Economy-Wide Surprises Investors recognize that a multitude of events influence stock returns. Some of these events—management decisions, technological advances, takeover attempts, and lawsuits, for example—may be of significance to only a single firm and its close competitors. Others—such as an unforeseen recession or a sudden change in interest rates—tend to affect almost all businesses and the value of their stocks, though each stock will be affected to a different degree. Portfolio managers (excepting those few who depend exclusively on indexing) have always sought to identify the attributes that point to a potential for superior future performance. They examine firms' competitive positions, the quality of their management, and the possible effects of changes in politics and technology. They also consider certain more quantifiable measures, such as market size, price/earnings ratio, book-to-market ratio, and other firm-specific attributes. At least over certain time frames, certain broad strategies have been rewarded, such as investing in small stocks or in those with a low P/E. Just as knowledge of basic firm-specific information is useful to an investor, so, too, is knowledge of how a firm's stock responds to broad economic changes. Neither type of information is a substitute for the other, and the best investment strategy takes both into account. With the BIRR Risks and Returns Analyzer®, you can use your own methods of selecting and ranking stocks and simultaneously control your exposures to various economy-wide surprises. |