The Risk Premium Factor, + Website: A New Model for Understanding the Volatile Forces that Drive Stock Prices(Wiley Finance)

A radical, definitive explanation of the link between loss aversion theory, the equity risk premium and stock price, and how to profit from it The Risk Premium Factor presents and proves a radical new theory that explains the stock market, offering a quantitative explanation for all the booms, busts, bubbles, and multiple expansions and contractions of the market we have experienced over the past half-century. Written by Stephen D. Hassett, a corporate development executive, author and specialist in value management, mergers and acquisitions, new venture strategy, development, and execution for high technology, SaaS, web, and mobile businesses, the book convincingly demonstrates that the equity risk premium is proportional to long-term Treasury yields, establishing a connection to loss aversion theory. Explains stock prices from 1960 through the present including the 2008/09 "market meltdown" Shows how the S&P 500 has consistently reverted to values predicted by the model Solves the equity premium puzzle by showing that it is consistent with findings on loss aversion Demonstrates that three factors drive valuation and stock price: earnings, long term growth, and interest rates Understanding the stock market is simple. By grasping the simplicity, business leaders, corporate decision makers, private equity, venture capital, professional, and individual investors will fully understand the system under which they operate, and find themselves empowered to make better decisions managing their businesses and investment portfolios.

Table of Contents:
List of Figures xi List of Tables xiii Preface xv Evolution of a Theory xvi Overview xvii How This Book Is Structured xxi As You Begin xxii Acknowledgments xxiii About the Author xxv Chapter 1 Understanding the Simplicity of Valuation 1 Rates, Compounding and Time Value 3 Why Time Value Matters for the Stock Market 3 Valuing a Perpetuity 4 Constant Growth Equation: The Key to Understanding the Stock Market 5 Not the First to Try This 6 Why Growth Rate and Cost of Capital Matter 9 P/E Ratio Expansion and Contraction 10 CAPM, Risk Premium and Valuation 11 Equity Risk Premium 11 Impact of Risk Premium on Valuation 13 Chapter Recap 14 PART ONE Exploring the Risk Premium Factor Valuation Model Chapter 2 The Risk Premium Factor Valuation Model 18 The RPF Model is Simple, but Does it Work? 21 Estimating the Risk Premium Factor (RPF) 24 Potential Causes for Shifts in the RPF 27 Potential Weaknesses in RPF Theory and Methodology 28 Adjusted Risk Free Rate 29 Comparison to the Fed Model 29 Chapter Recap 31 Chapter 3 Solving the Equity Premium Puzzle: The Link to Loss Aversion 33 Loss Aversion 34 Loss Aversion and Corporate Decision Making 34 Attempts to Solve the Equity Premium Puzzle 35 Impact of Inflation on Value 39 Back to Loss Aversion 39 Our Reptilian Brain 40 Chapter Recap 42 Chapter 4 The RPF Model and Major Market Events from 1981 to 2009 43 Efficient Market Hypothesis 44 How the RPF Valuation Model Explains Black Monday 45 2000 "Dot Com" Bubble: RPF Model Suggests Significant Bubble for the S&P 500 47 How the RPF Valuation Model Explains 2008-2009 Meltdown and Recovery 49 Markets Mostly Efficient and Rational, But Prone to Mistakes 52 Chapter Recap 53 PART TWO Applying the Risk Premium Factor Valuation Model Chapter 5 Application to Market Valuation 57 Beware of Interest Rates 58 Example: Application to the Market in Late September 2009 59 Why the Source of Growth Matters 61 Chapter Recap 63 Chapter 6 Risk Adjusted Real Implied Growth Rate (RIGR) 65 Analyzing Individual Companies with RIGR 66 RIGR Analysis of Apple and Google Pre-Earnings Announcement 71 Chapter Recap 75 Chapter 7 Valuing an Acquisition or Project 77 Brief Introduction to Valuing an Acquisition or Project 78 Translating Your World View into Numbers 79 Setting the Cost of Capital 84 Example: Utility Acquiring a Risky Asset 86 Selecting the Investment Forecast Time Horizon 87 The All Important Terminal Value 89 Chapter Recap 96 Chapter 8 Case Study 1: Valuation of a High-Growth Business 99 Calculating Enterprise Value and Stock Price 107 Scenario Analysis 107 Chapter Recap 108 Chapter 9 Case Study 2: Valuation of a Cyclical Business 109 Chapter Recap 118 Chapter 10 Using the RPF Model to Translate Punditry 119 Read Carefully Then Analyze 119 What Have I Got to Lose? 120 Beware of Oversimplification 122 Confusing Headlines and Misguided Blame 123 Almost Nailed It 124 Graham and Dodd 125 The Wrong Discussion 127 Dumb Money and Bubbles 127 The Right Discussion 128 Chapter Recap 129 Chapter 11 Using the RPF Model for Investment and Business Strategy 131 Estimating Fair Value: How to Identify and Exploit Bubbles 132 Beware of RPF Shifts 137 Investing in Individual Companies 137 Reported Earnings Can Be Misleading 138 How to Apply the RPF Model to Day-to-Day Business Decisions 140 Capital Structure and Risk Impact Cost of Capital 141 Opportunistic Adjustments to Corporate Capital Structure 141 Creating a Sense of Urgency 142 Avoiding Value Destruction 143 Value Creation 145 Key Merger-and-Acquisition Valuation Concepts 147 Inflation Is the Enemy of Value 147 Final Thoughts 147 Appendix A Mobile Apps: The Wave of the Past 149 Appendix B Technology on the Horizon: What if Moore's Law Continues for Another 40 Years? 152 Appendix C A Simple and Powerful Model Suggests the S&P 500 Is Greatly Underpriced 156 Appendix D S&P Index Still Undervalued 160 Appendix E 30 Percent Value Gap in S&P 500 Closed by Rise in Treasury Yields, Price 163 Appendix F Making a Case for Salesforce.com Valuation 165 Glossary 169 Notes 171 About the Companion Website 177 Index 179

About the Author :
STEPHEN D. HASSETT is a corporate development executive with Sage North America, a subsidiary of The Sage Group plc, a leading global supplier of business management software and services. He has published in the Journal of Applied Corporate Finance and is a regular contributing author for the Seeking Alpha investment website. Previously, he was an executive at the Weather Channel, software entrepreneur and consultant with Stern Stewart & Co. He holds an MBA from the Darden School of Business at the University of Virginia.