McGraw-Hill

P A R T T W O
Managing Portfolios
The chapters in Part 1 focused on disentangling the complex interrelationships
between stock prices and the forces that affect them.
The chapters in Part 2 look at how the insights gained from this process
of disentangling can be translated into investment performance.
As noted, OUT philosophy at Jacobs Levy Equity Management
is that stock returns are driven by a combination of factors, ranging
from stock-specific fundamentals, such as earnings announcement
and return on equity, to behavioral elements, such as investor overreaction
and herding, to economic conditions, such as interest rates
and inflation. Our security selection process considers a wide ran
of variables designed to capture economic and psychological effects,
as well as company-specific information and events.
The sheer breadth of variables considered, as well as the depth
of variable definition, help to capture the complexity of market pricing.
But we also note that the effects of these variables can differ
across different types of stock. It is thus important that the stock selection
process include breadth in terms of the coverage of stocks, as
well as the variables, considered. For this reason, our approach to
stock selection is in some ways 180 degrees removed from the approach
taken by traditional active equity managers.
Traditional active managers have tended to mine distinct sub
sets of the overall equity market. Value managers, for example,
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