July-August, 1960), pp. 43-45; James D. McWilliams, "Prices and Price-Earnings Ratios," Financial Analysts Joumal 22 (May-June 1966), pp. 137-142; and William Breen, "Low Price/Earnings Ratios and Industry Relatives," Financial Analysts Joumal 24 (July-August, 1968), pp. 125-127.

4. For details, see footnote, New Contrarian Investment Strategy, p. 149.

5. All companies with five-year records and with fiscal years ending in March, June, September, or December were included. In the high P/E group, a maximum multiple of 75 was used to filter out companies with only nominal eamings, which were put into an eleventh group and included in the calculation of the overall sample retum. Results of this group