buy and hold

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pages: 467 words: 154,960

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

Albert Einstein, Atul Gawande, backtesting, beat the dealer, Bernie Madoff, Black Swan, buy and hold, buy low sell high, capital asset pricing model, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, game design, hindsight bias, housing crisis, index fund, Isaac Newton, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, William of Occam, zero-sum game

The markets have always overflowed with Holy Grails—those systems, strategies, secret formulas, and interpretations of fundamentals that promise riches to whomever trades with them. Today, in 2009, it is no different. Buy and Hold After the stock market bubble burst in spring 2000 and after the crash of October and November 2008, the concept of buy and hold as a trading strategy should have been shown as the failure it is once and for all. Yet, I doubt that has happened. Investors still obey mantras such as, “Buy and hold for the long term.” “Stay the course.” “Buy the dips.” “Never surrender.” Buy-and-hold mantras are junk because they never answer the basic questions: Buy how much of what? Buy at what price? Hold for how long? Jerry Parker gives a strong rationale for choosing trend following over buy and hold: “Trend following is [similar] to a democracy. Sometimes it doesn’t look so good, but it’s better than anything else out there.

They allow themselves to fall for advertisements promising, “You can get rich by trading” or “Earn all the income you’ve ever dreamed of” or “Leave your day job forever and live off your day-trading profits.” Wall Street compounds the problem with analysts constantly screaming, “Buy” or with their nearly fanatical pitching of buy and hold as a legitimate trading 231 Another psychological aspect that drives me to use timing techniques on my portfolio is understanding myself well enough to know that I could never sit in a buy and hold strategy for two years during 1973 and 1974, watch my portfolio go down 48 percent and do nothing, hoping it would come back someday. Tom Basso 232 Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets strategy. It’s not legitimate. It’s a criminal, inane approach to trying to make money. In Buy and Hold: A Different Perspective, Richard Rudy explains how we always seek simple solutions to intricate problems. In response to the messy and frustrating reality, we often develop “rules of thumb” that we use in our decision making.

Making matters worse is that a pure buy-and-hold strategy during an extended drop in the market makes the recovery back to breakeven difficult (if not impossible). The “buy-and-hold” investor has been led to believe (perhaps by an industry with a powerful conflict of interest) that if he has tremendous patience and discipline and “stays with it,” he will make a good long-term return. These investors fully expect that they will make back most, if not all, of recent losses soon enough. They believe that the best place for long-term capital is the stock market and that if they give it 5 or 10 or 20 years they will surely do very well. Such investors need to understand that they can go 5, 10, and 20 years and make no return at all and even lose money.6 To compound problems even more, buy-and-hold panders to a kind of market revenge.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, beat the dealer, Bernie Madoff, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stocks for the long run, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

If past prices contain little or no useful information for the prediction of future prices, there is no point in following any technical trading rule for the timing of purchases or sales. A simple policy of buying and holding will be at least as good as any technical procedure. Discontinue your subscriptions to worthless technical services, and eschew brokers who read charts and are continually recommending trades. There is another major advantage to a buy-and-hold strategy. Buying and selling, to the extent that it is profitable at all, tends to generate capital gains, which are subject to tax. Buying and holding enables you to postpone or avoid gains taxes. By following any technical strategy, you are likely to realize short-term capital gains and pay larger taxes (as well as paying them sooner) than you would under a buy-and-hold strategy. Thus, simply buying and holding a diversified portfolio suited to your objectives will enable you to save on investment expense, brokerage charges, and taxes; and, at the same time, to achieve an overall performance record at least as good as that obtainable using technical methods.

The results of the administration to the two groups are compared, and the drug is deemed effective only if the group receiving the drug did better than the group getting the placebo. Obviously, if both groups got better in the same period of time, the drug should not be given the credit, even if the patients did recover. In the stock-market experiments, the placebo with which the technical strategies are compared is the buy-and-hold strategy. Technical schemes often do make profits for their users, but so does a buy-and-hold strategy. Indeed, as we shall see later, a simple buy-and-hold strategy using a portfolio consisting of all the stocks in a broad stock-market index has provided investors with an average annual rate of return of almost 10 percent over the past eighty years. Only if technical schemes produce better returns than the market can they be judged effective. To date, none has consistently passed the test.

The market’s performance after sell signals is no different from its performance after buy signals. Relative to simply buying and holding the representative list of stocks in the market averages, the Dow follower actually comes out a little behind, because the strategy entails a number of extra brokerage costs as the investor buys and sells when the strategy decrees. The Relative-Strength System In the relative-strength system, an investor buys and holds those stocks that are acting well, that is, outperforming the general market indexes. Conversely, the stocks that are acting poorly relative to the market should be avoided or, perhaps, even sold short. While there do seem to be some time periods when a relative-strength strategy would have outperformed a buy-and-hold strategy, there is no evidence that it can do so consistently. As indicated earlier, there is some evidence of momentum in the stock market.


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

affirmative action, asset allocation, backtesting, barriers to entry, Bernie Madoff, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fiat currency, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, High speed trading, housing crisis, index fund, joint-stock company, money market fund, moral hazard, Myron Scholes, passive investing, Ponzi scheme, price discovery process, random walk, risk tolerance, risk-adjusted returns, risk/return, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

I break up the book into three sections: Part One Old School . . . Of Thought, Part Two Wall Street: The Set Up, and Part Three Surviving the Rigged Game. Old school is just that—ideas that are past their prime. But is it that simple? The very idea of buying and holding something for a long period of time seems reckless and without any real thought. I look at two different companies, the very first was publicly traded, and one of the best performing of the last 40 years. You would think the incredible returns would prove a buy-and-hold approach. Hindsight identifies a needle in a haystack. But it doesn’t help you today going forward. Buy and hold is a phrase that has very little actual meaning and doesn’t describe any type of investment philosophy as much as a dogma or sales pitch. Even worse, as we enter the modern age of the asset-allocation pie chart, we realize risk has been understated and the very nature of illustration has been misrepresented.

Over the years there has always been a debate over whether investors should buy and hold stocks and never sell them versus the active pursuit of trading stocks to earn profits. I have no idea why anyone would take the risk that a corporation will last longer than you will or for that matter what buy and hold means. Why would anyone purchase a stock, and then never sell it? One common reason is that if the stock pays a dividend—the earnings of a corporation paid out to its shareholders—you can get cash flow just for holding the shares. Some people just want to accumulate wealth and hold onto stocks forever, but even the desire for endless fortune doesn’t mean an endless holding period. Would you still want to own shares of a typewriter company? Of course the basic assumption of buying and holding a stock is a better bet than the old adage of buy low sell high.

Nobody back in the 1950s could predict what would be around today, nor should we try to make guesses about how the world will be in 50 years. Let’s leave that to shows like NOVA or to Hollywood. It’s more fun and cool to watch years later when we see how far off we were. The question is not whether to buy and hold. By getting you to ask if you should buy and hold, Wall Street has tricked you into thinking about it as if it is a strategy. No reasonable person would bet that anything is a sure thing for 50 years, so we need to start off with the first insight on Wall Street: Buy and hold is dead. But the truth is, it never really existed. I think the first person to say this was a stockbroker. Wall Street manufactures publicly traded securities for people to consume. Some work, most don’t. Do you want someone to buy a product from your store only to have it returned?


pages: 482 words: 121,672

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) by Burton G. Malkiel

accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, butter production in bangladesh, buttonwood tree, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Detroit bankruptcy, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stocks for the long run, survivorship bias, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

The results of the administration to the two groups are compared, and the drug is deemed effective only if the group receiving the drug did better than the group getting the placebo. Obviously, if both groups got better in the same period of time, the drug should not be given the credit, even if the patients did recover. In the stock-market experiments, the placebo with which the technical strategies are compared is the buy-and-hold strategy. Technical schemes often do make profits for their users, but so does a buy-and-hold strategy. Indeed, as we shall see later, a simple buy-and-hold strategy using a portfolio consisting of all the stocks in a broad stock-market index has provided investors with an average annual rate of return of about 10 percent over the past eighty years. Only if technical schemes produce better returns than the market can they be judged effective. To date, none has consistently passed the test.

The market’s performance after sell signals is no different from its performance after buy signals. Relative to simply buying and holding the representative list of stocks in the market averages, the Dow follower actually comes out a little behind, because the strategy entails a number of extra brokerage costs as the investor buys and sells when the strategy decrees. The Relative-Strength System In the relative-strength system, an investor buys and holds those stocks that are acting well, that is, outperforming the general market indexes. Conversely, the stocks that are acting poorly relative to the market should be avoided or, perhaps, even sold short. While there do seem to be some time periods when a relative-strength strategy would have outperformed a buy-and-hold strategy, there is no evidence that it can do so consistently. As indicated earlier, there is some evidence of momentum in the stock market.

THREE GIANT STEPS DOWN WALL STREET The No-Brainer Step: Investing in Index Funds The Index-Fund Solution: A Summary A Broader Definition of Indexing A Specific Index-Fund Portfolio ETFs and Taxes The Do-It-Yourself Step: Potentially Useful Stock-Picking Rules Rule 1: Confine stock purchases to companies that appear able to sustain above-average earnings growth for at least five years Rule 2: Never pay more for a stock than can reasonably be justified by a firm foundation of value Rule 3: It helps to buy stocks with the kinds of stories of anticipated growth on which investors can build castles in the air Rule 4: Trade as little as possible The Substitute-Player Step: Hiring a Professional Wall Street Walker The Morningstar Mutual-Fund Information Service The Malkiel Step A Paradox Investment Advisers Some Last Reflections on Our Walk A Final Word A Random Walker’s Address Book and Reference Guide to Mutual Funds and ETFs Acknowledgments from Earlier Editions Index PREFACE IT HAS NOW been over forty years since the first edition of A Random Walk Down Wall Street. The message of the original edition was a very simple one: Investors would be far better off buying and holding an index fund than attempting to buy and sell individual securities or actively managed mutual funds. I boldly stated that buying and holding all the stocks in a broad stock-market average was likely to outperform professionally managed funds whose high expense charges and large trading costs detract substantially from investment returns. Now, over forty years later, I believe even more strongly in that original thesis, and there’s more than a six-figure gain to prove it.


Trend Commandments: Trading for Exceptional Returns by Michael W. Covel

Albert Einstein, Bernie Madoff, Black Swan, business cycle, buy and hold, commodity trading advisor, correlation coefficient, delayed gratification, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, Lao Tzu, Long Term Capital Management, market bubble, market microstructure, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Sharpe ratio, systematic trading, the scientific method, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

Long Only: Long only means you make one bet. You bet that the market will always go up. Buy and Hold: Buy and hold (hope) is the same as long only. Index Investing: You buy the S&P 500 Index and whatever it does is the return you get. Value Investing: Attempts to use fundamentals to uncover undervalued stocks. The belief is you are buying cheap or low (terms that can mean anything to anyone). When that doesn’t work out, you call the government and ask for a bailout. Quant: You use formulas and rules, not daily discretion or fundamentals to make trading decisions. That said, unless quant is defined with precision you can never know what it means exactly. Trend following is a form of quant trading. Repeatable Alpha: Alpha is return generated from trading skill. If you buy and hold the S&P 500 Index, and if it makes a positive return, that’s not alpha.

For instance, after the stock market bubble burst in spring 2000 and after the crash of October 2008, the concept of buy and hold as a strategy should have died a stake-to-the-heart death. Despite everything that should have been learned, most still follow this strategy. Stay the course. Buy the dips. Never surrender…. Buy and hold mantras are junk science because you never answer the basic questions: “Buy how much of what?” “Buy at what price?” “Hold for how long?” Consider the Nasdaq market crash of 1973–1974. The Nasdaq reached its high peak in December 1972. It then dropped by nearly 60 percent, hitting rock bottom in September 1974. The Nasdaq did not break free of the 1973–1974 bear market until April 1980. Buy and hold did nothing from December 1972 through March 1980. Your golden years happened during the 1970s—tough luck.

You think, “I lost my money in MSFT, and I’m going to make my money back in MSFT come hell or high water. I will just hold on!” Not wise. The examples do not stop. The Japanese Nikkei 225 stock index reached nearly 40,000 in 1989. Now, 22 years later, it is around 10,000. Do you think the Japanese still believe in buy and hold? 152 Tre n d C o m m a n d m e n t s Dow Jones Industrial Average (DJIA): 10,006 (March 1999) 14,164 (October 2007) 12,339 (February 2011) Nasdaq Composite: 5048 (March 2000) 2789 (February 2011) Nikkei 225 (Japan): 38,915 (Dec 1989) 10,600 (February 2011) Buy and hold as a strategy only works for those who live forever. It also works for those who gravitate toward magical thinking and/or pixie dust. However, mutual funds still make a fortune selling you the dream: Chart 9 Mutual Funds with Largest Fees 10-Year Period $21.40 Billion Total Fees Earned Fidelity Magellan 99-08 $3.70B Fidelity Contrafund 98-07 $3.00B American Century Ultra 99-08 $2.30B PIMCO Total Return 99-08 $3.00B American Funds Inv Co Amer 98-07 $1.54B Fidelity Growth & Income 99-08 $1.56B American Funds Growth Fnd Amer 99-08 $2.10B Fidelity Low-Priced Stock Fund 99-08 $1.66B American Funds Europacific 98-07 $1.74B Fidelity Dividend Growth 99-08 $0.80B $21 billion in fees have been paid to mutual funds for no performance over the last ten years.


pages: 222 words: 70,559

The Oil Factor: Protect Yourself-and Profit-from the Coming Energy Crisis by Stephen Leeb, Donna Leeb

Buckminster Fuller, buy and hold, diversified portfolio, fixed income, hydrogen economy, income per capita, index fund, mortgage debt, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit motive, reserve currency, rising living standards, Ronald Reagan, shareholder value, Silicon Valley, Vanguard fund, Yom Kippur War, zero-coupon bond

These offer essential protection against the inevitable periods of recessionary jitters that arise during inflationary times. Suspending Buy and Hold Some investors follow their portfolio’s ups and downs as avidly as a dog eyeing a piece of steak held in its trainer’s hand. They have their broker’s number on speed dial and are ready and willing to buy or sell at a moment’s notice in an effort to maximize their gains. Other investors by temperament or training have absorbed the notion that you should buy and hold for the long term. When pressed, they point to studies that show that over time stocks always go up, plus they hate paying brokers’ commissions. They are the ones who could take the proverbial trip around the world and never check on the status of their holdings. Some of the greatest investors of all time have adhered in large measure to the buy-and-hold school. And in many market environments, it’s an approach we endorse for most investors.

Now let’s look at a slightly different rule and see how it would have worked out in terms of specific stock market gains. Suppose, for instance, that during the same thirty-year period you got out of stocks whenever the year-over-year rise in oil prices was 80 percent or greater. You got back into stocks whenever the year-over-year change fell to 20 percent or less. In evaluating such rules, you typically use a buy-and-hold strategy as your benchmark. We’ll make this comparison easy: we’ll compare buying and holding the S&P 500 during those thirty years with buying the S&P 500 only when the signal from oil was favorable and selling whenever the signal was unfavorable. When you sell, we’ll assume you put your money into T-bills or some equivalent short-term money market instrument. Figures 2b, “Following Oil vs. Holding the S&P 500,” and 2c, “Oil’s Buy and Sell Signals,” together sum up the results.

Investments that seem to be on track when inflation is in the driver’s seat may suddenly tank when deflationary fears erupt, and vice versa. Moreover, in contrast to the recent past, you won’t be able to solve the problem by simply buying a representative index of seemingly safe, conservative stocks, for these are exactly the stocks that will lose ground to inflation. In addition, in the years ahead, a buy-and-hold strategy won’t do. If you buy the right stocks, those that tap into the prevailing economic winds, you’ll make good gains. But to hold on to those gains, you will need to be more proactive—to be willing to shift into inflation beneficiaries as inflation takes over and into deflation hedges when deflation seems the main threat. And this leads to the second reason we opened by mentioning oil.


pages: 267 words: 71,941

How to Predict the Unpredictable by William Poundstone

accounting loophole / creative accounting, Albert Einstein, Bernie Madoff, Brownian motion, business cycle, butter production in bangladesh, buy and hold, buy low sell high, call centre, centre right, Claude Shannon: information theory, computer age, crowdsourcing, Daniel Kahneman / Amos Tversky, Edward Thorp, Firefox, fixed income, forensic accounting, high net worth, index card, index fund, John von Neumann, market bubble, money market fund, pattern recognition, Paul Samuelson, Ponzi scheme, prediction markets, random walk, Richard Thaler, risk-adjusted returns, Robert Shiller, Robert Shiller, Rubik’s Cube, statistical model, Steven Pinker, transaction costs

I do not chart that because the line would hug the axis so closely as to be indistinguishable from it. A buy-and-hold stock investor in the S&P 500 and its precursor companies would have turned $1,000 into about $2,932,653. An investor using the PE momentum system to switch between stocks and bonds would have realized $23,836,362. That’s over 8 times the wealth of a buy-and-hold investor. Nobody invests for 132 years. Let’s look at something a little easier to relate to, the twenty years from January 1993 to January 2013. This time we start with $1,000 in 1993. A bond investment would have grown to $1,617 in real terms. A buy-and-hold stock investment would have risen to $3,173. The PE momentum system would have ended up with $5,517. It would have done that by making just two trades. The buy-and-hold portfolio was ahead of the momentum system for brief periods at the peaks of the dot-com and subprime mortgage bubbles.

That would have earned a return of 6.70 percent, beating the stock market by 0.47 percentage points a year. If that doesn’t sound like anything special, take a look at the chart below. It shows the (hypothetical!) growth of a $1,000 portfolio invested since 1881. A buy-and-hold investment in the S&P stocks would have grown to an inflation-adjusted $2,932,724. A buy-low, sell-high portfolio, with PE limit values of 13 and 28, would have grown to $5,239,915. The return is only half the story. Look at how smooth the upper line is, compared to buy-and-hold, over the past twenty years. A PE-directed investor would have sold out of stocks in January 1997, sparing herself a couple of agonizing crashes. She would have been in safe, steady fixed-income investments through January 2013. The PE investor’s superior return is due entirely to avoiding losses.

At the bottom of the market’s second plunge, in March 2009, the stock portfolio’s value was nearly tied with that of the bond portfolio. That’s one demonstration that stocks do not always outperform bonds over fairly long periods. The dotted line labeled “Capitulator” represents the possible fate of someone who considered himself a buy-and-hold investor but who was spooked by the second big plunge in a decade. Exasperated by weeks of declines, the capitulator threw in the towel. He sold, vowing never to invest in stocks again. The capitulating investor was lucky enough to sell somewhere above the very bottom. Still, as the dotted line shows, the capitulator ended up with less than the strict buy-and-hold investor. This is the behavioral penalty. Investors have been told that the booms and busts of recent years are unprecedented. Really, booms and busts are two of the few things that haven’t changed. A 50 percent drop in the market is not an anomaly.


Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, asset allocation, backtesting, Black-Scholes formula, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, joint-stock company, Long Term Capital Management, loss aversion, market bubble, mental accounting, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, purchasing power parity, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, Vanguard fund

Switching returns are defined as the returns to an investor who switches from stocks to bills a given number of months before (or after, if his or her predictions are not accurate) a business cycle peak and switches back to stocks a given num- CHAPTER 12 Stocks and the Business Cycle 215 ber of months before (or after) a business cycle trough. Buy-and-hold returns are defined as the returns from holding the market through the entire business cycle. Excess returns are defined as switching returns minus the returns from the buy-and-hold strategy.7 Over the entire period from 1802 through 2006, the excess returns are minimal over a buy-and-hold strategy if investors switch into bills exactly at the business cycle peak and into stocks exactly at the business cycle trough. In fact, investors switching into bills just one month after the business cycle peak and back into stocks just one month after the business cycle trough would have lost 0.6 percent per year compared to the benchmark buy-and-hold strategy. Interestingly, it is more important to be able to forecast troughs of the business cycle than it is peaks.

An investor who buys stocks before the trough of the business cycle gains more than an investor who sells stocks an equal number of months before the business cycle peak. The maximum excess return of 4.8 percent per year is obtained by investing in bills four months before the business cycle peaks and in stocks four months before the business cycle troughs. The strategy of switching between bills and stocks gains almost 30 basis points (30⁄100 of a 7 The returns of the buy-and-hold strategy are adjusted to reflect the same level of market risk as the buy-and-hold strategy. TABLE 12–4 Switching Returns (Percent) Minus Buy-and-Hold Returns (Percent) around Business Cycle Turning Points, 1802 through December 2006 Switching from Bills to Stocks before Trough Switching from Stocks to Bills before Peaks 4 month 3 month 2 month 1 month Switching from Stocks to Bills after Peaks 1 month 2 month 3 month 4 month 4 month 4.8 4.0 4.2 4.1 3.3 2.7 2.1 2.2 1.9 3 month 4.0 3.3 3.5 3.3 2.6 1.9 1.4 1.5 1.3 2 month 3.3 2.6 2.8 2.6 1.9 1.2 0.7 0.8 0.7 1 month 2.5 1.8 2.0 1.8 1.1 0.5 0.0 0.1 0.0 1.9 1.2 1.4 1.2 0.5 -0.2 -0.7 -0.6 -0.7 1 month 1.5 0.8 1.0 0.8 0.1 -0.6 -1.1 -1.0 -1.1 2 month 0.9 0.2 0.4 0.2 -0.5 -1.1 -1.7 -1.6 -1.7 3 month 0.5 -0.2 0.0 -0.2 -0.9 -1.5 -2.1 -2.0 -2.1 4 month 0.3 -0.4 -0.2 -0.3 -1.1 -1.7 -2.2 -2.1 -2.2 At Trough Switching from Bills to Stocks after Trough At Peak 216 PART 3 How the Economic Environment Impacts Stocks percentage point) in average annual returns for each week during the four-month period in which investors can predict the business cycle turning point.

If a portfolio falls by 50 percent in the first year and then doubles (up 100 percent) in the second year, “buy-and-hold” investors are back to where they started, with a total return of zero. The compound or geometric return rG, defined above as (1 ⫺ 0.5)(1 ⫹ 1) ⫺ 1, accurately indicates the zero total return of this investment over the two years. The average annual arithmetic return rA is ⫹25 percent ⫽ (⫺50 percent ⫹ 100 percent)/2. Over two years, this average return can be turned into a compound or total return only by successfully “timing” the market, specifically increasing the funds invested in the second year, hoping for a recovery in stock prices. Had the market dropped again in the second year, this strategy would have been unsuccessful and resulted in lower total returns than achieved by the buy-and-hold investor. 2 CHAPTER RISK, RETURN, AND PORTFOLIO ALLOCATION Why Stocks Are Less Risky Than Bonds in the Long Run As a matter of fact, what investment can we find which offers real fixity or certainty income?


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Asian financial crisis, asset allocation, backtesting, banking crisis, Black-Scholes formula, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, market bubble, mental accounting, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen: Great Stagnation, Vanguard fund

This number probably underestimates such costs, especially in the earlier years, but likely overstates these costs in more recent years. Looks are deceiving. When examining the returns from 2001 onward in Figure 20-2, it appears as if the returns from the timing strategy would swamp the buy-and-hold strategy, but that is not the case. The buy-and-hold strategy from 2001 to 2012 beats the timing strategy by more than 2 percentage points per year even before transaction costs are factored in. This is because the poor returns from the timing strategy occur when markets are not in a strong uptrend or downtrend and the market crosses the 200-day moving average many times, incurring large costs. Although the returns from the timing strategy often fall behind that of a buy-and-hold investor, the major gain from the timing strategy is that the timing investor is out of stocks before the bottom of every major bear market. Since the market timer is in the market less than two-thirds of the time, the standard deviation of returns is reduced by about one-quarter over the returns of a buy-and-hold investor.

The timing strategist participates in most bull markets and avoids bear markets, but the losses suffered when the market fluctuates with little trend are significant. FIGURE 20-3 Distribution of Annual Gains and Losses: Dow Industrials: Timing Versus Buy-and-Hold Strategy The distribution of gains and losses is quite similar to that of a buy-and-hold investor who has purchased index puts to cushion market declines. As noted in Chapter 18, purchasing index puts is equivalent to buying an insurance policy on the market. If no losses are realized, the cost of the puts drains returns. Similarly, the timing strategy involves a large number of small losses that come from moving in and out of the market. That is why the modal annual return for the timing strategy is from zero to minus 5 percent, while the modal return for a buy-and-hold investor is plus 5 to 10 percent. The most negative yearly return from the timing strategy occurred in 2000, when investors had to execute 16 switches and suffered a negative return that exceeded 33 percent, far below the negative 5 percent return realized by the buy-and-hold investor.

And as noted above, the NBER does not announce the dates that recessions end until many months after the economy turns up. GAINS THROUGH TIMING THE BUSINESS CYCLE My studies show that if investors could predict in advance when recessions will begin and end, they could enjoy superior returns to the returns earned by a buy-and-hold investor.8 Specifically, if an investor switched from stocks to cash (short-term bonds) four months before the beginning of a recession and back to stocks four months before the end of the recession, he would gain almost 5 percentage points per year on a risk-corrected basis over the buy-and-hold investor. About two-thirds of that gain is the result of predicting the end of the recession, where, as Table 15-3 shows, the stock market hits bottom between four and five months before the end of the economic downturn, and the other third comes from selling stocks four months before the peak.


pages: 369 words: 128,349

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

3Com Palm IPO, Andrei Shleifer, asset allocation, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, survivorship bias, transaction costs, Vanguard fund

The two-day holding period returns for the selected categories are 7.7 percent for European funds, 7.1 percent for foreign funds, and 10.8 percent for Pacific Asia funds. In most cases the returns for 2002 correspond closely with the co- Mispricing of Mutual Funds Returns from Trading Mispriced Funds 15% Six-Month Returns 10% 5% Buy and hold Two-day holding One-day holding 0% -5% -10% European funds Pacific Asia funds Figure 6.1 The returns from trading mispriced funds are compared with the fund’s buy-and-hold return over the January-June 2002 period. efficients reported in the last column. The close association between the January-June 2002 returns and the 2001 coefficients suggests that the pattern of returns is quite stable between 2001 and 2002 and is indicative of the future profitability of similar trading strategies.

Number of trades = 4 Return based on signals and holding for at least 30 days = –5.8% Abnormal return = 11.3% for 6 months Strategy 2 Pay the redemption fee if the predicted return is less than the redemption fee, that is, < –1.0% Number of trades = 8 Gross return based on signals = –4.3% Net return after payment of 7% in redemption fees = –11.3% Abnormal return = 5.8% for six months The results are reported in Table 6.5 for a thirty-day holding period. There are four signals during January–June 2002 with a 1.0 percent threshold. The total return is –5.8 percent. Compared with a buy-and-hold return of –17.1 percent, an investor would have earned an abnormal return of 11.3 percent over the six-month period, equivalent to an annual abnormal return of 22.6 percent even for a fund that has a thirty-day redemption fee. It is clear that a timing strategy is superior to a buy-and-hold strategy. Pay the Redemption Fee The second approach is to actually sell the fund even if you have to pay the redemption fee. However, the redemption fee is paid only when the predicted return is more negative than the redemption fee. Assuming a 1 percent redemption fee, there are eight buy signals for PEAGX over the January–June 2002 period.

The gross return is –4.3 percent without accounting for the redemption fees. Deducting a redemption fee of 7 percent for the seven premature sales generates a net return of –11.3 percent. Again, compared with the buy-and-hold return of –17.1 percent, an investor will earn an abnormal return of about 5.8 percent in a six-month period, or an 11.6 percent annual abnormal return, by paying the redemption fee each time it is less than the predicted return. To conclude, it can be observed that mispriced mutual funds are attractive for the smart investor. The redemption fees make the trading less attractive, but the returns from timing are still reasonable and better than a buy-and-hold strategy. The returns can be improved with a refinement in the regression model that includes multiple index returns instead of just the S&P 500, as mentioned in “The Trading Process.”


pages: 348 words: 82,499

DIY Investor: How to Take Control of Your Investments & Plan for a Financially Secure Future by Andy Bell

asset allocation, bank run, buy and hold, collapse of Lehman Brothers, credit crunch, diversification, diversified portfolio, estate planning, eurozone crisis, fixed income, high net worth, hiring and firing, Isaac Newton, Kickstarter, lateral thinking, money market fund, Northern Rock, passive investing, place-making, quantitative easing, selection bias, short selling, South Sea Bubble, technology bubble, transaction costs, Vanguard fund

The long-term buy and hold investor This self-explanatory way of investing, combined with passive investing, explained below, is arguably the strategy that gives the DIY investor the best chance of good returns over a long period of time. Buy and hold investing is founded on the idea that markets will give a good rate of return in the long term, in the way that they have done over long periods for most of the last 100 or so years. Buy and hold investors believe it is not possible to beat the market by making short-term bets on swings in valuations because the increased costs of dealing, including broker costs, stamp duty and bid/offer spreads, will more often than not wipe out whatever gains, if any, the investor trying to time the market might make. Supporters of buy and hold investing argue that markets are so efficient that the price of a share is always accurate, meaning there is no scope for an investor to find undervalued shares.

Of course there are risks in holding equities – neither share price nor dividends are guaranteed. But they do offer some protection against inflation – unlike cash on deposit – as equities tend to rise when prices rise. And by buying a basket of high-income equities you can spread the risk of one of them going bad. People who buy and hold equities long term are often investment platforms’ least profitable customers. That is why some investment platforms charge a custody fee or a quarterly inactivity fee for investors who are not actively trading. If you want to buy and hold income shares, make sure you use an investment platform that is not going to penalise you for doing so. Corporate actions – rights issues, open offers and takeovers Corporate actions are changes to the structure of a company that affect the shares you hold. The key corporate actions for DIY investors are takeovers, rights issues and consolidations, although there are less of these than there were a decade ago.

You also need to have the discipline to review your investments at least once a year and preferably twice a year, to make sure they are performing as they should. A few carefully considered Google alerts can keep you abreast of any key changes to your investments in the interim. The skills and commitment you will need will also depend on the type of investor that you intend to be. If you are going to adopt a long-term buy-and-hold strategy, you may need no more than a couple of hours a year to review your portfolio. That said, once everything is set up, checking your investments online is so straightforward that most people find themselves regularly looking to see how their investments are faring anyway. Several investment platforms now have mobile phone applications, which you may find compulsive. But don’t forget, a watched pot never boils.


pages: 425 words: 122,223

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

"Robert Solow", Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate raider, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, Kenneth Arrow, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, money market fund, Myron Scholes, new economy, New Journalism, Paul Samuelson, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, stochastic process, Thales and the olive presses, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond, zero-sum game

Rhea declares: “Surely no Dow theory student saw anything resembling the termination of a bear market until June and July 1932, and it is inconceivable that Hamilton would have turned bullish before then.”38 Rhea goes on to argue that, had Cowles continued his investigation beyond Hamilton’s death, he would have found that the capital of the buy and hold investor would have suffered a shrinkage of more than 80 percent before the bear market hit bottom whereas the investor who had followed Hamilton’s advice could have sat back comfortably with a pile of cash. On the other hand, an indefinite extension of the test period after 1933 might well have put the buy and hold investor back in the lead over the advice of a market-timing Dow theorist. The financial publications that Cowles investigated fared no better than Hamilton: “We are enabled to conclude that the average forecasting agency fell [below] the average of all performances achievable by pure chance.”39 In 1928, when an investor in the market as a whole would have earned the enormous return of 44 percent, the ratio of bullish to bearish forecasts by this group was only four to three.

Before the fact, however, they are always uncertain whether an observed trend is likely to continue or go into reverse, or whether a price movement counter to a trend is just a twitch or the beginning of a new trend in the opposite direction. This is the same dilemma that Kendall sought to resolve. In short, asks Alexander, are stock prices predictable, or are they ruled by the Demon of Chance? How investors answer that question determines whether they will choose to buy and hold for the long pull, or will try to swing between cash and stocks as the market fluctuates. Investors who opt for buy-and-hold say that all they can forecast is that stocks are a good investment over the long run. This attitude is typical among many individual investors. Some simply have no taste for shifting their holdings around. They see no advantage in doing so. Others have inherited their stocks and feel sentimental about them, or else they have old holdings with big unrealized gains and are reluctant to incur the capital gains taxes involved in selling.

They must be able to spot the very moment when a trend begins, when a trend is continuing in force, and when a trend is about to go into reverse. Otherwise they will have no chance of outperforming buy-and-hold. Alexander asserts that investors can accomplish this feat only if other investors have “imperfect knowledge of these facts”35—if they are what today we call “noise traders.” No one can win if everyone receives all the necessary information, understands it completely, and acts on it at once. When a given piece of information prompts an almost simultaneous response by investors—as when a bank announces a huge write-off for loan losses or an oil company comes up with a big drilling hit in an unexploited area—even the cleverest analyst of balance sheets or with the keenest eye for the charts will fail to do as well as the investor who simply buys and holds. At least, that is how a perfect market operates. Profitable trading depends on imperfections, which develop only when other investors are slower than the swinger to receive information, draw erroneous conclusions from it, or delay acting on it.


pages: 335 words: 94,657

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

asset allocation, buy and hold, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial independence, financial innovation, high net worth, index fund, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, market bubble, mental accounting, money market fund, passive investing, Paul Samuelson, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, stocks for the long run, survivorship bias, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

Larry Swedroe, author of four investment books: "Believing in the ability of market timers is the equivalent of believing astrologers can predict the future." Regarding Stay the Course Frank Armstrong, author: "Buy and hold is a very dull strategy. It has only one little advantage-it works, very profitably and very consistently." Jack Bogle: "No matter what happens, stick to your program. I've said `Stay-the-course' a thousand times and I meant it every time. It is the most important single piece of investment wisdom I can give to you." Rick Ferri, author of four excellent investment books: "Write down your strategy-then stay the course" Carol Gould, New York Times: "For most investors the odds favor a buy-and-hold strategy." Michael LeBoeuf, author of The Millionaire in You: "Simple buy-andhold index investing is one of the best, most efficient ways to grow your money to the ultimate goal of financial freedom."

The Securities and Exchange Commission (SEC) has an excellent primer where you can get more information on variable annuities at www.sec.gov/investor/pubs/varannty.htm#wvar. EXCHANGE-TRADED FUNDS Exchange-Traded Funds (ETFs) are basically mutual funds that trade like stocks on an exchange. They are bought and sold continuously throughout the day when the stock market is open. The ETF's stocklike features appeal to a wide range of investors, including long-term buy-and-hold investors, as well as short-term traders. Perhaps one of the biggest benefits of owning ETFs is the low cost. ETF expenses can be as low, or even lower, than many mutual funds that track the same index. ETFs are available that follow both foreign and domestic equity indexes. There are ETFs that follow bond indexes, as well. Although nearly all ETFs track a particular index, there are a few that are actively managed.

Unlike regular mutual funds, which are priced at net asset value (NAV) only once a day at the close of business by the fund company, based on the value of the securities owned by the fund, ETFs are priced continuously throughout the day, by an open market system, as are stocks, whenever the stock market is open. This makes ETFs attractive to those investors who wish to trade during the day and know the exact price of their trade. However, being able to trade ETFs during the day is of no benefit to Boglehead investors because we are buy-and-hold types. If you're interested in day-trading funds, you're reading the wrong book. There are some downsides to ETFs. First, you have to use a broker each time you buy or sell. Needless to say, the shorter the holding period, the more those added commission costs could negate any benefits of the ETF's lower expenses. As a result, ETFs are not suited for investors who make a number of smaller purchases, such as with dollar-cost averaging, since they'd have to pay a commission on each purchase.


pages: 356 words: 51,419

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle

asset allocation, backtesting, buy and hold, creative destruction, diversification, diversified portfolio, financial intermediation, fixed income, index fund, invention of the wheel, Isaac Newton, new economy, passive investing, Paul Samuelson, random walk, risk tolerance, risk-adjusted returns, Sharpe ratio, stocks for the long run, survivorship bias, transaction costs, Upton Sinclair, Vanguard fund, William of Occam, yield management, zero-sum game

Equally important, it is consistent with the age-old principle of simplicity expressed by Sir William of Occam: Instead of joining the crowd of investors who dabble in complex algorithms or other machinations to pick stocks, or who look to past performance to select mutual funds, or who try to outguess the stock market (for investors in the aggregate, three inevitably fruitless tasks), choose the simplest of all solutions—buy and hold a diversified, low-cost portfolio that tracks the stock market. Don’t Take My Word for It Hear David Swensen, the widely respected chief investment officer of the Yale University Endowment Fund. “[Over the fifteen years ending 1998, a] minuscule 4 percent of [mutual] funds produced market-beating after-tax results with a scant 0.6 percent [annual] margin of gain. The 96 percent of funds that fail to meet or beat the Vanguard 500 Index Fund lose by a wealth-destroying margin of 4.8 percent per annum

The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course. Don’t Take My Word for It The wise Warren Buffett shares my view. Consider what I call his four E’s. “The greatest Enemies of the Equity investor are Expenses and Emotions.” So does Andrew Lo, MIT professor and author of Adaptive Markets (2017), who personally “invests by buying and holding index funds.” * * * Perhaps even more surprisingly, the founder and chief executive of the largest mutual fund supermarket—while vigorously promoting stock trading and actively managed funds—favors the classic index fund for himself. When asked why people invest in managed funds, Charles Schwab answered: “It’s fun to play around . . . it’s human nature to try to select the right horse . . .

) * * * Mark Hulbert, editor of the highly regarded Hulbert Financial Digest, concurs. “Assuming that the future is like the past, you can outperform 80 percent of your fellow investors over the next several decades by investing in an index fund—and doing nothing else. . . . [A]cquire the discipline to do something even better [than trying to beat the market]: become a long-term index fund investor.” His New York Times article was headlined: “Buy and Hold? Sure, but Don’t Forget the ‘Hold.’” Notes 1 Extreme example: If a fund with $100 million of assets earns a time-weighted return of 30 percent on its net asset value during a given year, and investors, recognizing the strong return, purchase $1 billion worth of its shares on the final day of the year, the average dollar-weighted return earned by its investors would be just 4.9 percent. 2 This gap was estimated based on the difference between the time-weighted returns reported by Morningstar on the average large-cap fund and actual dollar-weighted returns over the full 25-year period.


pages: 249 words: 77,342

The Behavioral Investor by Daniel Crosby

affirmative action, Asian financial crisis, asset allocation, availability heuristic, backtesting, bank run, Black Swan, buy and hold, cognitive dissonance, colonial rule, compound rate of return, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, feminist movement, Flash crash, haute cuisine, hedonic treadmill, housing crisis, IKEA effect, impulse control, index fund, Isaac Newton, job automation, longitudinal study, loss aversion, market bubble, market fundamentalism, mental accounting, meta analysis, meta-analysis, Milgram experiment, moral panic, Murray Gell-Mann, Nate Silver, neurotypical, passive investing, pattern recognition, Ponzi scheme, prediction markets, random walk, Richard Feynman, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, science of happiness, Shai Danziger, short selling, South Sea Bubble, Stanford prison experiment, Stephen Hawking, Steve Jobs, stocks for the long run, Thales of Miletus, The Signal and the Noise by Nate Silver, tulip mania, Vanguard fund

Like a mostly-benevolent-but-sometimes-homicidal farmer, the market mostly giveth but can certainly take away in dramatic fashion. As a result, the thing to do is usually nothing at all. Buy and hold proponents Vanguard examined the performance of accounts that made no changes versus those who had made tweaks and found that the “no change” condition handily outperformed the tinkerers. Meir Statman cites research from Sweden showing that the heaviest traders lose 4% of their account value each year to trading costs and poor timing, and these results are consistent across the globe. Across 19 major stock exchanges, investors who made frequent changes trailed buy and hold investors by 1.5 percentage points per year. Jason Zweig pithily sums up the futility of excessive activity in his Devils Financial Dictionary definition of Day Trader: “n.

But for all of the evidence that market timing is foolish, there is equally compelling evidence that a buy and hold approach can yield unsatisfactory results for even the most patient investor. Michael Batnick published the table below, which provides a sobering look at how poor real returns can be over even long periods of time and how regular such occurrences truly are. Real growth of one dollar 1929–1943 $1.08 1944–1964 $10.83 1965–1981 $0.94 1982–1999 $11.90 2000–present $1.35 Urban Carmel, who writes at The Fat Pitch, shared some fascinating insights in his post, ‘When Buy and Hold Works and When It Doesn’t.’

The fund behemoth Vanguard examined the performance of accounts that had made no changes versus those who had made tweaks. Sure enough, they found that the “no change” condition handily outperformed the tinkerers. Behavioral economist Meir Statman cites research from Sweden showing that the heaviest traders lose 4% of their account value each year to trading costs and poor timing, and that these results are consistent across the globe. Across 19 major stock exchanges, investors who made frequent changes trailed buy and hold investors by 1.5 percentage points per year. Perhaps the best-known study on the damaging effects of our brain’s action bias also provides insight into gender-linked tendencies in trading behavior. Terrance Odean and Brad Barber, two of the fathers of behavioral finance, looked at the individual accounts of a large discount broker and found something that surprised them. The men in the study traded 45% more than the women, with single men out-trading their female counterparts by an incredible 67%.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, collapse of Lehman Brothers, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial independence, financial innovation, fixed income, full employment, implied volatility, index fund, information asymmetry, Isaac Newton, John Meriwether, Long Term Capital Management, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

Many investors seem to believe that beating the market is the goal of their investment programme, somewhat ignorant or blind to the fact that the world of investing is one of winners and losers and that costs (in the form of fees, commissions and taxes) result in more losers than winners in aggregate. The active management industry has done a good job in encouraging them to do so, and will try to do the same to you. Today, the battle for investors’ money rages around whether you should try to beat the markets through active decision-making, or simply try to capture the market return as closely as possible, adopting a buy-and-hold strategy, as you will see. It is a question of where the probabilities of success lie in your favour. This is how the story unfolds. The stockbroking model is on its last legs Before the early 1970s, investors had little option but to buy securities through stockbrokers, or employ a stockbroker to manage a portfolio for them, an optimal way of managing money at the time. Information about companies was disseminated largely in print, and portfolio reporting was commonly just a list of stocks showing their purchase and current prices.

It is tempting to be drawn into the comfort of passing the responsibility over to the professionals, who after all should be best placed to beat the market, as they spend their lives working with valuation models, work with bright colleagues, meet and analyse companies, and have good access to information. Surely if anyone can beat the markets, they can? Figure 4.1 Ways to try to beat a long-term buy-and-hold strategy Figure 4.1 illustrates how active managers attempt to beat the returns from a long-term investment policy mix of investments. The route you choose is a question of probabilities Managers who believe that they can beat your investment policy mix returns by market timing and security selection are known as active managers. The funds they manage are known as actively managed funds.

After all, many people gamble on the lottery, despite the odds that a thirty-five-year-old man buying a lottery ticket on a Monday has a greater chance of dying than winning the jackpot! For some reason, we hate to be considered average. We seem to aspire to want to be winners, which is fine if it is winning an egg and spoon race, but dangerous in the less-than-zero-sum game that we play as investors. In investing, there is nothing wrong with being average if by average you mean achieving the market return for your buy-and-hold portfolio, as you will see. The problem with many investors is that they are attracted to active management because they have not thought through the issues clearly, and have not seen or read the evidence that exists that helps them to decide which course of action is likely to be best for their investing health. Others see the evidence, which is now widely available, but still cannot stop themselves from being attracted to trying to beat the markets.


pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, buy and hold, centralized clearinghouse, clean water, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, fixed income, Flash crash, income inequality, index fund, information asymmetry, invisible hand, Kenneth Arrow, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, post-work, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

His definition of long-term? “So, OK, we’ll hold for a year.”7 For years, investing gurus urged retail investors not to try to outguess the market on a day-to-day basis. “Buy and hold” was the advice: pick great companies and stay with them.8 We are 180 degrees away from that. Today, a Google search for the phrase “buy and hold is dead” yields about 100,000 hits, including books like Buy and Hold Is Dead (Again): The Case for Active Portfolio Management in Dangerous Markets and Buy and Hold Is Dead: How to Control Risk and Make Money in Any Environment; innumerable articles with titles like “Buy and Hold Is Dead and Gone” and “Buy and Hold Is Dead (And Never Worked in the 1st Place)”; video clips; blogs; and stock market tips.9 As in less metaphorical forms of attention deficit hyperactivity disorder (ADHD), not all of this activity is intentional.

., 6–7, 139, 221, 235n24 Borrowers, financial system as intermediator between lenders and, 17, 19–22, 47, 74, 128–29, 211–13 “Brand Tracker” survey, 206 Brandeis, Louis, 92 Breakout Performance social media campaign, 115 Brealey, R. A., 254n2 BrightScope, 122 Brokers, fiduciary duty and, 256n23 Brooks, David, 167 Buffett, Warren, 45, 63, 64, 80, 150, 221 Business judgment rule, 78–79 Business school curriculum, 190–92 Buy and Hold Is Dead (Again) (Solow), 65 Buy and Hold Is Dead (Kee), 65 Buycott, 118 Cadbury, Adrian, 227 Call option, 93 CalPERS, 91, 110, 111–12, 208, 221, 241n37 CalSTRS, 208 Canada, pension funds in, 59, 111, 209 Capital Aberto (magazine), 117 Capital gains, taxation of, 92 Capital Institute, 59, 87 Capital losses, 92 Capitalism: agency, 33, 74–80 defined, 243n2 Eastern European countries’ transition to, 167 financial system and, 9 injecting ownership back into, 83–93 private ownership and, 62 reforming, 11–12 Carbon Disclosure Project, 89 Career paths, new economic thinking and, 189–90 CDC.


pages: 1,164 words: 309,327

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, asset allocation, automated trading system, barriers to entry, Bernie Madoff, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, fault tolerance, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, interest rate swap, invention of the telegraph, job automation, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, Nick Leeson, open economy, passive investing, pattern recognition, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, race to the bottom, random walk, rent-seeking, risk tolerance, risk-adjusted returns, selection bias, shareholder value, short selling, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

If you cannot predict which managers will be successful, you should not employ active investment managers. The most important decision investment sponsors make is whether to employ active managers. Investors who believe that they cannot speculate successfully often invest their money with passive investment managers. Passive investment managers use buy and hold strategies. They simply buy and hold securities. Passive managers therefore rarely trade. The most common buy and hold strategy is the index replication strategy. Index replicators buy and hold portfolios that they design to replicate the returns to a broad market index. We discuss how they do this in chapter 23. Indexing is very popular because many investors have decided that they do not want to speculate. They do not believe that they would be successful traders, and they do not believe that they can pick successful managers.

Even the best traders often lose because of events that they could not anticipate. Successful traders win more often than they lose, however. Those who do not are futile traders. * * * ▶ A Trading Oxymoron Investment managers help people manage their funds. They may help people invest, as their name implies, or they may help people speculate. Passive investment managers pursue buy and hold strategies. Managers who buy and hold rarely trade. Indexing is the most common buy and hold strategy. Indexers try to replicate the returns to an index. Such strategies are often appropriate for investors. Active investment managers are speculators who try to beat the market. Traders who “invest” with such managers actually speculate on whether the manager can beat the market. ◀ * * * 8.3 FUTILE TRADERS Futile traders expect to profit from trading, but they do not profit on average.

It is must easier to consistently lose than to consistently win. Some managers undoubtedly can beat the market on average, even after accounting for their transaction costs and management fees. Unfortunately, as we saw in chapter 22, identifying such managers is very difficult. Many uninformed investors employ buy and hold strategies to avoid the difficulties of selecting skilled active managers and the costs of investing with unskilled active managers. Buy and hold investors avoid trading losses by not trading. They also avoid high management fees. Since index funds implement buy and hold strategies, they are very attractive to investors who want exposure to index risk without the risk of substantially underperforming the market. The minor frictions associated with index fund management ensure that index funds will slightly underperform their indexes.


The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, Moorad Choudhry

asset allocation, asset-backed security, bank run, Bretton Woods, buy and hold, collateralized debt obligation, credit crunch, discounted cash flows, discrete time, disintermediation, fixed income, high net worth, intangible asset, interest rate derivative, interest rate swap, large denomination, locking in a profit, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, money market fund, moral hazard, mortgage debt, paper trading, Right to Buy, short selling, stocks for the long run, time value of money, value at risk, Y2K, yield curve, zero-coupon bond, zero-sum game

For a 3-month holding period, the results in Exhibit 3.10 indicate that riding the yield curve using 6-month bills provides an additional 10 basis points in returns on average and outperforms a buy-and-hold strategy over 82% of the time. Rides using longer bills increase the additional return, with a corresponding decrease in the percentage of rides that beat the buy-and-hold. For the 6-month holding period, the results suggest a similar story. A 6-month ride using the 9-month bill adds approximately 16 basis points on average, is effective 80% of the time, and has the highest (i.e., the most desirable) minimum return of all five riding strategies examined. A ride using the 12-month bill adds about 25 basis points on average and outperforms the buy-and-hold strategy 71% of the time. Of course, the higher returns generated by the riding strategies come at the expense of higher variability and the possibility of negative returns.

Marcus, and Pradipkumar Ramanlal examine the effectiveness of riding the yield curve using Treasury bills for the period January 2, 1987, through April 20, 1997.17 They find that riding the yield curve on average enhances return over a given holding period versus a buy-and-hold strategy. Exhibit 3.10 pre17 See Robin Grieves, Steven V. Mann, Alan J. Marcus, and Pradipkumar Ramanlal, “Riding the Bill Curve,” The Journal of Portfolio Management (Spring 1999), pp. 74–82. 42 THE GLOBAL MONEY MARKETS sents summary statistics for the differences in holding period returns. These return differences are reported in basis points. Panel A presents the mean, median, minimum, maximum, and the percentages of return differences that are positive (i.e., meaning the riding strategy outperforms the buy and hold) for the 3-month holding period. Panel B presents the same information for the 6-month holding period. For a 3-month holding period, the results in Exhibit 3.10 indicate that riding the yield curve using 6-month bills provides an additional 10 basis points in returns on average and outperforms a buy-and-hold strategy over 82% of the time.

EXHIBIT 3.8 The Spread Between 3-Month LIBOR and 3-Month Treasury Bills Summary Statistics for 1987-1999 (in basis points) Year Mean Standard Deviation Minimum Maximum 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 122.42 118.91 104.44 65.77 46.02 25.52 16.23 34.81 41.50 36.40 53.64 64.00 64.72 47.56 16.68 22.99 23.76 20.58 12.75 5.55 15.23 8.40 8.15 12.94 19.08 24.60 56.00 98.00 56.00 38.00 15.00 11.00 8.00 11.00 28.00 22.00 33.00 40.00 31.00 252.00 183.00 144.00 159.00 129.00 66.00 29.00 78.00 65.00 70.00 77.00 132.00 133.00 16 A reasonable explanation for these trends is that the level of interest rates fell during this period. However, the same pattern emerges when yield ratios (i.e., 3-month LIBOR/3-month Treasury-bill) are examined. 40 EXHIBIT 3.9 Bloomberg Treasury Bill Screens a. Treasury Bill Curve Screen b. Treasury Bill Screen Source: Bloomberg Financial Markets THE GLOBAL MONEY MARKETS 41 U.S. Treasury Bills EXHIBIT 3.10 Summary Statistics for Differences in Holding-Period Returns (Ride minus Buy-and-Hold) in Basis Points from January 1987 through April 1997 Strategy Mean Median Min Max % Positive 9.0 14.2 17.3 −34.9 −69.2 −107.9 67.2 106.4 139.7 82.36 73.60 65.56 15.8 27.9 −19.9 −68.7 78.8 144.1 80.04 71.23 Panel A: Three-Month Holding Period Ride Using 6-Month Ride Using 9-Month Ride Using 12-Month 10.6 16.0 17.9 Panel B: Six-Month Holding Period Ride Using 9-Month Ride Using 12-Month 16.1 25.2 Both of these yield curves are positively sloped.


pages: 621 words: 123,678

Financial Freedom: A Proven Path to All the Money You Will Ever Need by Grant Sabatier

"side hustle", 8-hour work day, Airbnb, anti-work, asset allocation, bitcoin, buy and hold, cryptocurrency, diversified portfolio, Donald Trump, financial independence, fixed income, follow your passion, full employment, Home mortgage interest deduction, index fund, loss aversion, Lyft, money market fund, mortgage debt, mortgage tax deduction, passive income, remote working, ride hailing / ride sharing, risk tolerance, Skype, stocks for the long run, stocks for the long term, TaskRabbit, the rule of 72, time value of money, uber lyft, Vanguard fund

One of the reasons this has been possible is because mortgage rates have been at historic lows and stocks have absolutely crushed it over the past eight years. Back in the 1980s, when mortgage rates were 10 to 12 percent, it would have made more sense to pay off a mortgage as quickly as possible, since other investments were unlikely to return that much. TWO WAYS TO INVEST IN REAL ESTATE There are two primary ways to invest in real estate: you can buy and sell (aka flip) properties, or buy and hold them for the long term. While the primary focus of this chapter is buying and holding real estate, let’s look at how both strategies can help you hit your number in different ways. Buying and flipping properties means you buy a property and then try to sell it within a few years (or even a few weeks). Sometimes the homes need repairs and sometimes they don’t, but the strategy is to look for values—homes that are worth more than you pay for them or could be worth a lot more with some repairs.

Buying and flipping homes can help you make some extra money that you can then use to either buy more properties or add to your stock investments. As you’ve already learned, because of the 1031 exchange rule, you can keep rolling over your profits tax-free by using them to buy new properties. Or you can flip your way into larger and larger homes so you can buy your dream home. You can also flip your way into buying a multi-unit property or apartment building that you can then hold and rent out. Just like buying and holding stock for the long term, buying and holding real estate is a more effective strategy than flipping to help you reach financial independence faster, since you can build up a portfolio that generates consistent monthly cash flow through rental income that can cover your mortgage debt and monthly expenses, as well as have a portfolio of assets that will also appreciate over time. You can’t get that with stocks. You can also deduct most of the interest and many of the expenses of owning rental properties, making things like upgrades, repairs, and management expenses tax deductible.

If you have access to consistent secure cash, then don’t keep your money on the sidelines unless you plan to actually retire in the next few years and will need to live off your investing income. As you get closer to early retirement you should increase your cash fund from six months of living expenses to twelve. Long-Term Investing No matter when you start investing, a majority of your money should be invested for the long term (thirty-plus years), because even if you plan to retire earlier than that, you will want to keep the money growing so you can live off it forever. Buy and hold is the name of the long-term investment game. Because you have a longer time horizon, short-term fluctuations in your investments don’t matter as much because they have a longer time to recover from losses. The best places to invest for the long term are in the U.S. and international stock markets. The rest of the investing strategy presented in this chapter is designed for long-term investing.


pages: 389 words: 109,207

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone

Albert Einstein, anti-communist, asset allocation, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, capital asset pricing model, Claude Shannon: information theory, computer age, correlation coefficient, diversified portfolio, Edward Thorp, en.wikipedia.org, Eugene Fama: efficient market hypothesis, high net worth, index fund, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, John Meriwether, John von Neumann, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Myron Scholes, New Journalism, Norbert Wiener, offshore financial centre, Paul Samuelson, publish or perish, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Rubik’s Cube, short selling, speech recognition, statistical arbitrage, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, value at risk, zero-coupon bond, zero-sum game

It is folly to bet everything on a favorite (horse or stock). The only way to survive is through diversification. Someone who bets on every horse—or buys an index fund—will at least enjoy average returns, minus transaction costs. “Average” isn’t so hot at the racetrack, given those steep track takes. “Average” is pretty decent for stocks, something like 6 percent above the inflation rate. For a buy-and-hold investor, commissions and taxes are small. Shannon was more interested in above average returns. The only way to beat the market (of stocks or horse wagers) is by knowing something that other people don’t. The stock ticker is like the tote board. It gives the public odds. A trader who wants to beat the market must have an edge, a more accurate view of what bets on stocks are really worth. There are of course many differences between a racetrack and a stock exchange.

The average return of the passive investors is exactly the same as that of the active investors, for the reason just outlined. Now factor in expenses. The passive investors have little or no brokerage fees, management fees, or capital gains taxes (they rarely have to sell). The expenses of the active traders vary. We’re using that term for everyone from day traders and hedge fund partners to people who buy and hold a few shares of stock. For the most part, active investors will be paying a percent or two in fees and more in commissions and taxes. (Hedge fund investors pay much more in fees when the fund does well.) This is something like 2 percent of capital, per year, and must be deducted from the return. Two percent is no trifle. In the twentieth century, the average stock market return was something like 5 percent more than the risk-free rate.

For simplicity, pretend that the short-term tax rate is also 20 percent (it’s generally higher). Then you pay the government 20 cents and end the first year with $1.80 rather than $2.00. This means that you are not doubling your money but increasing it by a factor of 1.8—after taxes. At the end of eleven years you will have not 211 but 1.811. That comes to about $683. That’s less than half what the buy-and-hold investor is left with after taxes. In the late 1970s, Jay Regan came up with a clever idea. At that time, a treasury bond was still a piece of fancy paper. Attached to the bond certificate were perforated coupons. Every six months, when an interest payment was due, the holder would detach a coupon and redeem it for the interest payment. After all the coupons were detached and the bond reached its maturity date, the bond certificate itself would be submitted for return of the principal.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low cost airline, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, stocks for the long run, survivorship bias, the market place, transaction costs, Y2K, yield curve, zero-sum game

The data show that it is extremely difficult to randomly select the top performers each and every year. Although this can be somewhat discouraging, an upside does exist: It is also extremely difficult to choose the worst-performing asset class every single year. As well, it is fairly easy to randomly be above the median almost half the time, which means oneyear buy-and-hold strategies are likely to generate average returns. One question immediately comes to mind: Why not buy and hold a single asset all the time? The data provides the answer. Table 1.2 reports the average returns realized for each year by selecting the top-ranked asset class, the second-ranked class, and so on, for each year. Holding one asset class for 30 consecutive years (see Table 1.4) contrasts these returns with the returns produced. Looking at the 30-year example, it is apparent that the best-performing asset class—small caps—would only rank in the second or third tier of a strategy that chose the top-performing asset class each year.

See also asset allocation annual returns, 19 mean-reversion hypothesis, 4, 18 Monte Carlo simulations, 4-6 performance of, 16-18 periodic table of asset returns, 6-11 selecting, 18-21 single asset buy-and-hold, 12-13 types of, 5 asset-allocation consultants, 3 B basis points, 30 benchmarks. See also passive management cyclical asset allocation (CAA) compared to, 141-142 strategic asset allocation (SAA) as, 104 historical allocations, 104-108, 113-115 lifecycle allocations, 115-116 market allocations, 108-115, 266-269 ERISA, 284n beta, 19, 21, 113 active versus passive management, 252-255 elasticity and, 211-212 swing assets, 290n in value-timing strategy, 243-250 Bretton Woods standard, 89 broad market. See market breadth Bush, George H.W., 55, 73, 76, 83, 238 Bush, George W., 55, 83-84, 101 buy-and-hold. See passive management C CAA. See cyclical asset allocation California energy crisis example (location effect), 194-198, 273 cap-weighted indexes versus equal-weighted indexes, 175-180, 242-245 capital asset pricing model (CAPM), 2-3, 19, 113, 253 capital gains, 72-73, 76-79, 83-84.

The results are robust enough to withstand and accommodate the many idiosyncratic demands the managers and participants employing the CAA strategy make, although the strategy itself can be easily adjusted to accommodate a variety of investment horizons and lifecycle constraints, a multitude of asset classes, and a wide range of risk tolerances. 162 UNDERSTANDING ASSET ALLOCATION 9 ACTIVE VERSUS PASSIVE MANAGEMENT 163 he debate over whether to actively or passively manage occurs with frequency in the investment profession.1 Although the two terms mean different things to different people, active management is generally considered a strategy incorporating active stock picking and market timing. In contrast, passive management usually refers to buy-and-hold strategies applied to individual stocks and/or asset classes. Passive management proponents argue active management does not perform any better than the market over the long run. They also argue, because index-like portfolios have lower expense ratios, passive portfolios deliver higher net-of-fee returns. Active managers counter with the argument it is possible to consistently outperform benchmarks.2 T At different points in market cycles, either the active or passive manager has more real-time ammunition with which to argue his position.


Work Less, Live More: The Way to Semi-Retirement by Robert Clyatt

asset allocation, backtesting, buy and hold, delayed gratification, diversification, diversified portfolio, employer provided health coverage, estate planning, Eugene Fama: efficient market hypothesis, financial independence, fixed income, future of work, index arbitrage, index fund, lateral thinking, Mahatma Gandhi, McMansion, merger arbitrage, money market fund, mortgage tax deduction, passive income, rising living standards, risk/return, Silicon Valley, Thorstein Veblen, transaction costs, unpaid internship, upwardly mobile, Vanguard fund, working poor, zero-sum game

Fortunately, in recent years, an investing paradigm has emerged that can be especially useful to semi-retirees and other long-term investors: buy-and-hold index investing. A growing body of credible research now supports this investment approach. At its heart, index investing is based on data confirming that simply matching the performance of the overall market, without attempting to beat the averages with superior timing and insight, will generally win out over most other investing approaches in the short run and almost invariably over the long run. While superior stock-picking skills give some investors an index-beating year or two, on average the indexers edge ahead, especially against funds seeking to beat the large widely followed indexes. chapter 3 | Put Your Investing on Autopilot | 163 While most investors have heard the merits of buy-and-hold index investing, what is only beginning to be appreciated and is especially relevant to semi-retirees are enhancements and research that build on the basic index investing paradigm.

This led me to uncover and clarify the merits of Rational Investing. chapter 3 | Put Your Investing on Autopilot | 165 Where Wall Street Goes Wrong Despite the warm and fuzzy ads exuding affinity for your financial goals, brokerage firms and securities houses are set up as selling organizations, pitching a product for a commission. It is rare to find a broker or dealer who can look at the big picture and create the low-cost buy-and-hold investing autopilot a semi-retiree needs. Most would much rather sell you on the merits of keeping their hands firmly on the wheel, then charge you for frequent course corrections. Those who handle most mutual funds are only a little better. Not only do they see your assets as their source of steady annual fees, but many then vigorously trade your money at inflated commission levels to receive soft dollar kickbacks from cozy corporate partners.

These Portfolio Optimizers include: • Advisory World’s ICE Web-based optimizer or the simpler RAMcap optimizer, at http://ice.advisoryworld.com/products/ramcap.php • Multiperiod Portfolio Optimizer MvoPlus, sold by William Bernstein’s firm, Efficient Solutions, Inc., along with a number of useful tools for historical returns analysis, at www.effisols.com • Hoadley PC Portfolio Optimizer, at www.hoadley.net/options/ develtoolsoptimize.htm, and • Wagner’s Mean Variance Optimizer, at www.mathfinance .wagner.com/products/mvopt/mvoptimizer/mvoptimizer.html. chapter 3 | Put Your Investing on Autopilot | 179 Rational Investing With an appreciation for buy-and-hold low-fee investing, a sense of the common investment foibles, and some background on how asset classes can be combined to make a low-volatility and efficient portfolio, you are ready to be introduced to the basic principles of Rational Investing. Together, these rules form a coherent, effective, and easy-to-use investing method for individual investors—especially semi-retirees. Own Diverse Asset Classes Rational Investing begins by focusing on building a portfolio with the right blend of asset classes.


Quantitative Trading: How to Build Your Own Algorithmic Trading Business by Ernie Chan

algorithmic trading, asset allocation, automated trading system, backtesting, Black Swan, Brownian motion, business continuity plan, buy and hold, compound rate of return, Edward Thorp, Elliott wave, endowment effect, fixed income, general-purpose programming language, index fund, John Markoff, Long Term Capital Management, loss aversion, p-value, paper trading, price discovery process, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Ray Kurzweil, Renaissance Technologies, risk-adjusted returns, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, systematic trading, transaction costs

This relationship between holding period (or, conversely, the trading frequency) and consistency of returns (that is, the Sharpe ratio or, conversely, the drawdown) will be discussed further in the following section. The upshot here is that the more regularly you want to realize profits and generate income, the shorter your holding period should be. There is a misconception aired by some investment advisers, though, that if your goal is to achieve maximum long-term capital growth, then the best strategy is a buy-and-hold one. This notion has been shown to be mathematically false. In reality, maximum long-term growth is achieved by finding a strategy with the maximum Sharpe ratio (defined in the next section), provided that you have access to sufficiently high leverage. Therefore, comparing a short-term strategy with a very short holding period, small annual return, but very high Sharpe ratio, to a long-term strategy with a long holding period, high annual return, but lower Sharpe ratio, it is still preferable to choose the short-term strategy even if your goal is long-term growth, barring tax considerations and the limitation on your margin borrowing (more on this surprising fact later in Chapter 6 on money and risk management).

Then Annualized Sharpe Ratio = NT × Sharpe Ratio Based on T P1: JYS c03 JWBK321-Chan September 24, 2008 13:52 Printer: Yet to come Backtesting 45 For example, if your strategy holds positions only during the NYSE market hours (9:30–16:00 ET), and the average hourly returns is R, and the standard deviation of the hourly returns is s, then the annu√ alized Sharpe ratio is 1638 × R/s. This is because NT = (252 trading days) × (6.5 trading hours per trading day) = 1,638. (A common mistake is to compute NT as 252 × 24 = 6,048.) Example 3.4: Calculating Sharpe Ratio for Long-Only Versus Market-Neutral Strategies Let’s calculate the Sharpe ratio of a trivial long-only strategy for IGE: buying and holding a share since the close of November 26, 2001, and selling it at close of November 14, 2007. Assume the average risk-free rate during this period is 4 percent per annum in this example. You can download the daily prices from Yahoo! Finance, specifying the date range desired, and store them as an Excel file (not the default comma-separated file), which you can call IGE.xls. The next steps can be done in either Excel or MATLAB: Using Excel 1.

Double-clicking the little black dot at the lower right corner of cell I3 will populate the entire column I with excess daily returns. 8. For clarity, type “Excess Dailyret” in the header cell I1. P1: JYS c03 JWBK321-Chan September 24, 2008 13:52 Printer: Yet to come 46 QUANTITATIVE TRADING 9. In cell I1506 (the last row in the next “=SQRT(252)* AVERAGE(I3:I1505)/STDEV(I3:I1505)”. column), type 10. The number displayed in cell I1505, which should be “0.789317538”, is the Sharpe ratio of this buy-and-hold strategy. The finished spreadsheet is available at my web site at epchan.com/ book/example3 4.xls. Using MATLAB % make sure previously defined variables are erased. clear; % read a spreadsheet named "IGE.xls" into MATLAB. [num, txt]=xlsread(‘IGE’); % the first column (starting from the second row) % contains the trading days in format mm/dd/yyyy. tday=txt(2:end, 1); % convert the format into yyyymmdd. tday=datestr(datenum(tday, ‘mm/dd/yyyy’), ‘yyyymmdd’); % convert the date strings first into cell arrays and % then into numeric format. tday=str2double(cellstr(tday)); % the last column contains the adjusted close prices. cls=num(:, end); % sort tday into ascending order.


pages: 194 words: 59,336

The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life by J L Collins

"side hustle", asset allocation, Bernie Madoff, buy and hold, compound rate of return, diversification, financial independence, full employment, German hyperinflation, index fund, money market fund, nuclear winter, passive income, payday loans, risk tolerance, Vanguard fund, yield curve

Professor: “It’s not possible to prevent financial crises.” In the online comments for the article, a reader named Patrick nailed the flaw: “So, markets are efficient except when they’re not. And buy and hold doesn’t work because most people don’t stick to it at the wrong time. OK wisdom, but is this news?” Gold star, Patrick. Worse still is the professor’s recommendation to hold “the entire spectrum of investment opportunities.” This is his solution to dealing with the new investing world his “adaptive markets hypothesis” implies? Seems odd, since he contends “buy and hold” no longer works, to suggest investors buy and hold nearly every asset class imaginable. Huh? Let’s accept the professor’s premise that markets have gotten more volatile and will likely stay that way. I’m not sure I buy it, but OK, he’s the credentialed economist.

In the interview the professor contends that the long-held theory of efficient markets—which says existing share prices almost instantly incorporate and reflect all relevant information—is morphing into what he calls the “adaptive markets hypothesis.” The idea is that with new trading technologies the market has become faster moving and more volatile. That means greater risk. True enough and so far so good. But he goes on to say this means “buy and hold investing doesn’t work anymore.” The magazine interviewer then points out, and good for him, that even during the “lost decade” of the 2000s, the buy and hold strategy of stock investing would have returned 4%. The professor responds: “Think about how that person earned 4%. He lost 30%, saw a big bounce back, and so on, and the compound rate of return….was 4%. But most investors did not wait for the dust to settle. After the first 25% loss, they probably reduced their holdings, and only got part way back in after the market somewhat recovered.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

In contrast, the next four chapters focus on popular dynamic strategies that involve dynamic asset weights (changing over time) but static exposures to a given factor or characteristic such as equity value or currency carry. The boundary between static and dynamic strategies is blurred because even passive equity or bond investing is not “buy and hold” but involves portfolio adjustments to reflect changes in index composition, and if you make a “static” allocation into hedge funds they will be trading quite actively. (Moreover, even a buy-and-hold portfolio may leave the asset contents relatively unchanged over time—the weights will change due to ordinary price movements, and the names will occasionally change due to corporate actions—but portfolio characteristics and risk exposures will be quite unstable. This is easiest to see with bonds, whose durations shorten and whose credit quality can change over time.)

A broader mindset naturally leads to questioning the traditional 60/40 portfolio which relies excessively on one source of excess returns (the equity premium) and which therefore has highly concentrated risk (more than 90% of portfolio volatility is due to equities). • The strategy style perspective is especially important for understanding the profit potential of popular active-trading approaches. Value, carry, momentum, and volatility styles have outperformed buy-and-hold investments in many asset classes. Styles can also offer better diversification opportunities than asset classes. • Sophisticated investors are increasingly trying to look beyond asset classes and strategies in order to identify the underlying factors driving their portfolio returns. A factor-based approach is also useful for thinking about the primary function of each asset class in a portfolio (stocks for harvesting growth-related premia, certain alternatives for illiquidity premia, Treasuries for deflation hedging, and so on) as well as for diversifying across economic scenarios.

Basic finance theory, including single-period Markowitz or mean variance optimization and the single-period CAPM, requires that one use arithmetic means (AM) as inputs. However, most investors are interested in wealth compounding and this is better captured by geometric means (GM, also called compound average returns or compound annual returns). When I present historical evidence I focus on GMs, which show realized buy-and-hold returns. An asset’s GM is always lower than its AM, and the difference is larger for high-volatility assets. An excellent approximation of the relation between GM and AM is: GM ≈ AM—Variance/2. For example, given 20% equity market volatility, annual variance is 4% (20% squared) so the difference between AM and GM is roughly 2%. For more on the AM–GM gap, see Box 28.1. 4.4. RETURNS IN WHAT CURRENCY?


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

One final observation pertains to the difference between dollarweighted and buy-and-hold returns. The returns one almost invariably sees from hedge funds are buy-and-hold returns, which operate on the assumption that the total dollars given by an investor to the fund does not change over time; that is, investors do not later decide to add more money to their position or, alternatively, withdraw existing investments. This can lead to the conclusion that hedge funds have generated more wealth than they actually have, given the reality that capital inflows tend to increase in the period after good returns because investors think the returns will persist into the future.34 Likewise, funds often experience outflows after poor performance, so the dollar-weighted returns can be much lower than buy-and-hold returns if performance reverts to the mean. 274 Investment: A History Some studies have highlighted the fact that the harm to the hedge fund vehicle was likely far greater than it appeared in the global financial crisis, as capital deployed to hedge funds was at its maximum in 2007.

This can lead to the conclusion that hedge funds have generated more wealth than they actually have, given the reality that capital inflows tend to increase in the period after good returns because investors think the returns will persist into the future.34 Likewise, funds often experience outflows after poor performance, so the dollar-weighted returns can be much lower than buy-and-hold returns if performance reverts to the mean. 274 Investment: A History Some studies have highlighted the fact that the harm to the hedge fund vehicle was likely far greater than it appeared in the global financial crisis, as capital deployed to hedge funds was at its maximum in 2007. As a consequence, the dollar-weighted losses were more significant than the buy-and-hold return metrics make them seem. Studies that attempt to measure how divergent buy-and-hold return measures are from dollar-weighted returns for hedge funds show that dollarweighted returns tend to be 3 to 7 percent less than buy-and-hold returns per year (with the precise value naturally contingent upon the interval of time one chooses to analyze).35 Ultimately, the hedge fund is a much more complicated vehicle than is widely appreciated. This group encompasses a plethora of different strategies offering different risk and return characteristics.

An alternative explanation put forward for the momentum seen in markets is that the market could be underreacting to new information such that markets begin to move but do so incompletely when a news shock first occurs, only to continue to drift in that direction for a short time thereafter.50 The thrust of the efficient market theorists’ response to these objections has been that while there may be momentum in some markets, one cannot truly generate outsized returns because of transaction costs. The work used to support these counterarguments by efficient market proponents has thus sought to compare those using momentum strategies to those relying on buy-and-hold approaches as a means of showing that the returns of the latter are greater or equal to the returns of the former. Other work that has sought to shake the foundations of the efficient market hypothesis has centered on predicting 254 Investment: A History returns using various stock characteristics, such as dividend yield and price-to-earnings ratio. The empirical evidence here is also mixed, with some studies advocating such strategies as “Dogs of the Dow” (or dividend-based yield strategies) as generating outsized returns followed by responses showing how this does not hold across all periods, how it may hold for only select aggregations of stocks, or again how one cannot predictably get excess returns by adhering to it.


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

asset allocation, buy and hold, collateralized debt obligation, commoditize, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, Flash crash, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, market bubble, market clearing, money market fund, mortgage debt, new economy, Occupy movement, passive investing, Paul Samuelson, Ponzi scheme, post-work, principal–agent problem, profit motive, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, statistical arbitrage, survivorship bias, The Wealth of Nations by Adam Smith, transaction costs, Vanguard fund, William of Occam, zero-sum game

The more volatile the fund returns, the more the investor fell short of the returns the fund actually earned. As shown in Exhibit 4.4, the gap between reported returns and investor returns was just 0.8 percentage points for the funds in the least volatile quintile—quite bad enough—but grew to fully 3.0 percentage points in the most volatile quintile, on average a staggering cumulative 15-year loss of some 82 percent of the potential return an investor could earn by simply buying and holding the fund. “The Good Old Days” How different it was in the industry’s early days! I’m one of the rare persons, if not the only one, alive today to have observed firsthand the sea change in the industry’s business model. At the industry’s outset in 1924, most fund management companies engaged solely in portfolio supervision, research, and, yes, management. They did not engage in marketing or in the distribution of fund shares.

Standard 4: Marketing Orientation What is more, the record is clear that the gap between the returns earned under the highly diversified, low-cost, broad market concept, relative to the more concentrated funds-as-individual-stocks concept, is far larger than the cost differential. Why? Because the cost differential reflects only the economic component of the investment management service. But there is also a large emotional component to the returns earned by investors. Since buying and holding the entire market is apt to entail far less trading and far less emotion, investors who own the entire stock market (at low cost) actually capture their fair share of the market’s return. But when fund managers act as salesmen of specialized funds, investors seem, far too often, to buy and sell their shares at the wrong time. Fund marketers favor the fads that are in the momentary limelight, with the expectation that investors will take the bait.

Yes, much of that gambling in ETFs is done by financial institutions that speculate, or hedge, or equitize cash holdings, or have margin lending on tap. No one seems to know how these numbers play out, but I’d estimate that 75 percent of ETF assets are held by institutional investors and the remaining 25 percent by individuals. Further, I’d also guess that about two-thirds of the individual holders follow trading strategies of one type or another, and only one-third follow a strict buy-and-hold strategy akin to that of the original TIF paradigm. (This would mean that less than 10 percent of ETF assets are held by long-term investors.) Exhibit 6.6 below shows the 2011 turnover rates for the major players in the ETF game, ranging from a high of 15,813 percent to a low of 342 percent. The exhibit also presents the turnover rates of a selection of individual ETFs, ranging from 12,004 percent to 207 percent.


The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William J. Bernstein

asset allocation, backtesting, buy and hold, capital asset pricing model, commoditize, computer age, correlation coefficient, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, fixed income, index arbitrage, index fund, intangible asset, Long Term Capital Management, p-value, passive investing, prediction markets, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, South Sea Bubble, stocks for the long run, survivorship bias, the rule of 72, the scientific method, time value of money, transaction costs, Vanguard fund, Yogi Berra, zero-coupon bond

Just as the amateur tennis player who simply tries to return the ball with a minimum of fancy moves is the one who usually wins, so too does the investor who simply buys and holds a widely diversified stock portfolio. This investor is the one who Market Efficiency 95 Figure 6-1. Ten-year January CRSP 9–10 decile minus S&P. usually comes out on top. The title of the piece refers to the concept that in both amateur tennis and professional investing, success is less a matter of winning than avoiding losing. And the easiest way to lose in investing is to incur high costs by trading excessively. The ultimate loss-avoidance strategy, then, is to simply buy and hold the entire market, i.e., to index. The reason should be apparent from the preceding discussion of fund costs. Since constantly analyzing and adjusting your portfolio results in high expenses and almost no excess return, why not just work at minimizing all four layers of expenses by buying and holding the market?

Since constantly analyzing and adjusting your portfolio results in high expenses and almost no excess return, why not just work at minimizing all four layers of expenses by buying and holding the market? Table 6-4 lists the four expense layers for an indexed approach to investing. The last row shows the theoretical difference in returns between the active and indexed approach. Again, it has to be pointed out that this is a theoretical advantage, since at least some of the active-fund expenses are spent on research, which has been shown to be of benefit. But remember that research expenses almost never completely pay for themselves, and only a small portion of an active fund’s total four-layer expense structure is spent on analysis. The basic thing to remember about research expense is that it results in turnover, which in turn increases total expense through commissions, spreads, and impact costs. 96 The Intelligent Asset Allocator Table 6-4.

A detailed discussion of the efficient market hypothesis is beyond the scope of this book, but what it means is this: it’s futile to analyze the prospects for an individual stock (or the entire market) on the basis of publicly available information, since that information has already been accounted for in the price of the stock (or market). Cognoscenti frequently respond to news about a company with a weary, “It’s already been discounted into the stock Market Efficiency 105 price.” In fact, a very good argument can be made that the market more often than not overreacts to events, falling too much on bad news and rising too much on good news. The corollary of the efficient market hypothesis is that you are better off buying and holding a random selection, or as we have shown above, an index of stocks rather than attempting to analyze the market. I am continually amazed at the amount of time the financial and mass media devote to well-regarded analysts attempting to divine the movements of the market from political and economic events. This is a fool’s errand. Almost always these analysts are the employees of large brokerage houses; one would think that these organizations would tire of looking foolish on so regular a basis.


Concentrated Investing by Allen C. Benello

activist fund / activist shareholder / activist investor, asset allocation, barriers to entry, beat the dealer, Benoit Mandelbrot, Bob Noyce, business cycle, buy and hold, carried interest, Claude Shannon: information theory, corporate governance, corporate raider, delta neutral, discounted cash flows, diversification, diversified portfolio, Edward Thorp, family office, fixed income, high net worth, index fund, John von Neumann, Louis Bachelier, margin call, merger arbitrage, Paul Samuelson, performance metric, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, survivorship bias, technology bubble, transaction costs, zero-sum game

He had lectured at Cambridge on the stock market in 1910, describing it as “essentially a practical subject, which cannot properly be taught by book or lecture,” about which “I myself have no practical experience of the questions involved.”19 He was given his first taste of finance when in 1911, he was appointed to King’s College’s Estates Committee, which was tasked with managing the college’s property and funds. The Estates Committee held King’s College’s non–real estate assets largely in cash. Keynes pushed to invest the money, which meant, at the time, buying and holding bonds.20 The stock market was out of the question. It was regarded as the province of the individual investor, and common stocks were not regarded as institutional assets.21 Keynes had no inherited wealth, and he was not well paid as a junior clerk. He started making money lecturing and tutoring private students at Cambridge. Royalties from his publication of The Economic Consequences of Peace in 1919, and fees from speaking engagements and opinion pieces, boosted his income sufficiently to provide him with a small grubstake—£4,000 or approximately $300,000 today.22 Keynes’s broker allowed him to leverage his capital on margin 10 to 1,23 and he used the not insignificant sum to begin speculating in the currency markets.

From 1922 to 1929, preference shares comprised about 12 percent of the portfolio. From 1930 to 1939, 22 percent of the portfolio was dedicated to U.K. preference shares and U.S. preferred stock, and 20 percent from 1940 to 1946.64 Like Lou Simpson would 50 years later in the United States, Keynes revolutionized insurance investment management in the United Kingdom. Before Keynes, institutional investing meant buying and holding bonds and real estate. U.K. institutions had only 3 percent of their assets in stocks in 1920 and only 10 percent by 1937.65 As he had with King’s College’s discretionary portfolios, though he held considerably less sway, Keynes pushed two British insurance companies he was involved with to shift into equities. He advocated that institutional portfolios put up to 75 percent of the assets in equities, considerably more than any insurer was prepared to allocate at the time, and more than Keynes would while managing those portfolios.66 Keynes relished concentration, focusing as much as half of his portfolio into five holdings.67 He liked to make colossal, concentrated bets on industries that he thought would appreciate sharply.

Chambers et al. note that his subsequent improvement in returns was a result of his “no longer having to make top‐down asset allocation decisions which compromised his stock‐picking instincts” because “he could now take greater care in timing the purchases of those stocks he liked.” The portfolio he managed for King’s College outshone the market throughout the 1930s, except for the crash of 1938, when he lost two‐thirds of his fortune. It quickly recovered. His shift to long‐term buy‐and‐hold value investing allowed him to maintain his commitment to his holdings when the market fell sharply in 1938, his final test. In so doing, he provides an excellent example of the natural advantages that accrue to investors with a long‐term focus, who are able to behave in a contrarian manner during economic and financial market downturns. John Maynard Keynes: Investor Philosopher 65 Under Keynes’s tenure as First Bursar of King’s College—a period that encompassed the 1929 market crash, the Great Depression, and World War II—the discretionary portfolio of the King’s College grew through Keynes’s investment prowess and cash inflows from just over £20,000 to £820,000.


pages: 250 words: 77,544

Personal Investing: The Missing Manual by Bonnie Biafore, Amy E. Buttell, Carol Fabbri

asset allocation, asset-backed security, business cycle, buy and hold, diversification, diversified portfolio, Donald Trump, employer provided health coverage, estate planning, fixed income, Home mortgage interest deduction, index fund, Kickstarter, money market fund, mortgage tax deduction, risk tolerance, risk-adjusted returns, Rubik’s Cube, Sharpe ratio, stocks for the long run, Vanguard fund, Yogi Berra, zero-coupon bond

For example, retirees often use bond income to cover part of their living expenses. The interest rate a bond pays doesn’t change once the bond is issued. Even if the company that issues the bond does spectacularly well, you still earn the 58 Chapter 4 original interest rate. For example, a $1,000 bond with a 6% interest rate pays $60 in interest each year until the bond matures. That’s one attraction of buying and holding a bond: Your return may be lower than what you’d earn from investing in stock, but you know what your return will be all along. Although most investors stick with bonds purely as income investments, you can make money with bonds in another way. Although a bond’s interest rate doesn’t change, its price can. For example, if market interest rates go up, the bond price goes down. (Page 136 explains why this happens.)

Individual Stocks Stocks that pay highdividends, which are taxable. Stocks you trade frequently, which results in capital gains. 68 Chapter 4 Low-turnover stock funds, such as index funds. ETFs, which don’t have to sell investments to meet redemption requests the way mutual funds do. Tax-managed funds, which invest with an eye toward reducing taxes. Stocks with low or no dividends. Stocks you tend to buy and hold onto, because you don’t pay capital gains until you sell, and then they’re long-term capital gains. Investments to hold in a tax-advantaged account Investments to hold in a taxable account Bonds and Bond Funds Regular bonds and highyield bonds, because they produce current income taxed at ordinary incometax rates. Municipal bonds and bond funds; the federal government doesn’t tax income (nor does the state tax bonds if you buy stateissued bonds in the state where you live).

Managing Taxes in Taxable Accounts Sometimes, you have to put higher-taxed investments into taxable accounts. For example, if you’re saving for a short-term goal, stocks may be too risky, so you put your money in bonds or bond funds, or in a savings account. Or you may be saving for a goal that doesn’t have a tax-advantaged account option. Don’t worry. Although you shouldn’t make investment decisions purely to avoid paying taxes, you can keep your investment taxes low with the following tactics: • Buy and hold individual stocks and bonds instead of stock or bond funds. You don’t pay capital gains on individual stocks and bonds until you sell them; fund managers may trade within stock or bond funds frequently, and you pay taxes on any gains from those trades. Sell individual securities in taxable accounts only to rebalance your asset allocation or because an investment hasn’t panned out as you hoped. • Buy municipal-bond funds or municipal bonds.


pages: 121 words: 31,813

The Art of Execution: How the World's Best Investors Get It Wrong and Still Make Millions by Lee Freeman-Shor

Black Swan, buy and hold, cognitive bias, collapse of Lehman Brothers, credit crunch, Daniel Kahneman / Amos Tversky, diversified portfolio, family office, I think there is a world market for maybe five computers, index fund, Isaac Newton, Jeff Bezos, Long Term Capital Management, loss aversion, Richard Thaler, Robert Shiller, Robert Shiller, rolodex, Skype, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, technology bubble, The Wisdom of Crowds, too big to fail, tulip mania, zero-sum game

This paints a picture of a rather bulletproof business model because so many companies rely on Experian’s reports in the day-to-day running of their businesses. What could possibly go wrong? A Hunter bought the stock on 13 June 2006, at an initial price of £9.02 per share. Despite holding out through the credit crunch, this Hunter subsequently sold his entire stake five years later on 1 September 2011 with the shares trading at £7.06 per share. Had he done nothing, his patience as a buy-and-hold investor would not have been rewarded and he would have realised a loss of 22%. So much for the saying, ‘Time is your friend when losing’. Fortunately, the Hunter had bought more shares in the company when they fell in price during that period. This reduced the average book price of his shares to £5.66 per share and meant that when he did sell he realised a profit of 19% and not a loss of 22%.

The Hunter adopts the three-bites-at-the-cherry approach to investing, which means that he initially invests a third of the total amount he is willing to invest in the stock. If the price falls beyond a certain threshold, he invests another third. If the price falls yet further, he will deploy his final third of remaining capital in the stock. The Rabbit invests his entire stake, $900, in one go and adopts a buy-and-hold approach. The Assassin also invests his entire stake of $900 in one go but will only keep holding it if it doesn’t hit the stop-loss set at 25% below his original purchase price. Here is an overview of each strategy over the next four years: Rabbit’s P&L Year Share price Shares bought Shares sold Total book cost Average price paid Profit or loss 2011 $100 9 0 $900 $100 $0 2012 $75 0 0 $900 $100 -$225 2013 $50 0 0 $900 $100 -$450 2014 $90 0 0 $900 $100 -$90 Overall profit or loss -$90 Assassin’s p&l Year Share price Shares bought Shares sold Total book cost Average price paid Profit or loss 2011 $100 9 0 $900 $100 $0 2012 $75 0 9 $900 $100 -$225 2013 $50 0 0 $900 $100 -$225?

Through its wholly-owned subsidiaries it does everything from investment banking to securities brokerage, fund management, hire purchase and machinery/equipment leasing. If you read one of its strategy documents you will see that its goal is to be Thailand’s main consumer bank. A Connoisseur initiated a position in Kasikornbank on 20 June 2008 when the shares traded at the equivalent of £1.09 per share. He sold two years later on 1 November 2010 with the shares trading at £2.65 per share. On a buy-and-hold basis this represented a return of 143%, but the investor’s trimming meant that his average sell price was £1.88 per share. Thus, when he eventually sold out completely he had made a profit of 79%. DATA POINT: Dealing with losses Remember, despite their successful approach, only one-in-three of the Connoisseurs’ ideas made money. In other words, every Connoisseur was also an Assassin or a Hunter when it came to losses.


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, price anchoring, price stability, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

The turmoil in the financial markets persuaded Sidney Homer to pick up the threads of his book, and soon he and Leibowitz were writing it together. The manuscript turned into Inside the Yield Book: New Tools for Bond Market Strategy, published in 1972 by PrenticeHall and the New York Institute of Finance.2 The very notion of a bond market strategy was revolutionary in a field where, as I mentioned earlier, bonds had been traditionally bought on a buy-and-hold basis. Active management of bond portfolios followed quickly in the wake of the book’s publication, while buy-and-hold almost vanished. The bond market has never been the same, and fixed-income investing has become more elaborate, more complex, more challenging— and often more risky—than the stock market. Thanks to the work of Homer and Leibowitz, theory now played an important role in helping to transform the practice of bond management in ways no one had in any way anticipated.

During this period, the aggregate portfolio of corporations, dealers, foreigners, and mutual funds showed annual gains of 1.5 percent over and above the gains they would have made just from the rise or fall of bern_c04.qxd 3/23/07 9:02 AM Page 57 Robert C. Merton 57 the market as a whole. Individuals, on the other hand, had disastrous results. Their returns from trading were 3.8 percent a year lower than if they had just invested on a buy-and-hold basis. The absolute magnitude of that number is astonishing: It is equal to 2.2 percent of Taiwan’s nominal GDP during 1995–1999, or nearly as much as total consumer spending on clothing and footwear in Taiwan. This weird and persistent form of market behavior evokes what Daniel Kahneman has had to say on these phenomena in a more general sense: “It is quite remarkable that you have those individuals losing money, and there seems to be an endless supply of individuals, because this is not a transitory phenomenon.

In this role, investors who use their cash to buy assets with future cash f lows are giving the sellers of those assets the option of realizing in the present the discounted value of those future cash f lows. But something more profound is going on. In this kind of role, financial markets are a time machine that allows selling investors to compress the future into the present and buying investors to stretch the present into the future. Without financial markets, all assets would be buy-and-hold, and the cost of capital would be an order of magnitude higher than it is today. Some of these kinds of transactions arise because one side or the other sees an opportunity to buy a bargain or to sell an overpriced asset. Either way, the seller is compressing the future into the present by raising cash, while the buyer is stretching the present into the future by committing cash. Bringing buyers and sellers together, financial markets do more than create the time machine swapping money today for money tomorrow.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

3Com Palm IPO, Albert Einstein, asset allocation, beat the dealer, Bernie Madoff, Black Swan, Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial innovation, George Santayana, German hyperinflation, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Meriwether, John Nash: game theory, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, margin call, Mason jar, merger arbitrage, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stocks for the long run, survivorship bias, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

In fact, their costs may be even less than those of indexers. If such a buy-and-hold investor were, for instance, to choose stocks at random, purchasing an amount of each proportional to its market capitalization, we could show, by reasoning like that used to prove Sharpe’s Principle, that the expected return is the same as for the index from which the stocks were chosen minus the presumably small costs of acquiring the stocks. The main disadvantage to buy-and-hold versus indexing is the added risk. In gambling terms, the return to buy-and-hold is like that from buying the index then adding random gains or losses by repeatedly flipping a coin. However, with a holding of twenty or so stocks spread out over different industries, this extra risk tends to be small. The threat to a buy-and-hold program is the investor himself. Following his stocks and listening to stories and advice about them can lead to trading actively, producing on average the inferior results about which I’ve warned.

Some securities industry spokesmen argue that harvesting this wealth from investors somehow makes the markets more efficient and that “markets need liquidity.” Nobel Prize–winning economist Paul Krugman disagrees sharply, arguing that high-frequency trading is simply a way of taking wealth from ordinary investors, serves no useful purpose, and wastes national wealth because the resources consumed create no social good. Since the more the rest of us trade the more we as a group lose to the computers, here’s one more reason to buy and hold rather than trade, unless you have a big enough edge. Although it’s politically not likely, a small federal tax, averaging a few cents a share on every purchase, could eliminate these traders and their profits, possibly saving more for investors than the extra tax, and adding cash to the US Treasury. If this cut a trading rate of about $30 trillion a year for equities by half, a 0.1 percent tax (3 cents a share on a $30 stock) would still raise about $15 billion

On the other hand, short-term losses are first used to offset short-term gains in the tax calculation, so they are often more valuable than long-term losses, which means that it is often better to sell losers before you have owned them for over a year. Princeton Newport Partners reduced or deferred much of the partners’ taxable gains at a time when tax laws were different from what they are now. Nonetheless, interesting possibilities still exist. — Tax-loss selling can be organized to yield greater benefits. Suppose you are a taxable investor who is happy buying and holding a stock index fund. If instead you buy a “basket” of twenty or thirty stocks that are chosen to track the index, you may be able to harvest increased tax benefits. That such a small number of stocks can, together, act like an index is shown by the Dow Jones Industrial Index, a basket of just thirty stocks. It has historically moved in concert with the S&P 500, even though the two indexes are chosen by entirely different methods and the very similar price behavior of the two was not planned.


Trade Your Way to Financial Freedom by van K. Tharp

asset allocation, backtesting, Bretton Woods, buy and hold, capital asset pricing model, commodity trading advisor, compound rate of return, computer age, distributed generation, diversification, dogs of the Dow, Elliott wave, high net worth, index fund, locking in a profit, margin call, market fundamentalism, passive income, prediction markets, price stability, random walk, reserve currency, risk tolerance, Ronald Reagan, Sharpe ratio, short selling, transaction costs

During the bear cycles, stock valuations go down (that is, P/E ratios go down), which usually means that prices go down.5 Tables 6.1 and 6.2 show the major cycles that have affected the U.S. stock market over the last 200 years. TABLE 6.1 Primary Bull Markets According to market historian Michael Alexander, we have had many such cycles during the last 200 years. Table 6.1 shows a listing of primary bull markets. On the average, these bull markets tend to last about 15 years, and investors who buy and hold the major averages earn about 13.2 percent per year. These bull markets lasted 103 years of this 200-year period. Unfortunately, for people who believe in buying and holding stocks, primary bull markets tend to be followed by primary bear markets. These are major shakeouts, which tend to correct the excesses of the bull market. The United States is now in such a primary bear market, which began in early 2000. Table 6.2 shows a listing of primary bear markets. TABLE 6.2 Primary Bear Markets The average primary bear market lasts 18 years and shows a “real” return of 0.3 percent per year.6 Thus, stocks may be facing a long period of decline ahead.

When the price drops below the one-year moving average, some people make the assumption that the direction of prices has changed. Colby and Meyers, in their Encyclopedia of Technical Market Indicators,13 found that the strategy of buying stock when the price crossed above the one-year average and selling it when it crossed below that average outperformed a buy-and-hold strategy by a large margin. The strategy of buying stock when the price crossed above the one-year average and selling it when it crossed below that average outperformed a buy-and-hold strategy by a large margin. Short moving averages, in contrast, are quick moving. A market does not have to go up too many days for the price to be above its five-day moving average. Similarly, prices could quickly drop below that average. Donchian was one of the first people to write about a system using moving averages.

They also have trading costs and the costs of having to have a certain amount of its assets in cash. Many mutual funds also have a sales load when you buy or sell your fund. These fees are paid by you. Thus, the costs of investing in funds that are actively managed are huge. According to Baer and Gensler, these fees are the primary reason that actively managed mutual funds cannot outperform a passive fund that simply buys and holds a major stock index. There are also several drawbacks to mutual funds that Baer and Gensler do not point out: • First, mutual funds control much of the stock market through their ownership. Most of them tend to invest in the large blue-chip companies of Wall Street, partially because these are the most liquid. In addition, if the fund falls in value, the public is not likely to fault them much if their holdings include giants such as General Electric and Microsoft.


The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals by Daniel R. Solin

asset allocation, buy and hold, corporate governance, diversification, diversified portfolio, index fund, market fundamentalism, money market fund, Myron Scholes, passive investing, prediction markets, random walk, risk tolerance, risk-adjusted returns, risk/return, transaction costs, Vanguard fund, zero-sum game

Mutual funds were originally conceived on the idea that small investors should not be buying and selling individual stocks frequently because transaction costs would eat up any potential profit. Instead, small investors should pool their money into a mutual fund, where a "professional" money manager buys and sells the stocks for them, in large blocks, 28 Your Broker or Advisor Is Keeping You from Being a Smart Investor with much lower commissions than an individual investor could get. In this way, the investor can "buy and hold" a good mutual fund, and the fund manager can indulge his or her illusive goal of beating the markets through stock picking and market timing. Nice theory. But today hyperactive brokers and advisors often recom~ mend that their diems sell old mutual funds and invest in the next "hot" fund. This way, these "investment professionals" can continue to generate sales commissions. Remember this: The proof is overw-helming that Smart Investing-investing for market rerurns---outperforms attempt~ ing to beat the markets over the long term.

No one has the ab ility to ptedict the next "hot" manager. Al l we know is that it is unlikely that he or she will be "hot" for long. Hyperactive Investors typically hold a mutual fund in their portfolio for four years or less. Why do they switch funds? After all, as I previously noted, the concept of a mutual fund was to allow small investors who didn't have time to research investments and pick their own stocks to "buy and hold" a fund and let the "invesunent professional" do the stock picking. Hyperactive Investors switch funds because they are convinced by the fi nancial media or by their hyperactive broker or advisor that they can do better in a "hot" mutual fund run by a "hot" mutual fund manager. And the coveted Morningstar five-star rating is freq uently what convinces these investors to sell lower-rated funds and buy the newly designated ones rated "five stars."

Clements is the rare exception to those financial journalists who routinely peddle "financial pornography." Too Good 10 Be True? 153 Here is what Burton Malkid has to say about charting (wh ich he likens to "alchemy") in his sem inal book, A Random Walk Down Wall Strut, (p. 165): "There has been a rematkable unjformity in the conclusions of studies done on all forms of technical ana1ysis. Not one has consistently outperformed the placebo of a buy-and-hold strategy. Technical methods cannot be used to make useful investment strategies ... Ma1kiel believes that chartistS simply provide cover fo r hyperactive brokers to encourage more trading-generating more fees-by their unsuspecting clients. It is notewonhy that, in February 2005, C itigroup fired its entire techn ical analysis group. This was reported at http://www.shiaustreet.com/200 5/february/ l 81 tao ph p.


pages: 357 words: 91,331

I Will Teach You To Be Rich by Sethi, Ramit

Albert Einstein, asset allocation, buy and hold, buy low sell high, diversification, diversified portfolio, index fund, late fees, money market fund, mortgage debt, mortgage tax deduction, prediction markets, random walk, risk tolerance, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, survivorship bias, the rule of 72, Vanguard fund

If, however, you hold your investment for more than a year, you’ll pay only a capital-gains tax, which in most cases is currently 15 percent (depending on your income, it could even be less). This is a strong incentive to buy and hold for the long term. In the above example of a $10,000 gain, if you sold it after one year and were taxed at 15 percent, you’d pocket $8,500. Here’s the trick: If you’ve invested within a tax-advantaged retirement account, you don’t have to pay taxes in the year that you sell your investment. In a 401(k), which is tax deferred, you’ll pay taxes much later when you withdraw your money. In a Roth IRA, by contrast, you’ve already paid taxes on the money you contribute, so when you withdraw, you won’t pay taxes at all. Since you presumably made a good investment, why not hold it for the long term? In Chapter 6, we covered how people can’t time the market. In Chapter 3, I showed you how buy-and-hold investing produces dramatically higher returns than frequent trading.

There’s a difference between being sexy and being rich. When I hear people talk about the stocks they bought, sold, or shorted last week, I realize that my investment style sounds pretty boring: “Well, I bought a few good funds five years ago and haven’t done anything since, except buy more on an automatic schedule.” But investment isn’t about being sexy—it’s about making money, and when you look at investment literature, buy-and-hold investing wins over the long term, every time. Forget what that money TV station or finance magazine says about the stock-of-the-month. Do some analysis, make your decision, and then reevaluate your investment every six months or so. It’s not as sexy as those guys in red coats shouting and waving their hands on TV, but as an individual investor, you’ll get far greater returns. Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.

If you’re selling outside of a retirement account, there are many tax implications, such as tax-loss harvesting (which lets you offset capital gains with losses), but since most of us will invest all of our money in tax-efficient retirement accounts, I’m not going to get into these issues here. I want to emphasize that I almost never have to sell investments because I rarely make specific stock investments. If you pick a lifecycle fund or build a portfolio of index funds instead, you rarely have to think about selling. My advice: Save your sanity and focus on more important things. YOU ACHIEVED YOUR SPECIFIC GOAL Buy and hold is a great strategy for ultra-long-term investments, but lots of people invest in the medium to short term to make money for specific goals. For example, “I’m going to invest for a dream vacation to Thailand. . . . I don’t need to take the trip any time soon, so I’ll just put $100/month into my investing account.” Remember, if your goal is less than five years away, you should set up a savings goal in your savings account.


pages: 327 words: 91,351

Traders at Work: How the World's Most Successful Traders Make Their Living in the Markets by Tim Bourquin, Nicholas Mango

algorithmic trading, automated trading system, backtesting, buy and hold, commodity trading advisor, Credit Default Swap, Elliott wave, fixed income, Long Term Capital Management, paper trading, pattern recognition, prediction markets, risk tolerance, Small Order Execution System, statistical arbitrage, The Wisdom of Crowds, transaction costs, zero-sum game

The Expo is a place where traders can come together, exchange ideas, meet vendors and suppliers, uncover new tools and techniques, and learn and improve their craft. It has been a long time since those days of bull market glory. The S&P 500 has barely changed from its peak value in 1998, even though 14 years have passed. The entire idea of buy and hold has been discredited, leaving a generation of investors looking for the 10 percent annual gains they were supposedly “entitled” to bitterly disappointed. For more than a decade, it has been crystal clear that trading is not an impossibility or a luxury; it is a necessity if you want to make money in the financial markets. The whole buy-and-hold concept was a joke to begin with. There simply is no free lunch. Investing and trading are work—hard work that pays well. Tim and co-author Nick have access to a lot of traders, including some of the very best, and this book contains the collected experience of a group of traders they both have come to know over the years.

I heard so many horror stories about people not getting out, and while I’m not saying I got all the way out myself, I knew to reduce my exposure and wondered why other people weren’t doing it, too. People said to me, “Well, we are in it for the long term,” but my view is that the long term is built upon shorter-term trades that can be managed on a long-term basis, though more on a tactical scale. So, although the strategic view is focusing on the long term, short-term trades can get you there better than just a buy-and-hold approach. After that, I talked to people about making trades for them and giving advice, and then I talked to an advisor who explained to me that it was easy to get into business and still be independent. One of my biggest hang-ups was that I didn’t want to work for a big brokerage house because I wanted more flexibility and to not have to push proprietary products or funds. So, it eventually just made sense to go out on my own.

So, it eventually just made sense to go out on my own. Bourquin: How do you make money while managing other people’s money? Is it a percentage of gains, a flat rate, or something else? Foster: For me, it’s just a straight percentage of assets, and it varies, depending on how active I am in the account. If, for example, a client is interested in a more passive account that mainly employs a buy-and-hold approach and for which major market changes would only result in changes to a smaller percentage of the account—that would be a 1.25 percent fee. Some accounts are totally active, where clients have more money with a big brokerage house, but they want to manage a portion of their account with me using what they call “play money.” Now, that’s quite an interesting term, and it would be nice to have that, but it’s essentially the aggressive portion of their account.


pages: 345 words: 87,745

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

asset allocation, backtesting, Bernie Madoff, buy and hold, capital asset pricing model, cognitive dissonance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Ponzi scheme, prediction markets, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

Assume three investors each start to invest in January 2000 with a portfolio of 45 percent in U.S. stocks as represented by the S&P 500, 15 percent in international stocks as represented by the MSCI EAFE Index, and 40 percent in bonds as represented by the Barclays Capital Aggregate Bond Index. One investor uses tactical asset allocation in an attempt to beat the markets and underperforms them by 1 percent annually. The second uses a buy-and-hold strategy and lets the portfolio sit over the 10-year period, thereby earning market returns. The third investor rebalances every year for 10 years and thereby outperforms the tactical asset allocator and the buy-and-hold investor. Figure 8.4 illustrates the outcomes. Figure 8.4 The Benefit from a Strategic Asset Allocation 2000–2009 The rebalanced portfolio in Figure 8.4 picked up an excess compounded return of 0.9 percentage points over the market portfolio that wasn’t rebalanced during the last decade.

HG4530.F428 2010 332.63'27—dc22 2010028567 Foreword In The Power of Passive Investing, Rick Ferri has given us a comprehensive guide to what is proving to be a virtual revolution in investment strategy. Up until the 1980s, “stock picking” was the dominant method of investing by individual investors. Then, through the 1990s, professional investment supervision through actively managed mutual funds was ascendant. But, gradually, index investing—buying and holding a portfolio representing the entire stock (or bond) market, or various sectors of those markets—has attracted the most attention (and dollars) from investors. Rick’s book begins with the historical background of index funds. As one who was present at the creation of the first index mutual fund in December 1975, I can attest to the accuracy of his chronology. (My first decision at the upstart firm Vanguard, which I founded and which began operations in May 1975, was to form the world’s first index mutual fund.)

There’s no academic evidence supporting the notion that active management has paid off in the long run, no way of telling which stocks have good fundamentals for investment purposes, and no research supporting the ridiculous notion that more diversification is imprudent overdiversification! But it doesn’t stop there. The same attorneys then say that “if you blindly throw money at index funds, then you should at least hold more than the 500 stocks in the S&P 500. . . . A trustee, for example, might consider a long-term buy and hold investment strategy using two index funds, one that tracks the Standard and Poor’s 500 Index and the other that tracks the Nasdaq-100 Index.”16 This advice shows poor knowledge of indexing methods. The S&P 500 primarily holds large U.S. stocks from all U.S. exchanges and NASDAQ-100 represents the largest 100 companies that trade mainly on the Nasdaq market, excluding financial firms. Adding a NASDAQ-100 index fund can’t diversify the S&P 500 because essentially every stock in the NASDAQ-100 Index is already in the S&P 500 Index!


The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

active measures, Affordable Care Act / Obamacare, barriers to entry, business cycle, business process, buy and hold, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, disruptive innovation, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial innovation, fixed income, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, Kenneth Arrow, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Robert Shiller, shareholder value, Steve Jobs, The Great Moderation, value at risk

The procedure for computing the partial R2 s for financial (accounting) reports—source no. 1—is illustrated as follows: First, for each quarter, the quarterly buy-and-hold abnormal return of a firm’s shares (CAR) is regressed on the three-day buy-and-hold abnormal 48 MATTER OF FACT returns associated with each of the three following types of events (information sources): corporate (nonaccounting) SEC filings (CAR_SEC), analysts’ forecasts (CAR_AF), and managers’ forecasts (CAR_MF), that is, the nonaccounting events occurring during the calendar quarter. The cross-sectional regression model is as follows (pooling across quarters of the year): CARjt = at + bt CAR_SECjt + ct CAR_AFjt + dt CAR_MFjt + 𝜀jt , (4.1) where j and t are firm and year subscripts, respectively. The residual of this regression is 𝜀jt . Second, the three-day buy-and-hold abnormal returns associated with the firm’s financial accounting reports released during the calendar quarter (CAR_FAR) are regressed on the three-day buy-and-hold abnormal returns associated with the three nonaccounting events: corporate (nonaccounting) SEC filings (CAR_SEC), analysts’ forecasts (CAR_AF), and managers’ forecasts (CAR_MF).

Second, the three-day buy-and-hold abnormal returns associated with the firm’s financial accounting reports released during the calendar quarter (CAR_FAR) are regressed on the three-day buy-and-hold abnormal returns associated with the three nonaccounting events: corporate (nonaccounting) SEC filings (CAR_SEC), analysts’ forecasts (CAR_AF), and managers’ forecasts (CAR_MF). The regression model is as follows (pooling across quarters): CAR_FARjt = 𝛼t + 𝛽t CAR_SECjt + 𝜒t CAR_AFjt + 𝛿t CAR_MFjt + 𝜌jt , (4.2) The residual of this regression is 𝜌jt . Finally, the residuals from the first regression (𝜀jt ) are regressed annually on the residuals from the second regression (𝜌jt ): 𝜀jt = κt + γt ρjt + θjt . (4.3) The R2 of this regression (equation (4.3)) is the unique contribution to investors’ information of firms’ financial reports, in a given year, and is reported in the bottom line of Figure 4.1.

See Public Company Accounting Oversight Board Penetration gains 139 Pepsi 88 Performance measures, annual median absolute prediction error 54–55 Pfizer company strategy 164 competitors 120 credit, enhanced transparency 202 drug launch 169–170 earnings conference calls, Q&A section 201 expected financials, earnings conference call 16 FDA decisions, impact 200 first-in-class product 169–170 growth prospects 78 Johnson & Johnson’s, comparison 165 joint development 168 SUBJECT INDEX patents 78, 88 pipeline-related questions, number/percentage 202f product pipeline, 10-K disclosure enhancements 209t R&D expenses 165 response (analyst pipeline questions) 200–201 restructuring cost 108 ROE 84–85 sales, expiration 164–165 10-K filings 200–201 transparency, enhancement 202 Pharmaceutics, Strategic Resources & Consequences Report 163, 167f Physical capital 82 Pipeline exposé, reasons 201–203 pipeline-related questions, number/percentage 202f questions, Pfizer response 200–201 test data, usefulness 170–171 Policies-in-force data 150 Post-financial crisis 19 Premium prices, charging 234 Price to earnings ratio (P/E ratio) 53, 232 Procter & Gamble, consumer product business 88 Product pipeline 170–173, 233 candidates 172f enhancements 209t Products growth 139 launch 105 Profitability maintenance 150–151 measures 78 ratios, inflation 216 Progressive advertising 147 year-on-year revenue growth reports 157 Property and casualty (PC) business risk 147 Subject Index Property and casualty (PC) firms, dominance 147 Property and casualty (PC) insurance, Strategic Resources & Consequences Report 146, 160f sector synopsis 147–148 Proposed information, elicitation process 199–200 Prosensa Holding NV, drug failure 104 Public companies financial analyst tracking 63 vintage year, accounting relevance (decrease) 89f Public Company Accounting Oversight Board (PCAOB), enforcement actions 56 Quantitative easing 32–33 Fed termination 54 Quarterly buy-and-hold abnormal return 47–48 Quarterly earnings releases 44 Quarterly reporting, elimination (consideration) 207 R2 . See Adjusted coefficient of variation Real assets 82 Real estate sales, turnover 97 Regression analysis, example 33–34 Regulation Fair Disclosure 45 Regulatory burden, lightening 206–208 Regulatory risk 158 Reinsurance 147 Reinsurers, company exposure 153 Relevance, loss 77 Reported earnings components 149 release 46 understatement 216 Reported financial information, role (documentation) 37–38 Reporting.


pages: 364 words: 101,286

The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot, Richard L. Hudson

Albert Einstein, asset allocation, Augustin-Louis Cauchy, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black-Scholes formula, British Empire, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, carbon-based life, discounted cash flows, diversification, double helix, Edward Lorenz: Chaos theory, Elliott wave, equity premium, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, full employment, Georg Cantor, Henri Poincaré, implied volatility, index fund, informal economy, invisible hand, John Meriwether, John von Neumann, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market microstructure, Myron Scholes, new economy, paper trading, passive investing, Paul Lévy, Paul Samuelson, plutocrats, Plutocrats, price mechanism, quantitative trading / quantitative finance, Ralph Nelson Elliott, RAND corporation, random walk, risk tolerance, Robert Shiller, Robert Shiller, short selling, statistical arbitrage, statistical model, Steve Ballmer, stochastic volatility, transfer pricing, value at risk, Vilfredo Pareto, volatility smile

While their wealth may vary, none of them is rich or powerful enough to influence prices on their own. They have, in the terminology of economics, homogeneous expectations. They are price-takers, not makers. They are like the molecules in the perfect, idealized gas of a physicist: identical and individually negligible. An equation that describes one such investor can be recycled to describe all. Reality: Patently, people are not alike—even if differences in wealth are disregarded. Some buy and hold stocks for twenty years, for a pension fund; others flip stocks daily, speculating on the Internet. Some are “value” investors who look for stocks in good companies temporarily out of fashion; others are “growth” investors who try to catch a ride on rising rockets. Once you drop the assumption of homogeneity, new and complicated things happen in your mathematical models of the market. For instance, assume just two types of investors, instead of one: fundamentalists who believe that each stock or currency has its own, intrinsic value and will eventually sell for that value, and chartists who ignore the fundamentals and only watch the price trends so they can jump on and off bandwagons.

From the very beginning, in 1963, some economists had pointed out that the degree of wildness—the fatness of the tails—appeared to diminish as you looked at returns over longer and longer time-periods, from a day to a year to a decade. The common wisdom in economics was, and in some circles still is, that I may be right that daily or weekly prices do not follow the standard model, but who cares? Most people, goes the argument, buy and hold for months, years, or decades—and in those time-scales, the conventional models work just fine. There is a fallacy in this, of course. Most people also do not contract HIV and then develop AIDS, but the few percent who do get it are very glad that the pharmaceutical industry has taken the time and expense to develop the necessary drugs to keep them alive longer. More importantly, the multifractal model successfully predicts what the data show: that at short time-frames prices vary wildly, and at longer time-frames they start to settle down.

But nearly half that decline occurred on just ten out of those 4,695 trading days. Put another way, 46 percent of the damage to dollar investors happened on 0.21 percent of the days. Similar statistics apply in other markets. In the 1980s, fully 40 percent of the positive returns from the Standard & Poor’s 500 index came during ten days—about 0.5 percent of the time. What is an investor to do? Brokers often advise their clients to buy and hold. Focus on the average annual increases in stock prices, they say. Do not try to “time the market,” seeking the golden moment to buy or sell. But this is wishful thinking. What matters is the particular, not the average. Some of the most successful investors are those who did, in fact, get the timing right. In the space of just two turbulent weeks in 1992, George Soros famously profited about $2 billion by betting against the British pound.


pages: 346 words: 102,625

Early Retirement Extreme by Jacob Lund Fisker

8-hour work day, active transport: walking or cycling, barriers to entry, buy and hold, clean water, Community Supported Agriculture, delayed gratification, discounted cash flows, diversification, dogs of the Dow, don't be evil, dumpster diving, financial independence, game design, index fund, invention of the steam engine, inventory management, lateral thinking, loose coupling, market bubble, McMansion, passive income, peak oil, place-making, Ponzi scheme, psychological pricing, the scientific method, time value of money, transaction costs, wage slave, working poor

Since the risk-reward profiles of most, but not all fund advisors are skewed--that is, fail conventionally and you're okay; fail unconventionally and you're fired; win conventionally and you're okay; win unconventionally and you're a genius--mutual fund advisors that wish to keep their jobs tend to flock together and behave like a herd. This has resulted in the growing popularity of "buy and hold" index funds, which simply mimic what everybody else is doing, on average, at less cost. Of course, the emerging behavior of such a strategy is eventual chaos, as nobody leads and everybody follows each other. Buy and hold is an investment strategy with no exit strategy. What this typically means is that stocks are usually liquidated when money is needed, rather than taking into account when a given stock is overvalued. The aggregate effect of workers investing in this manner is to turn the stock market into an elaborate demographical Ponzi scheme, where the value of investments depends on how many people are retiring and how many people are entering the labor market.

This is called a Monte Carlo simulation and there is one available at firecalc.com. Of course, this is only accurate if the future repeats the past numbers. Still, plotting for all possible historical periods shows how things have played out historically. This exercise can be repeated for different markets (domestic equity, international equity, commodities, real estate, timber, etc.) and for different investment methods (buy and hold, dividends, Dogs of the Dow, etc.). It will, however, quickly become clear that there are limits to how much the model can be fitted to the data. The objective of this exercise isn't to get a numerical value, but to get a sense of possible future scenarios, assuming that the future will likely repeat the past in one way or another. Numerical simulations require a lot of effort, so it's easier and more accurate to account for inflation and return rates by setting i to be the real rate of return, which equals the nominal rate of return minus inflation.

The US stock market has historically returned about 10% nominally--other stock markets have returned different amounts. Note that this result includes a significant two-decade-long bull market between 1983 and 2000. Other times, it has been flat for decades. In the periods 1905-1942, 1965-1983 and 2000-2007 market return was either zero or negative. Some of these periods are really long! If the investment strategy relies on capital gains, as it does in a buy and hold strategy, this will lead to failure if the withdrawal rate is too high during years of decline, as too much stock will be liquidated when the market is low. Monte Carlo simulations suggest that a withdrawal rate of 4% is good for 30 years of inflation-adjusted expenses and that a withdrawal rate of 3% is good for 60 years or more. A withdrawal rate of 2% will last forever--that is, if history repeats itself.


pages: 280 words: 73,420

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino by Jim McTague

algorithmic trading, automated trading system, Bernie Madoff, Bernie Sanders, Bretton Woods, buttonwood tree, buy and hold, computerized trading, corporate raider, creative destruction, credit crunch, Credit Default Swap, financial innovation, fixed income, Flash crash, High speed trading, housing crisis, index arbitrage, locking in a profit, Long Term Capital Management, margin call, market bubble, market fragmentation, market fundamentalism, Myron Scholes, naked short selling, pattern recognition, Ponzi scheme, quantitative trading / quantitative finance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, Vanguard fund, Y2K

Source: Birinyi Associates The market’s intraday swings were particularly unnerving during the 146 trading days between October 1, 2008 and March 31, 2009.3 Retail investors typically invest first thing in the morning, at the market opening. On these wild days, their newly purchased shares often dropped significantly in value by the time the market closed at 4 p.m. EST. Consequently, equity investors began to lose that old-time, buy-and-hold religion and became risk adverse to the extreme. No item of bad news was ignored; no piece of good news was accepted uncritically. No new money was flowing into the stock market, either. “It’s a show me market,” said Robert Doll, the chief equity strategist at BlackRock Inc. “Fresh in everybody’s mind is the carnage of late 2008 and 2009. Therefore, their mentality is to sell first and ask questions later.”4 By early 2010, investors were not only exhausted, they were depleted.

And it wasn’t just the machines that had lost touch with market fundamentals. Those retail investors who stayed in the market were playing the momentum game, not investing. They wanted to go with the flow, to ride the trend. Thus, they were inclined to buy stock-index futures, options, and ETFs that mimicked the S&P 500 or specific sectors of the economy. As far as the small investor was concerned, the classic buy-and-hold strategy had been a big bust. The market was a lightning-fast roller coaster, and you had to sell at the top of the hill before the market took you screaming to the bottom. Even if an investor had wanted to buy stocks the old-fashioned way—by pouring over its financials and weighing the informed opinions of star analysts—he would have found himself at a disadvantage compared to times gone by.

And if you are investing in bond funds in this volatile period, the average duration of the fund’s portfolio should not be longer than four to five years. Stock investing in the short-run is risky, Kay says, because of the sharp, violent swings caused by HFT and due to the movements of exchange-traded funds (ETFs), which will cause the underlying securities held by these funds to bounce around quite a bit. But, like McCaughan, Kay believes that the short-term swings will not injure long-term investors who buy and hold stocks for five years or longer. Gary Gastineau, a principal at ETF Consultants, Summit, New Jersey, recommends long-term investments in ETFs. He believes that the circuit breakers instituted by the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) will protect investors from rapid declines due to correlation. Gastineau argues that ETFs are superior to mutual funds because their operating expenses are considerably lower.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

His roommate Ibbotson had entered the Ph.D. program in the Chicago Business School after getting an MBA from Indiana University in 1967 and struggling a bit in the business world. While still a grad student, Ibbotson got a part-time job managing the university’s bond portfolio. When it came to stocks, the Chicago approach encouraged formerly frenetic traders to buy and hold. Bond investing had long been all about buying and holding, but the high inflation of the 1970s made that untenable. Holding on to a bond paying 5 percent interest when inflation was 10 percent was equivalent to giving away money. Ibbotson, using analytical tools being developed or rediscovered on campus—Fred Macaulay’s formula for duration had just been unearthed by two Chicago professors—began buying and selling bonds and running rings around the market.

With the help of his staff and a Hollerith (IBM) punch card calculating machine, Cowles had examined the individual stock picks of sixteen statistical services, the investment record of twenty-five insurance companies, the stock market calls of twenty-four forecasting letters, and the Dow theory editorials of the only forecaster Cowles mentioned by name: William Peter Hamilton. Cowles’s verdict, delivered in a paper titled, “Can Stock Market Forecasters Forecast?” was that no, they can’t. An investor who had bought and sold when Hamilton instructed between December 1903 and December 1929 would have made 12 percent a year. Just buying and holding the Dow Jones industrial average would have delivered a return of 15.5 percent a year. Of the other forecasters, only a few had been able to beat the market and even those better-than-average performances were “little, if any, better than what might be expected to result from pure chance.”25 That last was no idle comment. Cowles and his helpers had assembled random market forecasts from shuffled decks of hundreds of cards.

Of course, the prizes are all on paper and would disappear if everyone tried to cash them in. But why should anyone wish to sell such lucrative securities?2 Could a person take advantage of such mass delusions to make a killing? There can be no “foolproof system” to beat the market, Samuelson wrote in his textbook. But some approaches were better than others. He identified four classes of stock market players: (1) the buy and hold crowd, who do reasonably well as long as the economy grows; (2) “the hour-to-hour, day-to-day ticker watchers,” who mostly “make money only for their brokers”; (3) the market timers who try to take advantage of the changing moods of the investing public, and are sometimes successful at it; and finally (4) those who study companies closely enough to take advantage of “special situations” of which the investing public is not aware.


pages: 386 words: 116,233

The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime by Mj Demarco

8-hour work day, Albert Einstein, AltaVista, back-to-the-land, Bernie Madoff, bounce rate, business process, butterfly effect, buy and hold, cloud computing, commoditize, dark matter, delayed gratification, demand response, Donald Trump, fear of failure, financial independence, fixed income, housing crisis, Jeff Bezos, job-hopping, Lao Tzu, Mark Zuckerberg, passive income, passive investing, payday loans, Ponzi scheme, price anchoring, Ronald Reagan, upwardly mobile, wealth creators, white picket fence, World Values Survey, zero day

My wealth acceleration vehicle doesn't come from the stock market! Yet, you've been domesticated to believe that these tools accelerate wealth. Mutual funds, stocks, bonds, 401(k)s, dollar cost averaging, and compound interest are perfunctory stratagem for wealth acceleration in the Slowlane. Unfortunately, without control or leverage, they're impotent wealth accelerators. Buy-and-Hold Is Dead In college, I was taught “buy and hold” was the safe investment strategy that made millions. Buy stocks in solid companies, sit back and wait decades, and voila, I'd be awash with millions. They'd shove that graph in your face and say “A$10,000 Investment in XYZ Company in 1955 would be worth $5 million today!” Thankfully, I ignored it. In 1997, I opened a Roth IRA with $1,000 and invested the monies in a growth mutual fund at a major investment firm.

Give up on big dreams. Save, live frugal, don't take unnecessary risks, and one day I will retire with millions. So how do you know you're being sold the Slowlane? The following lists the primary munitions indigenous to the Slowlane roadmap. Go to school Get good grades Graduate Pay yourself first Overtime Corporate ladder Save X% of your paycheck Contribute to your 401(k) Invest in mutual funds Buy and hold Paychecks, pensions, benefits Diversify Raise your insurance deductibles The stock market Say “no” to expensive lattes Be frugal Get out of debt Clip coupons Cancel your credit cards Dollar cost averaging Get an advanced degree Pay off your house early Your home is an asset Individual retirement accounts (IRAs) Live below your means Understand compound interest When you encounter these “buzz phrases,” be wary-someone is selling you the Slowlane as a total plan to wealth.

I never touched it and let it ride the ebbs-and-flow of the Slowlane. Today that account is worth $698. $698! With inflation, the real purchasing power is $500. My spare change bucket on my kitchen table was a better investment. Had I invested $1 million, I'd have lost more than $400,000. And this is the Slowlaner's anointed weapon of wealth? Hilarious! Millions worship the Slowlane roadmap with “buy and hold” as Main Street, a Main Street that is decades long, imperiled by hazards, and rarely routes to wealth. I recently heard a Slowlane prognosticator proclaim the effectiveness of “Get Rich Slow” by citing this tasty factoid: If at the end of 1940 you had invested $1,000 in the stocks of the S%P 500 you would now have $1,341,513. So let's examine this fact, assuming it is fact. It's 1940 and assume you are 21 years old.


Mathematical Finance: Core Theory, Problems and Statistical Algorithms by Nikolai Dokuchaev

Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, discrete time, fixed income, implied volatility, incomplete markets, martingale, random walk, short selling, stochastic process, stochastic volatility, transaction costs, volatility smile, Wiener process, zero-coupon bond

For simplicity, we do not require this, because this condition is always satisfied for the special problems discussed below. Remark 3.7 Similarly, we can consider a multistock market model, when St={Sit} and γt={γit} are vectors, and when the wealth is Xt=βtBt+∑i γitSit. Some strategies Example 3.8 A risk-free (‘keep-only bonds’) strategy is a strategy when the portfolio contains only the bonds, γt≡0, and the corresponding total wealth is Example 3.9 A buy-and-hold strategy is a strategy when γt>0 does not depend on time. This strategy ensures a gain when stock price is increasing. Example 3.10 A short position is the state of the portfolio when γt<0. This portfolio ensures a gain when stock price is decreasing. Example 3.11 A ‘doubling strategy’ is sometimes used by an aggressive gambler (for instance in the coin-tossing game). In fact, the stochastic market model is close to the model of gambling.

This strategy requires selling the stock when its price is going up and buying when it is going down. Therefore, this strategy makes a profit when stock prices oscillate. Let us describe the resulting wealth for the constantly rebalanced portfolio given C. For simplicity, we assume that ρt≡1. Then Xt+1−Xt=γt(St+1−St)=γtStξt+1=CXtξt+1, © 2007 Nikolai Dokuchaev Discrete Time Market Models 27 i.e., For instance, let (S0, S1, S2, S3,…)=(1, 2, 1, 2, 1,…). It follows that Let X0=1. For the buy-and-hold strategy, the wealth is (X1, X2, X3,…)=(1, 2, 1, 2, 1,…). In contrast, the constantly rebalanced portfolio with gives the wealth of an exponential order of growth. (Of course, one cannot be sure that the stock prices will evolve in this specific way.) Problem 3.14 Consider a discrete time bond—stock market such that S0=1, S1=1.3, S2=1.1. Let the bond prices be B0=1, B1=1.1B0, B2=1.05B1. Let the initial wealth be X0=1.

An example of this requirement is the following: there exists a constant C such that X(t)≥C for all t a.s. For simplicity, we do not require this. Remark 5.8 The case of r(t)≡0 corresponds to the market model with free borrowing. Some strategies Example 5.9 For risk-free, ‘keep-only-bonds’, the strategy is such that the portfolio contains only the bonds, γ(t)≡0, and the corresponding total wealth is © 2007 Nikolai Dokuchaev Mathematical Finance 78 Example 5.10 Buy-and-hold strategy is a strategy when γ(t)>0 does not depend on time. This strategy ensures a gain when the stock price is increasing. Example 5.11 Merton’s type strategy is a strategy in a closed-loop form when γ(t)=µ(t)θ(t)X(t), where µ(t)>0 is a coefficient, X(t) is the wealth, is the so-called market price of the risk process. This strategy is important since it is optimal for certain optimal investment problems (including maximization of E ln X(T)).


pages: 198 words: 53,264

Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, asset allocation, bitcoin, Bretton Woods, buy and hold, buy low sell high, cognitive bias, cognitive dissonance, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, endowment effect, financial innovation, fixed income, hindsight bias, index fund, invention of the wheel, Isaac Newton, John Meriwether, Kickstarter, Long Term Capital Management, loss aversion, mega-rich, merger arbitrage, Myron Scholes, Paul Samuelson, quantitative easing, Renaissance Technologies, Richard Thaler, Robert Shiller, Robert Shiller, Snapchat, Stephen Hawking, Steve Jobs, Steve Wozniak, stocks for the long run, transcontinental railway, value at risk, Vanguard fund, Y Combinator

Maybe you've been going back and forth between picking stocks, buying options, or timing the market, all with little to show for it. That's fine, you're still on the path to discovery. I know all about it. It took me around five years and nearly $20,000 in commissions to realize that I was not destined to be the next Paul Tudor Jones. I was too emotional to be a successful trader, which led me into the arms of Bogle's index funds. Not everybody can buy and hold an index fund – it can be grueling and difficult, rife with drawdowns and potentially decades with nothing to show for it. But warts and all, for me, this is the best way. Not everybody comes to this conclusion and that's okay. The important part is finding a methodology that you are comfortable with. But a methodology means something that is repeatable. It means having a process. The stock market throws far too many curve balls for you to wing it.

In 1969 he had had enough, at just 39 years old, he shut down the partnership, before his warnings ever came to fruition. It's funny that despite his monstrous returns and his youth, two things that tend to favor the brash, Buffett's confidence level was kept in check. It's funnier still, that at 63, oozing with confidence, he would make the single costliest mistake of his investing career. The Oracle became the second wealthiest man in the world by buying and holding great businesses.7 In 1972, after arm wrestling with his partner Charlie Munger over the price, Berkshire Hathaway purchased See's Candy for $30 million. They could have paid multiples of the $25 million Buffett wanted to and done just fine, because See's Candy has generated $1.9 billion pretax since 1972.8 In 1983, Berkshire bought 90% of Nebraska Furniture Mart, for $55 million. It's now the largest furniture store in the country.

Things were so bad that Bill Ruane and Richard Cunniff almost shut it down in 1974.8 But they didn't, and with the help of Buffett's loyal acolytes, they persevered. The early investors that stuck with the fund have been handsomely rewarded. Sequoia has outperformed the S&P 500 by 2.6% a year for 47 years.9 $10,000 invested in July 1970 would have grown to nearly $4 million today. This is three times as much as one could have earned by buying and holding the S&P 500.10 Every investment strategy that doesn't deviate from its core tenets, whether its value or trend following or anything else, will have long periods of time where it looks and feels foolish. The dot‐com bubble was that period for all value investors, including Ruane & Cunniff. In 1999 the Sequoia Fund lost 16.5% while the S&P 500 gained 21% and the tech‐heavy NASDAQ Composite gained 86%!


Hedgehogging by Barton Biggs

activist fund / activist shareholder / activist investor, asset allocation, backtesting, barriers to entry, Bretton Woods, British Empire, business cycle, buy and hold, diversification, diversified portfolio, Elliott wave, family office, financial independence, fixed income, full employment, hiring and firing, index fund, Isaac Newton, job satisfaction, margin call, market bubble, Mikhail Gorbachev, new economy, oil shale / tar sands, paradox of thrift, Paul Samuelson, Ponzi scheme, random walk, Ronald Reagan, secular stagnation, Sharpe ratio, short selling, Silicon Valley, transaction costs, upwardly mobile, value at risk, Vanguard fund, zero-sum game, éminence grise

In 1932 he bought U.S. shares, in particular the preferred shares of the great public utility companies, which his analysis showed to be depressed far below their intrinsic values. When South Africa left the gold standard, he acquired shares in a South African gold mine run by an old friend. In the 1930s, when prices were deeply depressed, he also was a very successful buy-and-hold investor in art, manuscripts, and rare books. However, despite his good intentions, Keynes never really changed his ways. He was always a speculative and aggressive investor in the financial markets. He didn’t seem to realize that his use of leverage and the attacks of nerves he was prone to when prices were falling were inconsistent with his new buy-and-hold investment strategy. He also was not good at identifying irrational exuberance and market tops. He was to take another big hit in the 1937–1938 bear market. THE GREAT GAME AND THE GAMBLING INSTINCT Did Keynes invest so aggressively because he needed the income?

His criteria require that they ccc_biggs_ch06_63-79.qxd 70 11/29/05 11:11 AM Page 70 HEDGEHOGGING also generate free cash flow so they can buy back their stock and raise the dividend. He argues that in a slow-growth, low-inflation, low-interest-rate world, stocks with these characteristics will have great scarcity value and will sell at very high P/Es, just as they did in the late 1950s and early 1960s. This has always been his investment style. Buy and hold great growth stocks. “My favorite holding period is forever,” he says with a wry smile.The only difficulty is that companies with these characteristics are hard to find and usually are very expensive. We talked about Pepsico. Fayez thinks its earnings can grow 12% per annum even though its revenue growth is more like 6% to 7% and it is in very competitive businesses. He is convinced that management is exceptional.

There is usually bad news associated with them, and since investors tend to be extrapolators, they assume the bad news will continue. Benjamin Graham is the holy father of value investors. Warren Buffett reveres him, although Buffett has expanded Graham’s definition of intrinsic value to include the intangible worth of a great franchise or ccc_biggs_ch17-239-246.qxd 242 11/29/05 7:05 AM Page 242 HEDGEHOGGING brand. The sheer size of the Berkshire portfolio has forced him to become a buy-and-hold value investor, although that may be an investment oxymoron. Buffett says he likes to buy good companies at great prices. He likes businesses with products he can understand that generate free cash flow. Because technology stocks meet neither criterion, he has never owned them. Ben Graham preached that you always want to buy a common stock (or a corporate bond for that matter) with a margin of safety.That margin relates to the liquidating value of the assets of the company (the price an informed businessperson would pay) being well above the price you are paying for the stock.


pages: 135 words: 26,407

How to DeFi by Coingecko, Darren Lau, Sze Jin Teh, Kristian Kho, Erina Azmi, Tm Lee, Bobby Ong

algorithmic trading, asset allocation, Bernie Madoff, bitcoin, blockchain, buy and hold, capital controls, collapse of Lehman Brothers, cryptocurrency, distributed ledger, diversification, Ethereum, ethereum blockchain, fiat currency, Firefox, information retrieval, litecoin, margin call, new economy, passive income, payday loans, peer-to-peer, prediction markets, QR code, reserve currency, smart contracts, tulip mania, two-sided market

In other words, SET essentially implements cryptocurrency trading strategies in the form of tokens. ~ What kinds of Sets are there? There are two kinds of Sets: (i) Robo Sets and (ii) Social Trading Sets. Robo Sets Robo Sets are algorithmic trading strategies that buys and sells tokens based on predefined rules encoded in smart contracts. There are currently 4 main types of algorithmic strategies, namely: Buy and Hold: This strategy realigns the portfolio to its target allocation to prevent overexposure to any one token and spreads the risk over other tokens. Trend Trading: This strategy uses Technical Analysis indicators to shift from target asset to stablecoins based on the implemented strategy. Range-Bound: This strategy automates buying and selling within a designated range and is only intended for bearish or neutral markets.

Smart contract audit refers to the practice of reviewing the smart contract code to find vulnerabilities so that they can be fixed before it is exploited by hackers. An Application Programming Interface (API) An interface that acts as a bridge that allows two applications to interact with each other. For example, you can use CoinGecko's API to fetch the current market price of cryptocurrencies on your website. B Buy and Hold This refers to a TokenSets trading strategy which realigns to its target allocation to prevent overexposure to one coin and spreads risk over multiple tokens. Bonding Curve A bonding curve is a mathematical curve that defines a dynamic relationship between price and token supply. Bonding curves act as an automated market maker where as the number of supply of a token decreases, the price of the token increases.


100 Baggers: Stocks That Return 100-To-1 and How to Find Them by Christopher W Mayer

bank run, Bernie Madoff, business cycle, buy and hold, cloud computing, disintermediation, Dissolution of the Soviet Union, dumpster diving, Edward Thorp, hindsight bias, housing crisis, index fund, Jeff Bezos, market bubble, Network effects, new economy, oil shock, passive investing, peak oil, shareholder value, Silicon Valley, Stanford marshmallow experiment, Steve Jobs, survivorship bias, The Great Moderation, The Wisdom of Crowds

An Extreme Coffee-Can Portfolio Few things are harder to put up with than the annoyance of a good example. — Mark Twain, Pudd’nhead Wilson Just to give you an extreme example of this sort of thing, imagine sitting still for 80 years. There is a portfolio that makes the coffee-can portfolio look impatient: the Voya Corporate Leaders Trust Fund. It was the subject of a story written for Reuters by Ross Kerber. The headline was “Buy-and-Hold Fund Prospers with No New Bets in 80 Years.” Now, I know you have no interest in holding stocks for 80 years. I don’t, either. In fact, 10 years is pushing it. I know that. Still, that doesn’t mean we can’t learn something from the story. 18 100-BAGGERS Here’s Kerber: The Voya Corporate Leaders Trust Fund, now run by a unit of Voya Financial Inc bought equal amounts of stock in 30 major US corporations in 1935 and hasn’t picked a new stock since.

This meant prices might not match the underlying value of the portfolio. Disclosures were poor. And as you can imagine, sponsors often manipulated prices to their advantage.) MIT was something new under the sun. It promised transparency and fairness. It promised low-cost professional management for the small investor. It had a sensible and conservative investment policy with a focus on large dividend-paying stocks. MIT would not trade these stocks, but aim to buy and hold. As the late great professor Louis Lowenstein of Columbia University wrote, The transparency and flexibility, and the security and comfort thus offered to small investors, made MIT a uniquely American contribution to finance. . . . Good ideas usually have simple beginnings: it’s the very simplicity of the concept that makes them ultimately successful. This one was brilliant. Lowenstein told MIT’s story well in his book The Investor’s Dilemma, which I highly recommend to anyone who invests in mutual funds. 20 100-BAGGERS (Lowenstein is also the author of my two favorite books on corporate finance: Sense & Nonsense in Corporate Finance and What’s Wrong with Wall Street.)

I think it is easier to say these things than to do them. Investing is such a mental game. Further, you might point to periods where stocks got bubbly. In 1998 or 1999, Coke was trading for 50 times earnings. It was a sell then. But then again, would Coke have qualified for a buy based on our 100-bagger principles? I don’t think so. It was a sell even by those lights. Of course, investing in the buy-and-hold manner means sometimes you will be hit with a nasty loss. But that is why you own a portfolio of stocks. To me, investing in stocks is interesting only because you can make so much on a single stock. To truncate that upside because you are afraid to lose is like spending a lot of money on a car but never taking it out of the garage. I invest in stocks knowing I could lose big on any position.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, The Great Moderation, Thomas Bayes, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

Finance myths such as this and others have greatly compromised pension performance. What are some other myths? The idea that price does not matter is clearly a myth, and this is what drives people to buy equities regardless of the price level. I do not believe this idea. If you bought equities 10 years ago, you would be flat today. So that would not have been a good idea. Buy and hold was not a sensible strategy for the last decade. The problem with buy and hold is that you may have to wait a long time for your opportunity. A long only, “see what happens” type of strategy is probably best addressed by buying an index. You can run this strategy with a lean, low-cost staff. You basically resign yourself to the fact that you do not have market timing skill and opt instead for cheap beta through an index. A real money manager thinks about the world through the Capital Asset Pricing Model, which is a diversified efficient frontier model of managing money.

Meanwhile, a full year after the crash of ‘08, nearly everyone in the markets—from savvy hedge fund managers to small private investors with retirement accounts to policy makers—still struggle to understand what went wrong. While the debate over who or what deserves blame will likely rage for decades, the world has not ended and investors must now adapt and adjust to the new reality. The crisis of 2008 has called many investment mantras into question—notably the Endowment Model (diversifying into illiquid equity and equity-like investments) and others including stocks for the long term, buy the dip, buy and hold, and dollar cost averaging—yet no new model has taken root. The crisis of 2008 did, however, supply the financial community with an abundance of new information with regards to portfolio construction, in particular around risk, liquidity, and time horizons. After such an extreme year in the markets, reactions in the real money world have been polarized: some have learned valuable lessons and are incorporating them in their approach, whereas others are operating as if it is business as usual, completely dismissing 2008 as a one-in-a-hundred-year storm that has passed.

RETHINKING REAL MONEY—MACRO PRINCIPLES One of the main conclusions to come out of this book is that the accepted standard practice of real money no longer works. Real money management needs to be rethought as the old methodologies have failed. The massive growth of real money funds took place in a very benign environment where inflation was falling and virtually all assets performed well. In such conditions, static rule based strategies such as buy and hold, stocks for the long run, and the Endowment Model worked. But in a new, less benign world of higher volatility, a change in standard practice is required. Despite the widespread pain and colossal losses endured by most investors in 2008, there were a few bright spots. Global macro hedge funds, in aggregate, proved resilient by effectively managing risk and keeping a sharp focus on liquidity.


Systematic Trading: A Unique New Method for Designing Trading and Investing Systems by Robert Carver

asset allocation, automated trading system, backtesting, barriers to entry, Black Swan, buy and hold, cognitive bias, commodity trading advisor, Credit Default Swap, diversification, diversified portfolio, easy for humans, difficult for computers, Edward Thorp, Elliott wave, fixed income, implied volatility, index fund, interest rate swap, Long Term Capital Management, margin call, merger arbitrage, Nick Leeson, paper trading, performance metric, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, survivorship bias, systematic trading, technology bubble, transaction costs, Y Combinator, yield curve

In this case you will earn additional types of return from buying and selling, and the characteristics of those returns will depend on your trading style. There are various degrees of static strategies. The most vanilla flavour is a simple buy and hold portfolio. Let’s pretend that Apple and Microsoft have the same price per share. If you can’t decide between them then you’d buy equal numbers of shares in Apple and Microsoft today. Next week Apple brings out a new iGadget and doubles in price, whilst sclerotic Microsoft halves after releasing a new Windows that everyone hates. As a buy and hold investor you would do nothing. Your portfolio is now seriously unbalanced; 80% in Apple and only 20% in Microsoft. The second degree static strategy is to re-balance your portfolio so you keep the same cash value in each company.

Unlike the semi-automatic trader and the asset allocating investor, they embrace the use of systematic trading rules to forecast price changes, but within the same common framework for position risk management. Many systems traders think they can find trading rules that give them extra profits, or alpha. Others are unconvinced they have any special skill but believe there are additional returns available which can’t be captured just by ‘buy and hold’ investing. They can use very simple rules to capture these sources of alternative beta. Systems traders may have access to back-testing software, either in off-the-shelf packages, spreadsheets or bespoke software. It isn’t absolutely necessary to have such programs as I will be providing a flexible pre-configured trading system which doesn’t need backtesting. However if you want to develop your own new ideas I will show you how to use these powerful software tools safely.

The returns from hedge funds can be separated into beta – what you can get by tracking the market, alpha – the skill the hedge fund manager has, and alternative beta. An 3 Systematic Trading example of alternative beta is the additional return you can get from buying stocks with low price-to-earnings (PE) ratios, and selling those with high PE ratios – the equity value premium. Alternative beta doesn’t need skill, but it can’t be earned just by buying and holding shares. However it can be produced by following relatively simple rules. Some collective funds have been created to allow investors to get access to alternative beta, but they are still relatively expensive. Institutions should seriously consider using systematic rulebased trading to create in-house cheap alternative beta portfolios. The staunch systems trader example shows how this can be achieved.


All About Asset Allocation, Second Edition by Richard Ferri

activist fund / activist shareholder / activist investor, asset allocation, asset-backed security, barriers to entry, Bernie Madoff, buy and hold, capital controls, commoditize, commodity trading advisor, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, Long Term Capital Management, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, Sharpe ratio, stocks for the long run, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

The decade began with the deflation of technology and communication stock expectations, followed by two attacks on U.S. soil that lead to two wars fought halfway around the world, and finished with a housing price collapse that brought too-big-to-fail global financial institutions to their knees and massive government bailouts. The events of the past decade have shaken the foundations of investment knowledge and have forced people to rethink their own investment strategies from the ground up. People are questioning the validity of modern portfolio theory (MPT) that had become well indoctrinated into portfolios. Do the markets still operate efficiently? Is a buy and hold investment strategy dead? How does a radical shift in the global economic power affect my portfolio? Is the U.S. dollar in a long-term decline? What new asset classes are available, and should I invest in them? These questions are all valid, and they all deserve answers. In your quest for information and solutions, you will find no shortage of people willing to help with answers—any answers— even bad answers, and there will be people trying to sell you products that go along with their answers.

The other two require short-term market prediction in order to be successful. I leave those to the television talking heads. 1. Strategic asset allocation (no predictions needed) 2. Tactical and dynamic asset allocation (requires accurate market predictions) 3. Market timing (requires accurate market predictions) This book is all about long-term strategic asset allocation. This strategy is commonly known as “buy and hold”; however, I believe it is best described as “buy, hold, and rebalance.” Strategic asset allocation focuses on selecting suitable asset classes and investments to be held for the long run. An asset allocation should not change based on the cyclical ups and downs of the economy or because some cynic publicly doubts the strategy and then personally benefits from investors who waver. Once this allocation is set, it does need occasional review and perhaps tweaking, especially when there are changes in a person’s life.

Exactly how you invest in each of these asset classes is of lesser importance than owning the asset classes themselves, although some ways are better and less expensive than others. 3 CHAPTER 1 4 What is you current investment policy? Consider the following two portfolio management strategies. Which one best describes you today? ● ● Plan A. Buy investments that I expect will perform well over the next few years. If an investment performs poorly or the prospects change, switch to another investment or go to cash and wait for a better opportunity. Plan B. Buy and hold different types of investments in a diversified portfolio regardless of their near-term prospects. If an investment performs poorly, buy more of that investment to put my portfolio back in balance. If you are like most investors, Plan A looks familiar. People tend to put their money into investments that they believe will lead to profitable results in the near term and sell those that do not perform.


pages: 228 words: 68,315

The Complete Guide to Property Investment: How to Survive & Thrive in the New World of Buy-To-Let by Rob Dix

buy and hold, diversification, diversified portfolio, Firefox, risk tolerance, TaskRabbit, transaction costs, young professional

For example, just as casual investors are lining up a huge mortgage to grab their piece of the boom, those in the know are quietly selling their stock and stockpiling cash for the crash to come. In other words, most people buy high and sell low – exactly the opposite of what they should be doing. I can’t promise that knowing about the cycle will give you the degree of knowledge and mental toughness you need to buy at rock bottom and sell at the very height of the market. And nor do you need to – remember, each cycle starts at a higher level than the previous one, so “buy and hold for 20 years” is still a perfectly valid strategy. What’s more, if you sit around for years waiting for prices to fall, you’re missing out on a lot of income. There are, though, four very basic “rules” you should follow as an investor – and now you know about the cycle, it should be easier for you to do so: Don’t panic and sell a property just because prices are falling. Thanks to the cycle, you know that prices won’t go to zero and it won’t be that long (in the great scheme of things) until they’re back beyond where they were.

Hang on, didn’t I just say that remortgaging in the winner’s curse phase was a terrible idea? No, only if you’re using the equity you release to buy overpriced properties or fund your lifestyle. If you put the cash in the bank, you can use it later to buy properties at a discount – or just repay the money if you change your mind. So, I hope by now you’re a believer in the wonders of the property cycle. You don’t have to scrap “buy and hold” and start timing the market instead – although you can if you want to. Even if you just stick to the very basics, you’ll do very nicely indeed. As I said, the most fundamental lesson of all is to be aware that it’s an inevitability that a crash will happen at some point. That’s why I’ve dedicated the next chapter to making sure you’re able to survive it – because after all, there’s no point in going to all the trouble of building up a property portfolio just to lose it when the economy takes a turn for the worse.

The game has changed: your focus may previously have been on capital growth, but now what matters is rock-solid income. You might be holding properties that don’t yield particularly well, or even properties that you bought just because there was an opportunity to do a refurb and recycle your funds. Maybe you even want to offload your leasehold properties in favour of freehold, so you don’t have the uncertainty of service charges and dwindling leases to worry about. This is why the advice to “buy and hold forever” makes sense in some respects, but is incomplete: if a property was bought for a particular purpose and it’s no longer doing that job, selling might make sense. As investors, we shouldn’t be emotionally attached to any property. CONCLUSION If I had to guess, I’d say that having read this book, you won’t do anything with it. You won’t end up investing in property, and your life will look much the same in a few years as it does now.


pages: 733 words: 179,391

Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

"Robert Solow", Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, Sam Peltzman, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, survivorship bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

After all, they said, prices fully reflect all available information. Popular investment gurus told us to forget about trying to beat the market and to forget about relying on our flawed intuition. The price is always right, they said; we might as well throw darts at the financial pages to pick our stocks, because we’d end up doing just about as well as the professionals, if not better. We should buy and hold a passive, well-diversified portfolio of stocks and bonds, they said, preferably through a no-load index mutual fund or an exchange-traded fund, requiring as little thought as possible. The market has already taken everything into account. The market always takes everything into account. This idealistic view of the market still sticks in the craw of professional money managers, but the basic idea is more than forty years old.

In a curious twist of fate, a former Princeton undergraduate launched a mutual fund company for this exact purpose a year after Malkiel’s book debuted. You may have heard of this individual, the index fund pioneer John C. Bogle. His little startup, the Vanguard Group, manages over $3 trillion and employs more than fourteen thousand people as of December 31, 2014.5 Vanguard’s main message, and the advice most often dispensed to millions of consumers, is “don’t try this at home.” Don’t try to beat the market. Instead, stick to passive buy-and-hold investments in broadly diversified stock index funds, and hold these investments until you retire. Still, there’s no shortage of examples of investors who did and do beat the market. A few well-known portfolio managers have routed it decisively, like Warren Buffett, Peter Lynch, and George Soros. But have you ever heard of James Simons? In 1988, this former professor started a fund trading futures using his own mathematical models.

The idea is to adjust your asset allocation to suit your risk tolerance and your long-run investment objectives. Principle 5 makes your asset allocation decision even simpler: just hold stocks for the long run. This principle is based on the hugely influential book Stocks for the Long Run, written by the Wharton financial economist Jeremy Siegel.2 First published in 1994, this book is now in its fifth edition, and has become the “buy and hold Bible” of the investment management industry. Siegel’s argument isn’t hard to summarize: since 1802, the farthest back we have data on stocks, the historical performance of the U.S. stock market has been very attractive over sufficiently long holding periods. We could all be rich if we only held onto stocks for the long run. These five principles have become the foundation of the investment management industry, influencing virtually every product and service offered by financial professionals.


pages: 433 words: 53,078

Be Your Own Financial Adviser: The Comprehensive Guide to Wealth and Financial Planning by Jonquil Lowe

AltaVista, asset allocation, banking crisis, BRICs, buy and hold, correlation coefficient, cross-subsidies, diversification, diversified portfolio, estate planning, fixed income, high net worth, money market fund, mortgage debt, mortgage tax deduction, negative equity, offshore financial centre, Own Your Own Home, passive investing, place-making, Right to Buy, risk/return, short selling, zero-coupon bond

They argue that the long bull markets of M10_LOWE7798_01_SE_C10.indd 328 05/03/2010 09:51 10 n Managing your wealth 329 the last century will not be repeated and so it will no longer be possible to make money consistently out of simple buy-and-hold strategies. Absolute return funds will provide a medium-risk core for long-term investors in the same way that with-profits funds aimed to do in the past. Others question the ability of absolute return funds to deliver the promised returns. Most funds do not claim to meet their target month by month, but over an average period of a year or more. OO 130/30 funds. These funds are using something similar to leverage in order to magnify the gains from successful buy-and-hold investments. However, rather than borrowing to invest, the fund short sells investments to the value of 30 per cent of the fund. It then uses the proceeds of these sales to buy more of its buy-and-hold investments. The success of the strategy relies on the fund manager being able to stock pick successfully.

M10_LOWE7798_01_SE_C10.indd 303 05/03/2010 09:51 304 Part 3 n Building and managing your wealth However, rebalancing is a controversial topic. Advocates claim that it encourages sound investment behaviour. If one asset class – say, shares – does well relative to the others, it will become over-represented in your allocation. Therefore, you should sell shares and buy more of the assets that have done less well. This means you are forced to sell high and buy low, which is the basis of all buy-and-hold investment strategies. (See the case study below). Opponents of rebalancing question why you would sell investments that are doing well and buy into poor performers. One wit likened this to picking the flowers and leaving the weeds. There is also the question of how often rebalancing should take place. If you rebalance often – say, every six months – dealing costs will eat more heavily into your returns than if you rebalance infrequently.

At the end of a year, the shares have grown by 15 per cent, property by 8 per cent, the bonds have fallen by 10 per cent and the cash has remained fairly static. Overall his portfolio is now worth £105,350 and the allocation has drifted as shown in Figure 10.3 opposite. He has to decide whether to sell some equities and property and buy bonds to restore his original allocation. Time diversification As a buy-and-hold growth investor (also called investing ‘long’), your aim is to buy investments when their price is low and sell when they are high. Sounds simple enough, but in practice it is either difficult or impossible – depending on which school of thought you believe (see p. 309) – to get the timing right. And private investors are notorious for waiting so long after a change in market direction that they tend to invest when the market is near its peak and sell shortly before it hits rock bottom.


pages: 407 words: 114,478

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

asset allocation, Bretton Woods, British Empire, business cycle, butter production in bangladesh, buy and hold, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, George Santayana, German hyperinflation, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Harrison: Longitude, Long Term Capital Management, loss aversion, market bubble, mental accounting, money market fund, mortgage debt, new economy, pattern recognition, Paul Samuelson, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, stocks for the long run, stocks for the long term, survivorship bias, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

As a result, most small investors using active-fund managers tend to turn over their mutual funds once every several years in the hopes of achieving better returns elsewhere. What actually happens is that they generate more unnecessary capital gains and resultant taxes. For the taxable investor, indexing means never having to pay the tax and investment consequences of a bad manager. Why Can’t I Just Buy and Hold Stocks on My Own? Some of you may ask, “If the markets are efficient, why can’t I simply buy and hold my own stocks? That way, I’ll never sell them and incur capital gains as I would when an index occasionally changes its composition, forcing capital gains in the index funds that track it. And since I’ll never trade, my expenses will be even lower than an index fund’s.” In fact, until recently, periodic turnover in the stock composition of some indexes has been a problem at tax time.

Journalists tend to be a cynical lot, but it’s hard to find many as hard-bitten as intelligent, successful financial writers. They know that what they’re writing isn’t good for their readers, but there are deadlines to meet and mouths to feed. In a 1999 issue of Fortune, an anonymous writer penned a notorious piece entitled, “Confessions of a Former Mutual Funds Reporter.” Its writer admitted, “We were preaching buy-and-hold marriage while implicitly endorsing hot fund promiscuity.” Why? Because, “Unfortunately, rational, pro-index-fund stories don’t sell magazines, cause hits on Web sites, or boost Nielsen ratings.” The article went on to admit that most mutual fund columnists invest in index funds. (As do an increasing number of brokers, analysts, and hedge fund managers.) At the very top of the financial journalism heap are a select number of writers who are so popular and craft prose so well that they can get away with a regular output of unvarnished reality.

Since they are tax-exempt, their yields tend to be lower than Treasury securities of comparable maturity and much lower than corporates. Like corporates, it is necessary to protect yourself from credit/default risk by buying a fund. Wealthy investors tend to assemble their own muni portfolios because they can buy enough issues to maintain adequate diversification. This is usually unwise because muni bonds are thinly traded and have very high bid/ask spreads—around 3% to 4%. Thus, even if you buy and hold these issues to maturity, you still will be paying a 1.5% to 2% “half-spread” on purchase, which amortizes out to about 0.2% to 0.3% per year, in addition to trading costs and management fees. This is the one field where Vanguard is all alone in the quality of its product—it offers many national and single-state muni funds, all with annual expenses of 0.20% or less. And since almost all are well in excess of $1 billion in size, the bid/ask spreads paid by these funds are estimated by Vanguard to be less than half that quoted above.


Trading Risk: Enhanced Profitability Through Risk Control by Kenneth L. Grant

backtesting, business cycle, buy and hold, commodity trading advisor, correlation coefficient, correlation does not imply causation, delta neutral, diversification, diversified portfolio, fixed income, frictionless, frictionless market, George Santayana, implied volatility, interest rate swap, invisible hand, Isaac Newton, John Meriwether, Long Term Capital Management, market design, Myron Scholes, performance metric, price mechanism, price stability, risk tolerance, risk-adjusted returns, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two-sided market, value at risk, volatility arbitrage, yield curve, zero-coupon bond

This will increase your transactions costs, in all of their unholy forms, but I encourage you to consider these costs as part of the risk management investment. Diligently Manage Your Executions. Different trading and investment strategies have different sensitivities to the executions process. For example, the results associated with high-velocity trading strategies tend to be more dependent on the executions process than are buy-and-hold investment approaches. Similarly, the executions process will be a much more critical driver of profitability in complex, structured transactions than it might be in plain vanilla markets with ample liquidity. However, portfolio managers should seek to attack the executions process with as much effort and energy as they apply to any other element of their investment program. There are several reasons that attention to execution is so important.

This typically occurs when you have developed a very strong market hypothesis that, for one reason or another, has not played out in the marketplace in the manner you expected. Oftentimes, you still like the play and will be reluctant to liquidate your position because, invariably, it will seem that your liquidation is the very catalyst the position needs in order to move in the direction you originally expected. These things happen much less frequently to active traders than they do to the buy-and-hold crowd. This is because active traders operate with a mindset that reinforces the notion that both the liquidation and the reestablishment of a position is just a trade away. They might have the opportunity to put the trade on and to liquidate it (or at least to trade around it) a half dozen times before their catalyst monetizes itself. In the meantime, while they have generated transactions costs, they have gathered potentially important information with each new trade.

While they may not capture every major move that they may have anticipated in its entirety, in most instances the good ones capture the fat part of the pricing action. By trading actively in a disciplined manner, you stand to increase the size of the 10% pool that will determine your trading destiny over any period you choose to examine. The size of individual gains in these names may be smaller than those associated with a buy-and-hold strategy, but, by definition, you’ll have a lot more of them; and I believe that on the whole you’ll be substantially better off. I think I’ll close this section by invoking the image of Teddy Ballgame one last time. I know that we should probably let him rest in peace, but that does not seem to be what the Almighty has in store for him. On September 28, 1941, the last day of the baseball season and months before Pearl Harbor compelled Teddy to leave the diamond and strap himself into fighter planes for the next three odd years, the Boston Red Sox, 17 games behind the Yankees (who else?)


pages: 670 words: 194,502

The Intelligent Investor (Collins Business Essentials) by Benjamin Graham, Jason Zweig

3Com Palm IPO, accounting loophole / creative accounting, air freight, Andrei Shleifer, asset allocation, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate governance, corporate raider, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, George Santayana, hiring and firing, index fund, intangible asset, Isaac Newton, Long Term Capital Management, market bubble, merger arbitrage, money market fund, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, stocks for the long run, survivorship bias, the market place, the rule of 72, transaction costs, tulip mania, VA Linux, Vanguard fund, Y2K, Yogi Berra

A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom. If you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse. Since anyone—by just buying and holding a representative list—can equal the performance of the market averages, it would seem a comparatively simple matter to “beat the averages”; but as a matter of fact the proportion of smart people who try this and fail is surprisingly large. Even the majority of the investment funds, with all their experienced personnel, have not performed so well over the years as has the general market. Allied to the foregoing is the record of the published stock-market predictions of the brokerage houses, for there is strong evidence that their calculated forecasts have been somewhat less reliable than the simple tossing of a coin.

This would be a serious shrinkage, but it should not be exaggerated. It would not mean that the true value, or the purchasing power, of the investor’s fortune need be reduced over the years. If he spent half his interest income after taxes he would maintain this buying power intact, even against a 3% annual inflation. But the next question, naturally, is, “Can the investor be reasonably sure of doing better by buying and holding other things than high-grade bonds, even at the unprecedented rate of return offered in 1970–1971?” Would not, for example, an all-stock program be preferable to a part-bond, part-stock program? Do not common stocks have a built-in protection against inflation, and are they not almost certain to give a better return over the years than will bonds? Have not in fact stocks treated the investor far better than have bonds over the 55-year period of our study?

For then, if another bull market comes along, he will take the big rise not as a danger signal of an inevitable fall, not as a chance to cash in on his handsome profits, but rather as a vindication of the inflation hypothesis and as a reason to keep on buying common stocks no matter how high the market level nor how low the dividend return. That way lies sorrow. Alternatives to Common Stocks as Inflation Hedges The standard policy of people all over the world who mistrust their currency has been to buy and hold gold. This has been against the law for American citizens since 1935—luckily for them. In the past 35 years the price of gold in the open market has advanced from $35 per ounce to $48 in early 1972—a rise of only 35%. But during all this time the holder of gold has received no income return on his capital, and instead has incurred some annual expense for storage. Obviously, he would have done much better with his money at interest in a savings bank, in spite of the rise in the general price level.


pages: 394 words: 85,252

The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit From Price Declines by Alexander Elder

Atul Gawande, backtesting, buy and hold, buy low sell high, Checklist Manifesto, double helix, impulse control, paper trading, short selling, systematic trading, The Wealth of Nations by Adam Smith

Markets continuously swing between overvalued and undervalued levels. Counter-trend traders capitalize on this choppiness by trading against the extremes. Take a look at the chart in Figure 1.1, and the arguments for and against trend or counter-trend trading will leap at you from the page. You can easily recognize an uptrend from the lower left to the upper right corner. It seems appealing to buy and hold—until you realize that a trend is clear only in retrospect. If you had a long position, you’d be wondering every day, if not every hour, whether this uptrend was at an end. Sitting tight requires a great deal of mental work! Swing trading—buying below value and selling above value—has its own pluses and minuses. Trading shorter moves delivers thinner returns, but the trades tend to last just a few days.

Needless to say, to trade forex futures you must understand how to trade futures in the first place. There are many books on this topic, and my favorites are listed in the previous section. My goal here is merely to point out the differences between shorting forex and shorting stocks. Figure 8.9 Euro weekly This chart shows a four-year upmove in the euro against the U.S. dollar. The trend, driven by economic fundamentals, appeared unstoppable. One could buy and hold or try to play the swings At the right edge of the chart there are multiple severe bearish divergences. The bulls are healthy and powerful at peak A, which was followed by a normal pullback to the value zone. The rally to peak B was accompanied by prominent bearish divergences in MACD Lines and the Force Index; the divergence of MACD-Histogram was of a particularly ominous type—a missing right shoulder.

Major bull and bear markets reflect major trends in the economy as well as huge tides in mass psychology. The power of the market crowd is greater than that of any individual. The strength of a major trend is so vast that its extent often defies our imagination, making the ultimate target very difficult to forecast. • When we glance at a long-term chart, it may seem easy to ride a position in a major trend. Buy-and-hold (or in this case short-and-hold) seems like a pretty straight road to riches. In fact, the opposite is true. It is extremely hard to ride a major trend from start to finish. You need to have almost super-human patience and be prepared to sit through huge drawdowns while your trend corrects. A much more practical approach is to use weekly charts to define a trend and then switch to the daily charts for shorter-term trading in the direction of the weekly chart.


pages: 345 words: 86,394

Frequently Asked Questions in Quantitative Finance by Paul Wilmott

Albert Einstein, asset allocation, beat the dealer, Black-Scholes formula, Brownian motion, butterfly effect, buy and hold, capital asset pricing model, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discrete time, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, iterative process, lateral thinking, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk/return, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, transaction costs, urban planning, value at risk, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

A trading strategy incorporating historical data, such as price and volume information, will not systematically outperform a buy-and-hold strategy. It is often said that current prices accurately incorporate all historical information, and that current prices are the best estimate of the value of the investment. Prices will respond to news, but if this news is random then price changes will also be random. Technical analysis will not be profitable. Semi-strong form efficiency In the semi-strong form of the EMH a trading strategy incorporating current publicly available fundamental information (such as financial statements) and historical price information will not systematically outperform a buy-and-hold strategy. Share prices adjust instantaneously to publicly available new information, and no excess returns can be earned by using that information.

An alternative to using a parameterized model for the underlyings is to simulate straight from historical data, bypassing the normal-distribution assumption altogether. VaR is a very useful concept in practice for the following reasons. • VaR is easily calculated for individual instruments, entire portfolios, or at any level right up to an entire bank or fund • You can adjust the time horizon depending on your trading style. If you hedge every day you may want a one-day horizon, if you buy and hold for many months, then a longer horizon would be relevant • It can be broken down into components, so you can examine different classes of risk, or you can look at the marginal risk of adding new positions to your book • It can be used to constrain positions of individual traders or entire hedge funds • It is easily understood, by management, by investors, by people who are perhaps not that technically sophisticated Table 2.1: Degree of confidence and the relationship with deviation from the mean.


pages: 415 words: 125,089

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

"Robert Solow", Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buttonwood tree, buy and hold, capital asset pricing model, cognitive dissonance, computerized trading, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial innovation, full employment, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, Kenneth Arrow, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Myron Scholes, Nash equilibrium, Norman Macrae, Paul Samuelson, Philip Mirowski, probability theory / Blaise Pascal / Pierre de Fermat, random walk, Richard Thaler, Robert Shiller, Robert Shiller, spectrum auction, statistical model, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas Bayes, trade route, transaction costs, tulip mania, Vanguard fund, zero-sum game

Suppose an investor acts as a market-timer, trying to buy before prices rise and sell before prices fall. How much margin of error can a market-timer sustain and still come out ahead of a simple buy-and-hold strategy? One of the risks of market timing is being out of the market when it has a big upward move. Consider the period from May 26, 1970, to April 29, 1994. Suppose our market-timer was in cash instead of stocks for only the five best days in the market out of that 14-year period of 3,500 trading days. He might feel pretty good at having just about doubled his opening investment (before taxes), until he reckoned how he would have done if he had merely bought in at the beginning and held on without trying anything tricky. Buy-and-hold would have tripled his investment. Market timing is a risky strategy! Risk measurement becomes even more complicated when the parameters are fluid rather than stationary.

But volatility in this sector has also been high: two-thirds of the returns have fallen between -23% and +59%; negative returns over twelvemonth periods have occurred in almost one out of every three years and have averaged 20%. Thus, the outlook for any given year has been extremely uncertain, regardless of the high average rewards generated by these stocks over the long run. As an alternative, suppose a different broker recommends a fund that buys and holds the 500 stocks that comprise the Standard & Poor's Composite Index. The average annual return on these stocks over the past 69 years has been about 13%, but two-thirds of the annual returns have fallen within the narrower range of -11% and +36%; negative returns have averaged 13%. Assuming the future will look approximately like the past, but also assuming that you do not have 70 years to find out how well you did, is the higher average expected return on the small-stock fund sufficient to justify its much greater volatility of returns?

The business badly needs to replace its cottage industry operating methods.20 For the first time risk management became the biggest game in town. First came a major emphasis on diversification, not only in stock holdings, but across the entire portfolio, ranging from stocks to bonds to cash assets. Diversification also forced investors to look into new areas and to develop appropriate management techniques. The traditional strategy of buy-and-hold-until-maturity for long-term bonds, for example, was replaced by active, computer-based management of fixedincome assets. Pressures for diversification also led investors to look outside the United States. There they found opportunities for high returns, quite apart from the diversification benefits of international investing. But even as the search for risk-management techniques was gaining popularity, the 1970s and the 1980s gave rise to new uncertainties that had never been encountered by people whose world view had been shaped by the benign experiences of the postwar era.


pages: 442 words: 39,064

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

Asian financial crisis, asset allocation, Berlin Wall, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, stocks for the long run, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

Insults Back into cave 8 week bear market!? Disbelief Looking good! B2C Greenspan speaks Optimistic CNBC guest Pain Joe Ignore history Arggh! Larry Nothing matters Any gains lost in next day rally Ralph Bad breadth Wealth effect Abby Earnings slowdown Big volume Futures up Greenspan silent Rally!!! Bears bail Phew! MSFT breakup e-broker TV ads P/E’s of 2000 Weird yield curve Buy and hold forever “Bottom is in” Mergers Soros out Gold auctions Margin call W$W elves 401k inflows 16 year olds beat market vets Flight to safety Hot market Dollar goes every which way Old Economy New Economy Oil up DOW 36,000 IPO billionaires 30yr bond extinct Fig. 4.1. Cartoon illustrating the many factors influencing traders, as well as the psychological and social nature of the investment universe (source: anonymous).

The relative impact of the contrarian behavior on the imitation forces is thus of the order of 1/n, the ratio of the time to enter in position to the holding time. For “intraday” traders who are very active, this ratio may not be small at all. The large amount of works on minority games [77, 78, 76, 75] suggests that changing one’s strategy often may be profitable in that situation. It also suggests that only when the information complexifies or when the number of traders decreases will the traders be able to make consistent profits. In contrast, the buy-and-hold strategies profit as long as the information remains simple, such as when a trend remains strong. The problem then boils down to exit/reverse before or at the reversal of the trend. The difficulty however, as everyone who has tried to invest in the stock market will know, is that trends and trend reversals occur at all time scales. Figure 4.5 illustrates this observation by a construction based on the insertion of a succession of trends and trend reversals at all scales.

“Rational Bubbles” and Goldstone Modes of the Price “Parity Symmetry” Breaking Blanchard [43] and Blanchard and Watson [45] originally introduced the model of rational expectations (RE) bubbles to account for the possibility, often discussed in the empirical literature and by practitioners, that observed prices may deviate significantly and over 140 chapter 5 extended time intervals from fundamental prices. While allowing for deviations from fundamental prices, rational bubbles keep a fundamental anchor point of economic modeling, namely that bubbles must obey the condition of rational expectations and of no-arbitrage opportunities. Indeed, for fluid assets, dynamic investment strategies rarely perform better than simple buy-and-hold strategies [282]; in other words, the market is not far from being efficient and few arbitrage opportunities exist as a result of the constant search for gains by sophisticated investors. The conditions of rational expectations and of no-arbitrage are useful approximations. The rationality of both expectations and behavior does not imply that the price of an asset is equal to its fundamental value.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

In contrast, the SR is based on an assumption that investors prefer the former. 2.3. ESTIMATING PERFORMANCE MEASURES To estimate expected returns, standard deviations, and regressions, we can use standard methods. Expected returns are estimated as the realized average return, using the available data over T time periods. Some people use geometric averages,2 while others use arithmetic ones, The geometric average corresponds to the experience of a buy-and-hold investor who neither adds capital nor takes capital out of a hedge fund. The arithmetic average is the optimal estimator from a statistical point of view, and it corresponds more closely to the experience of an investor who adds and redeems capital in order to keep a constant dollar exposure to the hedge fund, under certain conditions. Whether using geometric or arithmetic averages, it is important to keep in mind that any estimate of future expected returns is extremely noisy.

Funding costs arise when a trader leverages his investments and must borrow money at a higher interest rate than the interest rate he earns on his cash holdings and short sale proceeds. Furthermore, leverage is associated with funding liquidity risk, that is, the risk that the trader cannot continue to finance his positions and is forced to liquidate in a fire sale. These implementation costs—market and funding liquidity costs—are important for active investors because they eat into the profits of all trading strategies. Whereas passive unleveraged buy-and-hold investors incur only few implementation costs, an active investor may trade frequently, and the more frequent the trades, the more the investor needs to worry about the effects of transaction costs. Furthermore, the larger and more leveraged the positions a trader takes, the more important are implementation costs. Implementation costs have several implications, including affecting (a) whether or not a strategy is profitable, (b) which trading rule is the best, (c) which securities to trade, and (d) how large to scale the trade.

In the real world, traders face transaction costs and funding costs, which means that arbitrage trades involve costs and are almost never risk free. With transaction costs, we cannot determine an exact fundamental value using the no-arbitrage condition, but we can find an upper and lower bound for the value. The three types of arbitrage arguments above are increasingly influenced by frictions. While the arbitrages of types 1 and 2 involve buy-and-hold strategies, type 3 requires dynamic trading, which involves much higher transaction costs. Therefore, arbitrage relations based on type 3 can more easily break down in an efficiently inefficient market. The strength of an arbitrage relation also depends on whether it has a natural convergence time. Suppose for instance that the same security is traded on two different trading venues. If the shares are fungible in the sense that you can buy shares at one exchange and sell them at the other exchange, then arbitrage is super easy and the trade converges as soon as you can hit “buy” on the one exchange and “sell” on the other.


Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson

Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, butter production in bangladesh, buy and hold, capital asset pricing model, cognitive dissonance, compound rate of return, computerized trading, Daniel Kahneman / Amos Tversky, distributed generation, Elliott wave, en.wikipedia.org, feminist movement, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, mental accounting, meta analysis, meta-analysis, p-value, pattern recognition, Paul Samuelson, Ponzi scheme, price anchoring, price stability, quantitative trading / quantitative finance, Ralph Nelson Elliott, random walk, retrograde motion, revision control, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, source of truth, statistical model, stocks for the long run, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra

., a randomly generated signal). This is consistent with scientific practice in other fields. In medicine, a new drug must convincingly outperform a placebo (sugar pill) to be considered useful. Of course, rational investors might reasonably choose a higher standard of performance but not a lesser one. Some other benchmarks that could make sense would be the riskless rate of return, the return of a buy-and-hold strategy, or the rate of return of the rule currently being used. In fact, to be considered good, it is not sufficient for a rule to simply beat the benchmark. It must beat it by a wide enough margin to exclude the possibility that its victory was merely due to chance (good luck). It is entirely possible for a rule with no predictive power to beat its benchmark in a given sample of data by sheer luck.

However, the pioneers of EMH asserted that random walks were a necessary consequence of efficient markets. This section states their case and examines its weaknesses. What Is an Efficient Market? An efficient market is a market that cannot be beaten. In such a market, no fundamental or technical analysis strategy, formula, or system can earn a risk-adjusted rate of return that beats the market defined by a benchmark index. If the market is indeed efficient, the risk-adjusted return earned by buying and holding the market index is the best one can hope for. This is so because prices in an efficient market properly reflect all known and knowable information. Therefore, the current price provides the best estimate of each security’s value. According to EMH, markets achieve a state of efficient pricing because of the vigorous efforts of numerous rational investors attempting to maximize their wealth. In their pursuit of true value, these investors are constantly updating their beliefs with the latest information in a probabilistically correct manner9 so as to project each security’s future cash flows.

In seeking to maximize wealth, they buy undervalued assets pushing their prices higher and sell overvalued assets pushing prices lower.11 “Taken to its logical extreme, it means that a blindfolded monkey selecting stocks by throwing darts at a newspaper’s financial pages could do just as well as one carefully selected by the experts.”12 “EMH rules out the possibility of trading systems, based on available information, that have expected profits or returns in excess of equilibrium expected profit or return.”13 “In plain English, an average investor— whether an individual, pension fund, or a mutual fund—cannot hope to consistently beat the market, and the vast resources that such investors dedicate to analyzing, picking and trading securities are wasted.”14 Although, under EMH, it is still possible to generate positive returns from an investment strategy, when those returns are adjusted for risk, they will not be superior to the return of buying and holding the market index portfolio. The efficient markets hypothesis also declares that when there is no news entering the market, prices tend to oscillate in a random and unbiased fashion above and below the rational price level. See Figure 7.2. Because this level is itself subject to uncertainty, no technical or fundamental indicator can reliably indicate when prices are above or below it. This means, for example, that in an efficient market stocks with a low price to book ratio, a well known fundamental indicator, are no more likely to appreciate than stocks with a high price to book ratio.


pages: 290 words: 98,699

Wealth Without a Job: The Entrepreneur's Guide to Freedom and Security Beyond the 9 to 5 Lifestyle by Phil Laut, Andy Fuehl

British Empire, business process, buy and hold, declining real wages, fear of failure, hiring and firing, index card, job satisfaction, Menlo Park, Silicon Valley, women in the workforce

Buoyed by a booming economy, the dot-com craze, and this new and enduring influx of cash from retirement savings, that had traditionally gone to the bond market, the stock market as characterized by the Dow Jones Industrial Average (DJIA) more than tripled. Employees put their retirement savings into mutual funds that invested primarily in the stock market and forgot about them, except to watch the growth in portfolio value each quarter. “Buy and hold” became an investment strategy that anyone could win with. Many new investors realized unprecedented gains with little or no understanding of the market, business, or accounting. Stock market success seemed deceptively easy. In 1999 the dot-com bubble broke. In 2001 the war on terror 23 ccc_laut_ch02_19-26.qxd 7/8/04 12:23 PM Page 24 24 The Old Methods No Longer Work in Today’s Economy began (more on this later), as did accounting scandals in a score of major U.S. industrial companies.

This lack of recognition is reflected in forecasts of broad-based improvement in stock prices in the near future. 25 ccc_laut_ch02_19-26.qxd 7/8/04 12:23 PM Page 26 26 The Old Methods No Longer Work in Today’s Economy The stock market will continue to present attractive opportunities for the investor with a sharp pencil and a strong stomach. However, the days of broad-based, double-digit annual gains experienced in the final decade of the twentieth century are over. To profit in the stock market over the next 10 years, very different skills are required from those that grew portfolios earlier. Buy and hold won’t work anymore. You must be prepared to buck the trend, to do your own research on individual stocks, to pay careful attention to timing, and to admit errors quickly. Most people are not interested in going to all this trouble and expenditure of time; for them, their own business will be a far more reliable and satisfying producer of wealth than the stock market. ccc_laut_ch03_27-30.qxd 7/8/04 12:23 PM Page 27 3 C H A P T E R WHAT THE GLOBAL ECONOMY MEANS TO YOU Today events on the other side of the world affect your paycheck and your prospects.

See also Power affirmations Ah-ha moments, 62 Analytical mind, 135–137 Anger, 112, 121, 124–126 Answering machines, 229 Anxiety, sources of, 6, 56, 94, 119, 211 Associated position, in perception, 109–110, 155, 194–195 Attorney, functions of, 190–191 Auditory representational system, 201, 203, 206–207, 224, 232, 235, 240, 263–264 Authority figures: Authority Size method, 103–104 perceptions of, 101–103, 171 Authority Size method, 103–104 Awareness, importance of, 62–63, 111, 260 Bad habits, 17 Baseball Diamond method, 50–52, 95, 132, 199, 224, 259 Behavioral flexibility, 41 Belief system, 72 Belligerence, 160 Birth experience analogy, 113–114 Birth without Violence (Leboyer), 113 Blame, 31–35, 77–78 Bonds, in family dynamics, 80–82 Boundaries, in family dynamics, 81–82 Burnout, 16 Business model: business process, 180–181 hiring strategies, 181–182 network marketing, 182–183 prospective customers, 180 top-down view, 179–180 Business opportunities, recognition of, 143–144 Buy and hold strategy, 23, 26 Career, Power Affirmations method, 176 Career development, 16–17 Cause and effect, 31–33, 121 Certainty, 68 Change, benefits of, 12. See also Change dynamics Change dynamics: addictions, 59 cause and effect, 31–33, 121 control factor, 52–53 creativity, 34–35 excellence, physiology and psychology of, 42–44, 57 internal sensory representations, 54–57, 113, 154 massive action, 45–46 mastery, 38–40 motivation, 46–52 273 ccc_laut_ind_273-278.qxd 7/8/04 12:28 PM Page 274 274 Index Change dynamics (continued) optimal learning state, 36–38 perceptions, 56–59 productive strategy, 34–36 responsibility, 33–34 state of being, 53–54 success factors, 40–42 Charitable contributions, 3.


Triumph of the Optimists: 101 Years of Global Investment Returns by Elroy Dimson, Paul Marsh, Mike Staunton

asset allocation, banking crisis, Berlin Wall, Bretton Woods, British Empire, buy and hold, capital asset pricing model, capital controls, central bank independence, colonial rule, corporate governance, correlation coefficient, cuban missile crisis, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, European colonialism, fixed income, floating exchange rates, German hyperinflation, index fund, information asymmetry, joint-stock company, negative equity, new economy, oil shock, passive investing, purchasing power parity, random walk, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, stocks for the long run, survivorship bias, technology bubble, transaction costs, yield curve

It shows the wealth that would have accumulated at each year-end from 1900 through to 2000 from an initial investment of $1 in stocks, bonds, or bills at the end of 1899. It assumes that dividends and interest were reinvested, and that there were no taxes or transactions costs. Figure 4-1 also shows inflation, that is, the increase in consumer prices over time. For stocks, the investment strategy represented in Figure 4-1 is one of buying and holding the US equity market. Today, this would be most cheaply accomplished by investing in an index tracker fund. Back in 1900, some 70 years before tracker funds were launched, it would have meant investing in all NYSE securities in proportion to their market capitalizations. From 1900–25, we use the capitalization weighted Cowles Index of all NYSE stocks (as modified by Wilson and Jones, 2002); from 1926–61, we employ the capitalization weighted CRSP Index of all NYSE stocks; from 1962–70, we use the extended CRSP Index, which over this period also incorporates Amex stocks; and from 1971 on, the underlying investment is in the comprehensive Wilshire 5000 Index, which, despite its name, now contains over 7,000 US stocks, including, of course, Nasdaq stocks (for further details, see chapter 33).

At the same time, retail investors are becoming better informed about the true likelihood of mutual funds outperforming their benchmarks, even on a pre-costs and fees basis. Regulators and those concerned with investor protection are helping to educate investors here, and also to curb the more strident, performance-based advertising claims made by some money managers. We therefore expect a growing appreciation of the advantages of buy-and-hold strategies, and a move toward favoring funds that choose either a demanding outperformance objective or a low cost structure. To sum up, individual investors now need to adapt their investment strategies to take account of the evidence presented in this book. Today’s real interest rates and bond yields are, of course, much higher than the twentieth century average. Compared to the equity risk premium from recent decades, today’s forward-looking equity premium is lower.

., 138 Bowers, J., xii, 229 Bowley, A.L., 259 BP, 28, 31 Brav, A., 188 Brazil, 12, 15, 20, 21, 84 Brealey, R.A., xi, 185, 211, 218, 239 Breeden, D., 180 Breen, W., 146 Brennan, M.J., 35 Bretton Woods, 93, 94, 99, 103, 115, 116 British economy, 48 British Empire, 21, 48, 114 Brown, M., xi Brown, P., 229 Brown, R.H., xi, 85 Brown, S., 35, 41 Bruner, R.F., 194, 216 Buckley, K.A.H., 239 Buelens, F., xii, 234 Buy-and-hold strategies, 207–8 see also indexation Buybacks, see repurchases Calendar anomalies, 8, 135–8, 208 Campbell, J.Y., 57, 84, 118 Canada, 239–43 see also cross-country comparisons Capaul, C., 145 Capital Asset Pricing Model (CAPM), 179–81, 215 Capital gains, 5, 35, 39, 85, 140, 149–51, 159, 161, 171, 234, 279, 301 Capitalization weighting, 13, 38–40, 128, 311 Carhart, M.M., 35 Carpenter, J.N., 35 Center for Research in Securities Prices (CRSP), 30, 38, 39, 45, 46, 125, 126, 133, 136, 140, 158, 187, 306 334 Chan, L., 145 Chen, P., 190, 192 Chicago, 20, 38, 45, 306 Chile, 20, 21 China, xi, 12, 13, 15, 41, 222 Christiansen, J., 244 Chung, S., 211 Ciocca, P., 264 Claus, J., 188 Closet index funds, 208 Cold War, 22, 189, 210, 223, 224 Columbia, 20 Common-currency returns, 17, 40, 100–3, 105 Conant, C.A., 122 Concentration, 5, 11, 28– 33, 223, 300 Constant growth model, 155, 162, 177–9, 189–92 see also dividend growth Cooper, I., xi, 121, 122, 184 Copenhagen, 244 Cornell, B., 181 Corporate bonds, 6, 14, 16, 87–90 Corporate financing, 10, 217, 219 Corporate investment, 211–7 Correlation, 13, 86, 87, 106, 107–8, 114–17, 128, 143, 153, 154, 156, 157, 161, 173, 180 Cost of capital, 3, 9, 18, 149, 193, 198, 211–9 Cost of debt, 212, 218 Cost of equity, 9, 163, 183, 211–9 Coverage, 11–28, 34–40, 43, 44, 128, 133, 158, 222, 264 Cowles, A., 23, 39, 46 Crash of October, 1987, 47, 58, 117 Credit Suisse First Boston (CSFB), 174 Triumph of the Optimists: 101 Years of Global Investment Returns Cross-holdings, 12, 13, 39 Cross-country comparisons, bills, 59–61, 71–2 bonds, 51–3, 59–61, 79– 80, 100–3, 105–8 bond markets, 14–7 common-currency returns, 100–3 concentration, 28–32 correlation, 114–7 dividend growth, 154–7 dividend yield, 157–8 easy data bias, 42–3 equities, 50–3, 59–61, 100–3, 105–8 equity markets, 11–4 exchange rates, 91–108 gains from international diversification, 111– 4, 117–20 home bias, 120–2 inflation, 65–8 interest rates, 71–2 maturity premia, 82–4 risk premia, 166–8, 171– 3, 183–5, 188–90, 201–4 sector weightings, 26–8 size effect, 129–35 value-growth effect, 145–8 Currency, 3, 91–104, 105– 8, 311 see also common-currency returns, currency risk, exchange rates Currency risk, 17, 98–9, 105–8 Currency volatility, see currency risk Cuyvers, L., 234 Czech Republic, 20, 21 Darlington, K., xi Das, S., 117 Datastream, 27, 234, 244, 259, 289, 294 Davis, J., 142 Day-of-the-week effect, 135 de Ceuster, J., 234 De Long, B., 161 de Ridder, A., 289 de Zoete, 36, 37, 38 Default, 87–9 Default risk, 68, 74, 87–90, 163, 169, 214, 219 Deflation, 6, 64, 68, 70, 71, 73, 78, 221 Denmark, 244–8 see also cross-country comparisons Devos, G., 234 Dimson, E., iii, v, xi, xii, 27, 35, 126, 129, 130, 138, 184, 193, 299 Disappearing dividends, 149, 153, 158–61 Distress, financial, 87, 141, 147, 218, 219 Diversification, 6, 7, 20, 45, 56–8, 61, 105, 108, 109, 111, 114–23, 168, 180, 188, 189, 194, 201 Dividends, 8, 10, 35, 38, 46, 47, 49, 51, 124, 126, 139–43, 149–62, 174, 177–9, 190–3, 211, 234, 239, 244, 274, 284, 289, 294, 300, 306 see also disappearing dividends, dividend growth, dividend policy, dividend yield Dividend growth, 8, 9, 124, 134, 149, 152–7, 161, 162, 178, 190–3, 214 Dividend growth and GDP, 155–7 Dividend payout, 157–61 Dividend policy, 158–61, 216–9 Dividend yield, 8, 38, 39, 139–48, 149–51, 155, 157–8, 162, 177, 190–4, 218, 234, 259, 279, 284, 294, 300 Dodd, D.L., 139 Dow Jones, 39, 47, 58, 176–9 Dulberger, E.R., 43 Eades, K.M., 194, 216 Index Early stock markets, 19– 23 Easy-data bias, 6, 34, 40– 4, 174, 221, 222 Eatwell, J., 48 Egypt, 20, 21 Eichholtz, P., 274 Elias, D., 176 Elton, E.J., 35 Equity premium puzzle, 180, 202 Equity returns, 4, 9, 37, 38, 39, 42, 43, 44, 45–62, 105–23, 124–38, 138–48, 163–75, 176–94, 195– 204, 206, 220–4 Equity risk premium, see risk premium Ericsson, 29 Euro, 15 Eurobonds, 16–7 Eurozone, 15, 17, 99, 213 Excess returns, 82, 112, 114, 165 Exchange rate risk, 98–9, 105–8 Exchange rate volatility, 98–9, 105–8 Exchange rates, xii, 7, 11, 36, 91–104, 219, 220, 227, 254 see also commoncurrency returns, exchange rate volatility, real exchange rates Expectations, 4, 54, 77, 79, 81, 85, 87, 89, 90, 158, 161, 166, 167, 169, 171, 176–94, 201, 202, 210, 212, 223, 224 Fama, E.F., 70, 141, 142, 143, 146, 147, 155, 158, 159, 160, 162, 192, 218 Fat tails, 56, 204 Financial distress, 87, 218, 219 Financial management, 211–9 Financial reporting, 218–9 Financial Times (FT), 23, 24, 36, 37, 223, 299 335 Financial Times-Stock Exchange (FTSE), xi, 28, 38, 115, 133, 134, 143, 299 Finland, 12, 20, 28, 29, 121 Finn, F.J., 229 Firer, C., xii, 42, 279 First World War, 37, 44, 47, 69, 75, 76, 93, 94, 116, 122, 123, 153 Fisher, I., 38, 69, 70 Fisher, L., 38 Fisher effect, 69–70 Floating exchange rates, 94, 98 Foreign bonds, 16–7 Foidl, N., 254 France, 249–53 see also cross-country comparisons Frankfurt, 19 Fraser, P., 188 Free float, 13, 39 French, K.R., xi, xii, 140, 141, 142, 143, 146, 155, 158, 159, 160, 162, 192, 218 Frennberg, P., xii, 289 FT Index, 36, 37 Fujino, S., 269 Function of bond markets, 18–9 Function of stock markets, 18–9 Fund managment, 9, 144, 205–9 Gallais-Hamonno, G., xii, 249 GDP, see gross domestic product Gemis, M., 234 General Electric Corp, 18, 23, 28, 32 Geometric mean, 38, 51, 59–61, 71, 82, 89, 92, 110, 152, 154, 163–75, 181–94, 197, 198, 202, 203, 214, 219, 223 Germany, 254–8 see also cross-country comparisons Giammarino, R., 239 Gielen, G., 254 Glassman, J.


pages: 650 words: 204,878

Reminiscences of a Stock Operator by Edwin Lefèvre, William J. O'Neil

activist fund / activist shareholder / activist investor, bank run, British Empire, business process, buttonwood tree, buy and hold, clean water, Credit Default Swap, Donald Trump, fiat currency, Hernando de Soto, margin call, Monroe Doctrine, new economy, pattern recognition, Ponzi scheme, price stability, refrigerator car, reserve currency, short selling, technology bubble, trade route, transcontinental railway, traveling salesman, Upton Sinclair, yellow journalism

Lefevre believed that there were few techniques more important than trading in sync with the primary trend. In a bull market, he believed, you should trade with the bulls. In a bear market, you should trade with the bears. Later in this chapter he sums it up by stating “The big money was not in the individual fluctuations but in the main movements—that is, not in reading the tape but in sizing up the entire market and its trend.” A little farther along, he adds, “In a bull market your game is to buy and hold until you believe that the bull market is near the end.” The guidance is elegant in its timeless simplicity. The customers, who were all eager to be shoved and forced into doing things so as to lay the blame for failure on others, used to go to old Partridge and tell him what some friend of a friend of an insider had advised them to do in a certain stock. They would tell him what they had not done with the tip so he would tell them what they ought to do.

Reminiscences was published almost a decade later, so you can see that Livermore was nothing if not resilient, as he accepted every setback as a course in what he calls “a very efficient educational agency.” He survived because he learned to “capitalize” his mistakes, he says, by determining the reason for each loss and adding it to his “schedule of assets.” Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see—or if you prefer, until you think you see—the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear.

Harriman has 30,000 partners in his Western railway empire, nearly 12,000 of whom have joined him since the Government opened fire on him.” The article mounts the same defense for the Guggenheims before adding, with evident approval, that the public was defying the government’s anti-trust crusade by putting its money into stocks at a pace “as never before in history.”17 The next decade and a half would not be kind to investors who adhered to a buy-and-hold strategy. The month the article ran, the Dow Jones Industrial Average closed at 83. Despite considerable volatility along the way, it would still be trading at the same level in 1922, 14 years later. THE PUBLIC’S INTERESTS IN PROMINENT STOCKS. ENDNOTES 1 Kerry A. Odell and Marc D. Weidenmier, “Real Shock, Monetary Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907,” Journal of Economic History (September 2002): 1002-1027. 2 Charles Kindleberger, Manias, Panics, and Crashes (1978), 189. 3 Alexander Dana Noyes, Forty Years of American Finance (New York: G.P.


pages: 354 words: 26,550

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial intermediation, fixed income, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, law of one price, Long Term Capital Management, Louis Bachelier, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, profit motive, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, trade route, transaction costs, value at risk, yield curve, zero-sum game

With volatility in LIBOR and hyperinflation around the corner, however, overnight positions can become increasingly expensive and therefore unprofitable for many money managers. High-frequency strategies avoid the overnight carry, creating considerable savings for investors in tight lending conditions and in high-interest environments. High-frequency trading has additional advantages. High-frequency strategies have little or no correlation with traditional long-term buy and hold strategies, making high-frequency strategies valuable diversification tools for long-term portfolios. High-frequency strategies also require shorter evaluation periods because of their statistical properties, which are discussed in depth further along in this book. If an average monthly strategy requires six months to two years of observation to establish the strategy’s credibility, the performance of many high-frequency strategies can be statistically ascertained within a month.

As illustrated in Figure 2.7, the lag of fixed income instruments can be explained by the relative tardiness of electronic trading development for them, given that many of them are traded OTC and are difficult to synchronize as a result. While research dedicated to the performance of high-frequency trading is scarce, due to the unavailability of system performance data relative to data on long-term buy-and-hold strategies, anecdotal evidence suggests that most computer-driven strategies are high-frequency strategies. Systematic and algorithmic trading naturally lends itself to trading applications demanding high speed and precision of execution, as well as high-frequency analysis of volumes of tick data. Systematic trading, in turn, has been shown to outperform human-led trading along several key metrics.

In addition to stocks, equity markets trade exchange-traded funds (ETFs), warrants, certificates, and even structured products. There are stock futures and options, as well as index futures and options. Most stock exchanges provide full electronic trading functionality for all of their offerings. Table 4.6 documents sample daily electronic trading volumes in most active equity futures trading on Globex. Equity markets display diversity in investment objectives. Many equity market participants invest in long-term buy-and-hold patterns. Short-term opportunities for high-frequency traders abound. Commodity Markets Commodities products also include spot, futures, and options. Spot commodity contracts provide physical delivery of goods (e.g., a bushel of corn) and are therefore ill suited for high-frequency trading. Electronically traded and liquid commodity futures and options, on the other hand, can provide viable and profitable trading strategies.


The Permanent Portfolio by Craig Rowland, J. M. Lawson

Andrei Shleifer, asset allocation, automated trading system, backtesting, bank run, banking crisis, Bernie Madoff, buy and hold, capital controls, correlation does not imply causation, Credit Default Swap, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, high net worth, High speed trading, index fund, inflation targeting, margin call, market bubble, money market fund, new economy, passive investing, Ponzi scheme, prediction markets, risk tolerance, stocks for the long run, survivorship bias, technology bubble, transaction costs, Vanguard fund

These funds maintain a constant average years to maturity and require no action on your part other than to periodically rebalance the entire portfolio. Buying Bonds There are three basic ways to buy U.S. Treasury long-term bonds: 1. At auction from the Treasury. 2. On the secondary market. 3. Through a bond fund. At Auction or on Secondary Markets Buying and holding bonds directly is the best and safest way to have exposure to Treasury bonds. This can be done at a bond auction or on the secondary market. Buying and holding bonds directly is the best and safest way to have exposure to Treasury bonds. Buying bonds at auction from the Treasury can be done in two primary ways: 1. Open an account at Treasury Direct (www.treasurydirect.gov) to make the purchase. 2. Use your mutual fund company or broker to make the purchase. Treasury Direct is a service of the U.S.

You can't trade in and out of it multiple times a day. Some companies (like Vanguard) won't even let you buy back into a fund you have just sold for 60 days. Some funds may also charge you an early sale redemption fee as a penalty. This sort of policy is in place to keep the market timers and performance chasers from hurting the long-term holders of the fund and keep down costs. The difference here doesn't matter much for a buy-and-hold investment strategy like the Permanent Portfolio. The hourly or even daily fluctuations in price are irrelevant. However there is one major difference between ETFs and mutual funds: trading costs. When you buy a mutual fund you send your money to your broker or fund custodian and make the purchase. Many times if the mutual fund is with the same company there is no transaction fee for this. You would, for example, send your money into Vanguard and tell them “Buy as many shares of the Total Stock Market Index as my deposit allows.”


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, plutocrats, Plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk-adjusted returns, Ronald Reagan, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

Instead elites propose public policy remedies. Monopolies are addressed by antitrust enforcement. Asymmetric information is addressed by warranties. Such remedies are legion. Remedial costs and benefits are hotly debated. Yet the general equilibrium goes unquestioned. The root of general equilibrium is rational behavior. Rational people save for retirement. Rational people buy more on sale. Rational people buy and hold stocks. Rational people borrow when rates are low. Rational people think ahead. This bundle of beliefs is called rational expectations theory. It is all very neat. Rational expectations theory holds that people behave predictably in response to price signals. Markets are a medium for the signals. When systemic equilibrium is perturbed through unemployment or recession, central bankers manipulate markets to emit price signals designed to induce preferred behaviors.

When the time comes, the government will steal your ten thousand dollars with inflation and taxes, but you’ll still have the gold.” She said she would do that, but in my experience savers do not follow through. Land is accessible to most investors. Investors may own a home—a good start. Income-producing land, either rental properties or farms, provides current income along with wealth preservation. Retirement properties in locations attractive to prospective retirees are a good buy-and-hold investment. The most difficult asset to access is art. Investments should be confined to fine art, either paintings, drawings, collage, or sculpture. The art should be museum quality, meaning that the artist either already has some work in a museum or is considered a good candidate for acquisition by curators. The challenge with museum-quality art is how to buy it. A multibillionaire can pay $100 million or more for a well-known Picasso painting, not an option open to most investors.

They are sensible risk-adjusted bets on bona fide wealth creation by entrepreneurs, inventors, and those with superior skills at executing a business plan. High-quality bonds have a role in helping investors hit their goals. Bonds have set maturities and coupons. Investors have long-term goals like their children’s education, parental care, or retirement. With high credit quality and ancillary inflation protection—gold is good for this—a ladder of bonds can be built to deliver returns timed to meet future needs. A bond ladder is true buy-and-hold investing. Listed equities should occupy a relatively small allocation. As late as the 1960s, some state statutes prohibited fiduciaries from purchasing stocks at all. Memories of the 1929 crash were still fresh. The stock market was considered no better than the biblical den of thieves. Until the 1970s insurance and pension portfolios were about careful selection of bonds to meet future liabilities owed to beneficiaries.


file:///C:/Documents%20and%... by vpavan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, asset allocation, Berlin Wall, business cycle, buttonwood tree, buy and hold, corporate governance, corporate raider, disintermediation, diversification, diversified portfolio, Donald Trump, estate planning, fixed income, index fund, intangible asset, interest rate swap, margin call, money market fund, Myron Scholes, new economy, price discovery process, profit motive, risk tolerance, shareholder value, short selling, Silicon Valley, Small Order Execution System, Steve Jobs, stocks for the long run, stocks for the long term, technology bubble, transaction costs, Vanguard fund, women in the workforce, zero-coupon bond, éminence grise

On bonds, brokers don't charge commissions. Instead, they make their money off the "spread," or the difference between what the firm paid to buy the bond and the price at which the firm sells the bond to you. Warren Buffett, the chairman and CEO of Berkshire Hathaway Inc. and one of the smartest investors I've ever met, knows all about broker conflicts. He likes to point out that any broker who recommended buying and holding Berkshire Hathaway stock from 1965 to now would have made his clients fabulously wealthy. A single share of Berkshire Hathaway purchased for $12 in 1965 would be worth $71,000 as of April 2002. But any broker who did so would have starved to death. While working in the early 1950s for his father's brokerage firm in Omaha, Neb., Buffett says he learned that "the broker is not your friend. He's more like a doctor who charges patients on how often they change medicines.

One is the broker network of St. Louis–based Edward Jones, whose 7,500 branch offices dot just about every Main Street in America. If you are among the 5.4 million customers of this regional brokerage firm, and are satisfied with the service you are getting, then relax. The 8,000 brokers at Edward Jones work on commission, but they are trained to teach their customers to invest for the long term— that is, to buy and hold for at least ten, and up to twenty, years when possible. Managing Partner John Bachmann says the typical Edward Jones customer holds the same mutual fund for twenty years, against an industry average of four years. That tells me his brokers aren't putting their financial interests ahead of their clients'. Edward Jones differs in several other important ways. It does no investment banking, so there is no danger that an Edward Jones "buy" recommendation is influenced by a desire to win a stock-underwriting deal.

Morningstar studied the effects of turnover on fund performance in 1998. It found that the lower the turnover, the better the performance, because turnover drives up trading costs, such as brokerage commissions, and trading costs reduce results. So why do managers persist with their frenetic buying and selling? Because they are convinced that they can add value by outsmarting the market on a day-to-day basis rather than buying and holding for the long term. "Short-term speculation is what they're doing," gripes Vanguard founder Bogle. "All this thrashing around hits investors with higher transaction costs and higher taxes, but no observable improvement in fund performance." Too many fund managers also buy stocks when they think the market is about to move up and sell when they believe the market is getting ready to swoon. In other words, they try to time the market, a strategy most experts warn is a foolish attempt at achieving the impossible.


pages: 274 words: 60,596

Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School by Andrew Hallam

Albert Einstein, asset allocation, Bernie Madoff, buy and hold, diversified portfolio, financial independence, George Gilder, index fund, Long Term Capital Management, new economy, passive investing, Paul Samuelson, Ponzi scheme, pre–internet, price stability, random walk, risk tolerance, Silicon Valley, South China Sea, stocks for the long run, survivorship bias, transaction costs, Vanguard fund, yield curve

This is called a “100 percent turnover.”21 The trading practices of most mutual fund managers trigger short-term capital gains to the owners of those funds (when the funds make money). In the U.S., the short-term capital gain tax is a hefty penalty, but few actively managed fund managers seem to care. In comparison, index-fund investors pay far fewer taxes in taxable accounts because index funds follow a “buy and hold” strategy. The more trading that occurs within a mutual fund, the higher the taxes incurred by the investor. In the Bogle Financial Markets Research Center’s 15-year study on after-tax mutual fund performances (from 1994 to 2009), it found actively managed stock market mutual funds were dramatically less tax efficient than a stock market index. For example, if you had invested in a fund (for your taxable account) that equaled the performance of the stock market index from 1994 to 2009, you would have paradoxically made less money than if you had invested in an index fund.

That said, if you’re still tempted to battle the stock market indexes yourself, let me share what lessons we have learned. Just remember this: no matter what kind of early results you achieve, don’t get romanced by the notion that it’s going to be easy to beat the market—and don’t allocate more than a small portion of your portfolio to individual stocks. Commit to the Stocks You Buy I don’t believe most millionaires trade stocks. If they own any shares at all, I believe they buy and hold them for long periods, much like they would if they bought a business, an apartment building, or a piece of land. Numerous international studies have shown that, on average, the more you trade, the less you make after taxes and fees.4 So forget about the high-flying, seductive rants and quacks on CNBC’s financial program Squawk Box, convincing you to react to any market hiccup. Forget about fast-paced online newsletter pontifications touting the next hot sector or trading method.


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Toward Rational Exuberance: The Evolution of the Modern Stock Market by B. Mark Smith

bank run, banking crisis, business climate, business cycle, buy and hold, capital asset pricing model, compound rate of return, computerized trading, credit crunch, cuban missile crisis, discounted cash flows, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, full employment, income inequality, index arbitrage, index fund, joint-stock company, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market clearing, merger arbitrage, money market fund, Myron Scholes, Paul Samuelson, price stability, random walk, Richard Thaler, risk tolerance, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, stocks for the long run, the market place, transaction costs

He believed that such a conservative approach to investing caused portfolio managers to underperform in a surging economy; in such an environment, “prudence” was in fact imprudent. Johnson described his approach as laissez faire without chaos.11 He believed in diversification, but he also sought to beat the market by aggressive stock selection. Johnson’s approach at Fidelity was unorthodox; he would trade stocks actively, instead of adopting the traditional conservative “buy and hold” strategy. “We didn’t want to feel we were married to a stock when we bought into it …,” he commented. “Possibly now and again we liked to have a ‘liaison’—or even, very occasionally, a couple of nights together.” 12 Johnson’s track record was good; his marketing strategy was even better. By the time he finally turned Fidelity Funds over to his son in 1972, the funds’ assets under management had grown from $3 million to $3 billion.

The study covered the period from 1926 to 1960 and found that an investor who bought into the stock market in 1926 and reinvested all dividends would, by 1960, have multiplied his money by nearly 30 times, representing a 9% annualized rate of return.4 Because the period analyzed included the 1929 crash and subsequent Depression, these results surprised many people. The 9% return greatly exceeded that received by bond investors over the same period, confirming Lawrence Smith’s work of 1924, which had first made the case for stocks over bonds but had seemingly been discredited in the 1930s. The Fischer-Lorie study implied that impressive long-term results could be achieved simply by buying and holding a portfolio representative of the entire market. This dovetailed neatly with William Sharpe’s conclusion that the most risk-efficient portfolio an investor could buy was a portfolio representing the entire market. Fama waded into the discussion with his Ph.D. dissertation in 1965, published in the Journal of Business, in which he defined the term “efficient capital market.” In such an efficient market, securities are instantaneously priced to reflect all information available to market participants.

But the study (which concluded in 1969) also found that these same funds underperformed the market when stock prices turned down in 1969.40 In effect, the performance funds exaggerated moves in the overall market, rising faster in bull market periods but falling faster in bear market environments. The Wharton study also found that, unsurprisingly, the emphasis on short-term performance induced mutual fund managers to speed up the pace at which they bought and sold stocks. The old “buy and hold” strategy had seemingly fallen by the wayside. In 1960 the turnover rate for mutual fund portfolios had been only 17.6%, up only slightly from the 13.1% figure for 1953. But then the pace of trading exploded, reaching 46.6% (for the average fund) in 1968. As has been seen, the turnover rate for the most aggressive performance funds was significantly higher still. The new stars of the go-go era liked to see themselves as mavericks who sought to shake up the stodgy, conservative Wall Street establishment.


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Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier

Albert Einstein, asset allocation, banking crisis, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, floating exchange rates, Fractional reserve banking, full employment, hindsight bias, Kickstarter, Long Term Capital Management, market bubble, mortgage tax deduction, Myron Scholes, new economy, oil shock, price stability, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

When one looks at the q ratio and cyclically adjusted PE, then 1974 ranks fifth in the pantheon of great bear-market bottoms. Of course, as well as determining the biggest bear market bottoms by reference to valuation criteria, this study also selects periods for analysis by reference to subsequent returns to investors. In particular, we focus on those periods when investors could confidently pursue a buy and hold strategy and achieve above-normal returns. As Figure 90 shows, the December 1974 market bottom created a great trading opportunity, but it is less clear that it produced a great buy and hold opportunity. FIGURE 90. DOW JONES INDUSTRIAL AVERAGE – JANUARY 1965 TO DECEMBER 1984 Source: Dow Jones & Co. There is a clear contrast between the gyrations of the market after December 1974 and the broad advance in prices, which set in after 1921, 1932, 1949 and 1982. A further important factor that relegates 1974 to fifth position in the history of great buying opportunities on Wall Street is inflation.

If no such price adjustment is associated with a decline in the stock market then this may not be one of these great buying opportunities. This is not to say that one can’t buy into declining equity prices in the absence of a major disruption of the general price level. However it is to say that the absence of such a price disruption may mean that equities have not reached such a low level as to permit one to pursue a long-term buy and hold strategy. Low valuations, when combined with a return to normalcy in the general price level, are likely to provide the best prospect of above-normal returns for investors. The general price level refers to the prices of all goods and services in the economy. The term is used in this book to avoid confusion with the regular references to more specific price changes. A disturbance usefully covers either a rise or a fall in prices.


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MONEY Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins

3D printing, active measures, activist fund / activist shareholder / activist investor, addicted to oil, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, backtesting, bitcoin, buy and hold, clean water, cloud computing, corporate governance, corporate raider, correlation does not imply causation, Credit Default Swap, Dean Kamen, declining real wages, diversification, diversified portfolio, Donald Trump, estate planning, fear of failure, fiat currency, financial independence, fixed income, forensic accounting, high net worth, index fund, Internet of things, invention of the wheel, Jeff Bezos, Kenneth Rogoff, lake wobegon effect, Lao Tzu, London Interbank Offered Rate, market bubble, money market fund, mortgage debt, new economy, obamacare, offshore financial centre, oil shock, optical character recognition, Own Your Own Home, passive investing, profit motive, Ralph Waldo Emerson, random walk, Ray Kurzweil, Richard Thaler, risk tolerance, riskless arbitrage, Robert Shiller, Robert Shiller, self-driving car, shareholder value, Silicon Valley, Skype, Snapchat, sovereign wealth fund, stem cell, Steve Jobs, survivorship bias, telerobotics, the rule of 72, thinkpad, transaction costs, Upton Sinclair, Vanguard fund, World Values Survey, X Prize, Yogi Berra, young professional, zero-sum game

But let’s take a look at mutual funds. Do you know what those mutual fund managers of yours are doing every day? They’re trading. They are buying and selling stocks and bonds on a daily, monthly, or quarterly basis. This is what the industry calls “turnover.” According to Charlie Farrell of CBS MarketWatch, “So although their marketing material encourages investors to buy and hold, the managers certainly don’t practice what they preach. What they really mean is buy and hold their mutual fund, while they trade your retirement savings like crazy.” Experts say that the vast majority of mutual funds do not hold on to their investments for a full year. Why else would you buy them other than hoping they can trade their way to better performance? And you know what that means? Unless you’re holding all of your mutual funds inside your 401(k), you’re typically paying ordinary income taxes on any gains.10 In short, there’s a good chance you’re being charged 35%, 45%, or up to 50% or more in income tax, depending on what state you live in and your income level.

Jack Bogle, founder of Vanguard (which, incidentally, offers many ETF funds), told me he sees nothing wrong with owning broad-spectrum index ETFs, but he warns that some are too specialized for individual investors. “You can not only bet on the market,” he told me, “but on countries, on industry sectors. And you may be right and you may be wrong.” David Swensen wonders why individual investors should bother with ETFs at all. “I’m a big believer in buying and holding for the long run,” he told me. “The main reason you’d go into an ETF is to trade. And so I’m not a big fan.” 2. High-Yield Bonds. You might also know these as junk bonds, and there’s a reason they call them junk. These are bonds with the lowest safety ratings, and you get a high-yield coupon (higher rate of return than a more secure bond) only because you’re taking a big risk. For a refresher, go back and read the bond briefing at the end of the last chapter. 3.

If you put all your money into the US stock market at the beginning of 2000, you got killed. One dollar invested in the S&P 500 on December 31, 1999, was worth 90 cents by the end of 2009. But according to Burt Malkiel, if you had spread out your investments through dollar-cost averaging during the same time period, you would have made money! Malkiel authored a Wall Street Journal article titled “ ‘Buy and Hold’ Is Still a Winner,” in which he explained that if you were diversified among a basket of index funds, including US stocks, foreign stocks, and emerging-market stocks, bonds, and real estate, between the beginning of 2000 and the end of 2009, a $100,000 initial investment would have grown to $191,859. That’s over 6.7% annually during a lost decade. “Dollar-cost averaging is how you make the volatility of the market work for you,” he told me.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

• The third pillar of repression is structural: the direct government ownership of banks, or effective government direction of their business decisions, including measures to direct credit to government-favored uses. Restrictions on entry into the financial industry and reducing the number of competitors through consolidation are also part of the package. How does financial repression work? Basically, it sees to it that investors are herded into buying and holding government debt at negative real interest rates while inflation eats away at the real value of the debt. If the combination of low rates and inflation runs to 4 or 5 percent a year, the value of debt as a percentage of the economy can fall 40 or 50 percent in a decade, even without compounding. For example, I noted previously that the United Kingdom ran up debts equal to 260 percent of GDP in order to beat Napoleon, and then took 40 years to get that number below 100 percent.

If you bought the pre-1929 Crash Dow Jones average and held it all the way through to 1960, you have done very well, at least in nominal terms. If you had to sell in 1930 or 1940, you did very badly indeed. The fabled wisdom that equities always outperform bonds over the long run is correct, but as Keynes said, in the long run we are all dead. Most of the gains in the market, and most of the losses, occur in very short inflection 137 138 Chapter 6 | The Consumer in the World After Finance points that are unpredictable. Buying and holding means you won’t miss the good surprises, but you won’t avoid the bad ones either. Download from Wow! eBook <www.wowebook.com> What is certain is that equities are a claim on future earnings, which are always subject to events and shifts in sentiment. Given that, companies that make money in transparent ways and can actually pay a dividend to shareholders are often safer bets. The virtues of diversification have been oversold because in a panic, assets tend to fall across the board, but investing in index funds that mirror whole markets or broadly diversified mutual funds is probably well advised for the average investor.


pages: 263 words: 75,455

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, business cycle, butter production in bangladesh, buy and hold, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Edward Thorp, Eugene Fama: efficient market hypothesis, forensic accounting, hindsight bias, intangible asset, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, survivorship bias, systematic trading, The Myth of the Rational Market, time value of money, transaction costs

To put this in context, on December 31, 2011, the smallest stock in our investable universe had a market capitalization of $1.4 billion. We measure the stock returns from January 1964 through December 2011. We determine market capitalization by the value on June 30 of year t. We calculate stock fundamentals on December 31 of year t − 1. We sort the stocks into deciles on each measure on June 30 of year t, and then compute the buy-and-hold monthly returns from July of year t to June of year t + 1. We rebalance the portfolios annually. THE RACE CALL We analyze the compound annual growth rates of each price ratio over the 1964 to 2011 period for market capitalization–weighted decile portfolios. We find the best-performing price ratio measured on a raw compound annual growth rate is the EBIT variation of the enterprise multiple.

Universe Selection and Back-Test Assumptions Description Market Capitalization NYSE 40% breakpoint23 Exchanges NYSE/AMEX/Nasdaq Real estate investment trusts (REITs) Business development companies (BDCs) Tracking stocks Limited partnerships (LPs) Master limited partnerships (MLPs) Excluded Security Types Mortgage REITs Royalty trusts Exchange-traded funds or notes (ETFs, ETNs) Closed-end funds American depositary receipts (ADRs) or Americandepository shares (ADSs) Special-purpose acquisition companies (SPACs) Excluded Industries Financials Utilities Return Data CRSP: Prices adjusted for dividends, splits, and corporate actions Fundamentals Data Compustat: Annual data starting December 31, 1962 Delisting Algorithm “Delisting Returns and Their Effect on Accounting-Based Market Anomalies,” by William Beaver, Maureen McNichols, and Richard Price24 Portfolio Weights Market capitalization weighted One-year buy-and-hold returns Formation Date June 30 of year t Fundamentals Date December 31 of year t − 1. Firms with fiscal years ending before March 31 of year t use year t fundamentals, after March 31 use year t − 1 fundamentals Data Requirements Firms must have data for all core data items We don't generate our ideas through statistical analysis and curve fitting. We rely on tried-and-true security analysis techniques, and we supplement these metrics with academic research and common sense.


pages: 268 words: 74,724

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

Airbnb, bank run, Bernie Madoff, bitcoin, Bretton Woods, buy and hold, Carmen Reinhart, corporate raider, correlation does not imply causation, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Mark Zuckerberg, market bubble, money market fund, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Travis Kalanick, Uber for X, War on Poverty, yield curve

Maybe not, but what would be taken from him is the ability to fix the corporations he invests in. While Buffett is known to “buy and hold,” he doesn’t allow the businesses he owns to operate like charities. As he acknowledged in a 2015 op-ed for the Wall Street Journal, job loss in the modern economy is normal. It is “simply a consequence of an economic engine that constantly requires more high-order talents while reducing the need for commodity-like tasks.”8 Buffett knows well that for businesses to thrive, they must sometimes reduce head count. But as Senator Buffett, his ability to discipline flabby corporations would be severely limited by politicians who are eager to protect their constituents’ jobs. Buffett doesn’t always “buy and hold.” Despite the lousy investment reputation of airlines, Buffett once took a large position in what was then U.S.


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Straight to Hell: True Tales of Deviance, Debauchery, and Billion-Dollar Deals by John Lefevre

airport security, blood diamonds, buy and hold, colonial rule, credit crunch, fixed income, Goldman Sachs: Vampire Squid, high net worth, income inequality, jitney, lateral thinking, market clearing, Occupy movement, Sloane Ranger, the market place

Once we get the issuer to sign off on the deal terms, we’re ready to allocate bonds to investors, get the deal across the finish line, and then move on to the next one. The allocation process is one of the most nuanced and contentious aspects of the execution process, and probably the most important. Our primary focus when it comes to allocating bonds is to do what’s in the best interests of the deal—place the bonds in safe hands (i.e., serious long-term buy-and-hold accounts who are participating in the deal because they know and like the credit, not because they think it’s a hot deal and they can “flip the bonds on the break,” or sell them immediately after the deal prices). However, it’s not always as straightforward as that. Part of what makes the allocation process such an art form is that we have total discretion to allocate bonds to whomever we choose and for whatever reason.

The Duke tends to let what he hears about the size of the order book dictate how big (and inflated) his order is going to be. For some unknown reason, he must have been told that this is a really hot deal, despite the obviously weaker market backdrop. Part of the reason he might think that the deal is still in good shape is that’s what we’re telling our sales force to say: that the order book is comfortably oversubscribed with key anchor orders and high-quality, real money (buy-and-hold) investors with little price sensitivity. Smithers yells back across the three rows that separate us. “By the way, you know the Duke is Roo’s client. Can you put the order in for her? She’s not around and I can’t access any of her clients in the system.” I put the order in for Roo and then shoot her a quick email so that she knows to confirm it when we launch final deal terms. Roo is the head of .


pages: 231 words: 76,283

Work Optional: Retire Early the Non-Penny-Pinching Way by Tanja Hester

"side hustle", Affordable Care Act / Obamacare, Airbnb, anti-work, asset allocation, barriers to entry, buy and hold, crowdsourcing, diversification, estate planning, financial independence, full employment, gig economy, hedonic treadmill, high net worth, index fund, labor-force participation, longitudinal study, medical bankruptcy, mortgage debt, obamacare, passive income, post-work, remote working, rent control, ride hailing / ride sharing, risk tolerance, stocks for the long run, Vanguard fund

(And anyone who insists that market timing is about skill, not luck, is trying to sell you something. Run far, far away.) As the saying goes, “Time in the markets is more important than timing the markets.” The nature of the markets is to go up and down, so you do need to get used to the idea that sometimes your accounts will look like they’ve lost money. But you only lose money when you sell shares and lock in your losses, so if you buy and hold for the long term, those short-term fluctuations don’t matter, and you’re better off tuning them out. So long as you don’t need the money you’re investing in the markets right away, you’re virtually guaranteed that it will gain in value over time. And as a smart investor, you’re only interested in the long term. Any money you need in the short term, such as an emergency fund or money to buy a home, should be saved outside of the markets in cash savings vehicles. 3.

Note, however, that research shows that investors who buy individual stocks do less well historically than the markets as a whole, capturing only about 80% of the gains made by the markets at large. That could be explained by two factors: (1) Trading fees on stock transactions can disproportionately erode gains, especially for investors who trade often, and (2) people who buy individual stocks are more likely to get caught up in market frenzies and panics, buying high and selling low, the opposite of the buy-and-hold strategy that is the cornerstone of creating magic money. Unless you have access to discounted stock-buying opportunities through an employee stock purchase plan, avoid making individual stocks a large part of your portfolio. Bonds, however, are a good hedge against stock market volatility and belong in your portfolio. If the thought of choosing which bonds you wish to buy is too daunting to you, bond mutual funds and index funds (discussed below) are excellent options.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, diversification, diversified portfolio, family office, fixed income, glass ceiling, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, John Meriwether, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shale / tar sands, oil shock, out of africa, paper trading, Paul Samuelson, Peter Thiel, price anchoring, purchasing power parity, reserve currency, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond, zero-sum game

Keynes’ distaste of floating currencies (ironically his original vehicle of choice for speculating) eventually led him to participate in the construction of a global fixed currency regime at Bretton Woods in 1945.The post-World War II economic landscape, coupled with the ensuing Cold War–induced peace and the relative stability fostered by Bretton Woods, led to a boom in 500 450 Keynes 400 UK Broad Country Index Initial Base Value (100) 350 300 250 200 150 100 50 19 45 19 44 19 43 19 42 19 41 19 40 19 39 19 38 19 37 19 36 19 35 19 34 19 33 19 32 19 31 19 30 19 29 19 28 0 FIGURE 2.1 King’s College Cambridge Chest Fund and the UK Broad Country Equity Index Source: Motley Fool. THE HISTORY OF GLOBAL MACRO HEDGE FUNDS 7 developed-country equity markets starting in 1945 and lasting until the early 1970s. During that time, there were few better opportunities in the global markets than buying and holding stocks. It wasn’t until the breakdown of the Bretton Woods Agreement in 1971, and the subsequent decline in the U.S. dollar, that the investment universe again offered the opportunities that spawned the next generation of global macro managers. POLITICIANS AND SPECULATORS Recent history is riddled with examples of politicians attempting to place blame on speculators for shortcomings in their own policies, and the breakdown of Bretton Woods was no exception.

The most profitable trade wasn’t a trade but an approach to markets and a realization that, over time, positive carry works. Applying this concept to higher yielding currencies versus lower yielding currencies was my most profitable trade ever. I got to the point in this trade where I was running portfolios of about $6 billion and I remember central banks being shocked at the size of currency positions I was willing to buy and hold over the course of years. FORWARD RATE BIAS The empirical tendency of forward exchange rates is to overestimate changes in spot exchange rates. According to the theory of uncovered interest arbitrage, forward exchange rates are unbiased predictors of future spot exchange rates, implying that a forward contract’s expected return equals 0 percent. It is an empirical fact, however, that during the modern floating rate era, the forward exchange rates of the major currencies have predicted larger subsequent changes in the spot rates than have occurred.

See also Central bank(s)/banking Bank of Canada, 285 Bank of England, 14–15, 113, 152, 161, 166, 175, 274–275, 285 Bank of Japan, 175, 318 Bank paper, 141 Barclays Capital, 134–139, 141, 153 Barings Singapore, 80 Barron’s, 231, 238 Baruch, Bernard, 146–147 Bear/bearish markets, 82–83, 123, 157, 225, 228, 230, 237, 340 Beauty contest, 164–165 Behavioral finance, 152, 159 Bernanke, Ben, 350 Bessent, Scott, 14, 16, 20, 269–288 Bessent Capital, 269 Beta, 8, 282, 328 BHP Billiton, 252 Bid/offer spreads, 45, 61 Big-bet approach, 341–343 Black box trading systems, 332 Black Monday, 11, 212–213 Black Wednesday 1992, 10, 14–17, 29, 114, 275 361 362 Blodgett, Henry, 260 Bond investments, 61, 88, 118, 121–122, 146–147, 157–158, 231, 251 Bond market, 61, 78, 145, 149–151, 193, 225–226, 292, 323, 328 Bond market rout of 1994, 10, 17, 155 Bond prices, 204 Bond rally, 75 Bond specialists, 127 Bonfire of the Vanities (Wolfe), 244 Boom-bust cycle, 167–168 Bosnia, 51 Bottom-up approach, 51, 346 Brady bonds, 296 Brazil/Brazilian real,193, 204, 208–209, 239, 261, 290, 295–296, 327–328, 334–335 Bretton Woods, 6–7, 90, 123, 201 British pound, 14–16, 76, 117, 209, 221–222, 274, 285. See also Sterling Brown Brothers, 271 BTPs (Buoni del Tesoro Poliennali), 85–87 Bucket shops, 36 Buffett,Warren, 278, 292 Bull/bullish market, 83, 107, 123, 217, 225–226, 228, 230–231, 239, 273 Bund/BTP convergence trade, 85–87 Bundesbank, 14 Bunds, 75, 340 Business cycle, global, 328–329 Butterfly options, 46 Buy and hold strategy, 7, 47 Buy low, sell high, 228–229 Buy signals, 226 Call options, 85 Canada, 167 Canadian dollar, 67, 239, 286 Capital allocation, 24, 33, 98–99, 315, 321 Capital preservation, 144, 323–324 Carry trades, 78–79, 110–111, 113, 117–118, 125, 134 Cash market, 85 Caxton, 9–10, 33 Central bank(s)/banking, 32, 40, 83, 139–140, 148, 151–153, 161–162, 167–170, 204, 313, 331 Central banker(s), 13–14, 160, 229, 349.


pages: 611 words: 130,419

Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller

agricultural Revolution, Albert Einstein, algorithmic trading, Andrei Shleifer, autonomous vehicles, bank run, banking crisis, basic income, bitcoin, blockchain, business cycle, butterfly effect, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, central bank independence, collective bargaining, computerized trading, corporate raider, correlation does not imply causation, cryptocurrency, Daniel Kahneman / Amos Tversky, debt deflation, disintermediation, Donald Trump, Edmond Halley, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, full employment, George Akerlof, germ theory of disease, German hyperinflation, Gunnar Myrdal, Gödel, Escher, Bach, Hacker Ethic, implied volatility, income inequality, inflation targeting, invention of radio, invention of the telegraph, Jean Tirole, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, litecoin, market bubble, money market fund, moral hazard, Northern Rock, nudge unit, Own Your Own Home, Paul Samuelson, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, publish or perish, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Rubik’s Cube, Satoshi Nakamoto, secular stagnation, shareholder value, Silicon Valley, speech recognition, Steve Jobs, Steven Pinker, stochastic process, stocks for the long run, superstar cities, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, traveling salesman, trickle-down economics, tulip mania, universal basic income, Watson beat the top human players on Jeopardy!, We are the 99%, yellow journalism, yield curve, Yom Kippur War

This narrative has an element of truth to it, as professional narratives generally do, though there is now a professional literature that finds imperfections not predicted by the theory. Occasionally these professional narratives translate into popular narratives, but the public often distorts these narratives. For example, one distorted narrative states that a buy-and-hold strategy in the domestic stock market is the best investment decision. That narrative conflicts with the professional canon, despite the popular idea that the buy-and-hold strategy comes from scholarly research. Like the popular interpretation of the random walk, some distorted narratives have an economic impact for generations. As with any kind of historical reconstruction, we cannot go back in time with a sound recorder to capture the conversations that created and spread the narratives, so we have to rely on indirect sources.

., 33 Brown, Roger, 307n13 Bruner, Jerome, 65 Bryan, William Jennings, 108, 164, 167–68, 170, 171, 172, 313n29 Buffett, Warren, 4 Burns, Arthur F., 125, 309n10 Bush, George W., 83, 154–55 business confidence narrative, 114–15, 116f, 118–19; conventional economists’ view and, xvi–xvii; gold standard and, 167, 168–69; stimulated by Bitcoin narrative, 4 business cycle, 124–25, 271. See also economic fluctuations butterfly effect, 299–300 buy-and-hold strategy, xiii “Buy Now Campaign” during Great Depression, 255 Callahan, Charlene, 281 Canada, National Dream, 151; Bank of Canada, 156 Čapek, Karel, 181–82, 203 Capital in the Twenty-First Century (Piketty), 150, 210–11 capitalism: Bitcoin narrative and, 87; triumphant narrative of, 29 Capper, Arthur, 249 The Captive Mind (Milosz), 57 Carroll, Lewis, 188 Case, Karl, 216, 226, 285 Case-Shiller home price index, 216, 222 Cass, David, 74 Cassel, Gustav, 188 causality between narratives and events, 71–74; controlled experiments and, 72–73, 77–79; vs. correlation, 286; direction of, 71, 72–74; economists’ presumption about, 73, 76–77; flashbulb memory and, 80; for recessions and depressions in US, 112.


pages: 348 words: 83,490

More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded) by Michael J. Mauboussin

Albert Einstein, Andrei Shleifer, Atul Gawande, availability heuristic, beat the dealer, Benoit Mandelbrot, Black Swan, Brownian motion, butter production in bangladesh, buy and hold, capital asset pricing model, Clayton Christensen, clockwork universe, complexity theory, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, dogs of the Dow, Drosophila, Edward Thorp, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, fixed income, framing effect, functional fixedness, hindsight bias, hiring and firing, Howard Rheingold, index fund, information asymmetry, intangible asset, invisible hand, Isaac Newton, Jeff Bezos, Kenneth Arrow, Laplace demon, Long Term Capital Management, loss aversion, mandelbrot fractal, margin call, market bubble, Menlo Park, mental accounting, Milgram experiment, Murray Gell-Mann, Nash equilibrium, new economy, Paul Samuelson, Pierre-Simon Laplace, quantitative trading / quantitative finance, random walk, Richard Florida, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, statistical model, Steven Pinker, stocks for the long run, survivorship bias, The Wisdom of Crowds, transaction costs, traveling salesman, value at risk, wealth creators, women in the workforce, zero-sum game

The data consistently show that the low-turnover funds (which imply two-year-plus investor holding periods) perform best over three-, five-, ten-, and fifteen-year time frames (see exhibit 8.2). We may be able to attribute this performance difference to lower costs—a reason in and of itself to reduce turnover for many portfolios—but we would note that transaction costs tend to represent only about one-third of total costs for the average mutual fund. Despite consistent evidence supporting the performance benefits of a buy-and-hold strategy, the average actively managed mutual fund has annual turnover nearly 90 percent. What gives? First off, an efficient stock market requires investor diversity—across styles and time horizons. Not everyone can, or should, be a long-term investor. This fallacy of composition is the flaw behind the “Dow 36,000” theory, which argues that if all investors adopt a long-term horizon, the equity-risk premium will dissipate and the market will enjoy a onetime rise.9 Changing the nature of the investors changes the nature of the market.

See also loss aversion; psychology of investing behaviors: anchoring; certainty and; herding; information overload; pattern-seeking Beinhocker, Eric belief bell curve Benartzi, Shlomo Bernoulli, Daniel Bernstein, Peter Bernstein, William BetFair Bet with the Best (Crist) Bezos, Jeff blackjack Black-Scholes options-pricing model Bogle, Jack C. bomb search boom-and-bust phenomenon Bosch-Domènech, Antoni boundary rules Brady commission brain development Buffett, Warren buy-and-hold strategy Calculated Risks (Gigerenzer) Calvin, William Camerer, Colin Campbell, Donald capital, tangible vs. intangible capital-asset pricing model (CAPM) capital gains taxes card experiment Carlile, Paul cash flow return on investment (CFROI); downturns cash-flow-to-net-income ratio categorization cause and effect; complex adaptive systems and; human explanation for; press reports cause and effect thinking cave paintings centralized control certainty/uncertainty Chamberlain, Wilt Chan, Louis K.


pages: 321

Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

algorithmic trading, asset allocation, automated trading system, backtesting, barriers to entry, business cycle, buy and hold, capital asset pricing model, constrained optimization, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial intermediation, Flash crash, implied volatility, index arbitrage, index fund, intangible asset, iterative process, Long Term Capital Management, loss aversion, market design, market microstructure, merger arbitrage, natural language processing, passive investing, pattern recognition, performance metric, popular capitalism, prediction markets, price discovery process, profit motive, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, selection bias, sentiment analysis, shareholder value, Sharpe ratio, short selling, Silicon Valley, speech recognition, statistical arbitrage, statistical model, stochastic process, survivorship bias, systematic trading, text mining, transaction costs, Vanguard fund, yield curve

The theory was first confirmed by Amihud and Mendelson (1986), showing that, on average, a 1% increase in the spread is associated with a 0.211% increase in monthly risk-adjusted returns. Hence, a strategy applied to assets with high spreads yields increased returns in exchange for a fixed cost: in line with the aforementioned results, a 1% extra fixed cost as a result of increased spread is counterbalanced by the elevated return over a excess spread 1 , or roughly five months. In period of monthly excess return 0.211 other words, buy-and-hold investors with at least a five-month-long investment horizon, or investors trading daily alphas with turnover less monthly excess return 0.211 number of days in a month 21 , or roughly 1%, seek a profit than excess spreadd 1 by investing in assets with a higher spread. Liquidity can be measured in alternative ways. Researchers have shown that other proxies, such as the Amihud illiquidity (2002), can capture a significant proportion of the excess return.

Some of the more commonly day-traded financial instruments are stocks, options, currencies, and a host of futures contracts, such as equity index futures, interest rate futures, currency futures, and commodity futures. Strictly defined, all day-trading positions are closed before the market closes. Many traders, however, include day trading as one component of an overall strategy. Traders who trade intraday with the motive of profit are considered speculators rather than hedgers or liquidity traders. The methods of quick trading contrast with the long-­term methods underlying buy-and-hold and value investing strategies. It may seem quite unremarkable that a trader can buy and sell an instrument on the same day, but day trading is a relatively new concept. Although the practice can be traced back to 1867 and the creation of the first ticker tape, there were significant barriers to entry at that time, and as a result this type of trading was not popular among the general population.


pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, business cycle, buy and hold, California gold rush, Carmen Reinhart, central bank independence, commoditize, conceptual framework, corporate governance, corporate raider, creative destruction, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, Paul Samuelson, payday loans, plutocrats, Plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

Today, even among auditors and federal regulators, the use of speculative estimates and “forward looking” indicators is widely accepted as a reasonable means to conduct oversight and surveillance of the internal workings of companies and banks.28 Instead of gradually sharing in the additive growth of a company through dividends, the prevailing “investment” model became to buy a stock at one price and sell it at a higher price to another market participant—in part because the rate of change in a given company or industry was so rapid that the traditional buy and hold investment strategy could not keep up. This transient view of the value offered by a company stock or government bond is typified today by television programs such as Mad Money, the CNBC program hosted by former Goldman Sachs trader Jim Cramer. Cramer derides buy and hold or “value” investing of the type advocated by Graham and Dodd, and instead instructs his viewers to jump from one stock to the next in a speculative fashion. This view of money and investing as an essentially speculative activity says a great deal for the way in which modern day Americans view their world.

Brazil, foreign loan moratorium Bretton Woods currency system interment (1994) internationalist vision, Korean War conflict Bretton Woods Agreement (1944) arrangement, impact cessation criticism Keynes, impact ratification Bryan, William Jennings American Bimetallic League sponsorship Bryanism, popularity defeat political speech (Chicago convention 1896) Burns, Arthur economic expansion limitation gold perspective interest rate increase valedictory speech (1979) Bush, George W. Business attack cycles, Keynes theory (formulation) FDR revanchist campaign government oversight, Republican laissez faire approach Business expansion (financing), private debt (usage) Buy and hold investing, derision Byrd, Robert Calder, Lendol Financing the American Dream Calhoun, John C. California economic activity, gold production stimulation Callan, Charles (Back Door to War) Call loans, liquidations Calomiris, Charles Camp David international settlements secret meeting Canova, Anthony Capital free flow funds, private deman (low level) importer Captive financing vehicles Cardenas, Lazaro Carnegie, Andrew investments, pooling Morgan buyout Carter, Jimmy cabinet reshuffle conservatism Miller selection nomination policy, inconsistency spending caution Catterall, Ralph C.H.


pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, fixed income, implied volatility, index fund, intangible asset, interest rate swap, inventory management, London Interbank Offered Rate, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

Related Terms: • Bond • Market Maker • Stock Market • Broker-Dealer • Par Value The Investopedia Guide to Wall Speak 221 Passive Investing What Does Passive Investing Mean? An investment strategy that does not include active buying and selling of securities. Passive investors purchase investments with the intention of long-term appreciation and thus have limited portfolio turnover. Index fund investing, in which shares in the fund simply mirror an index, is a form of passive investing. Investopedia explains Passive Investing Also known as a buy-and-hold or couch potato strategy, passive investing requires good initial research, patience, and a well-diversified portfolio. Unlike active investors, passive investors buy a security and typically do not actively attempt to profit from short-term price fluctuations. Passive investors instead rely on their belief that in the long term the investment will be profitable. Related Terms: • Diversification • Index • Mutual Fund • Exchange-Traded Fund • Index Fund Payback Period What Does Payback Period Mean?

See also specific topics and types of bonds Bond ladder, 26 Bond rating, 26-27 Bond yield. See Current yield; Yield Bonus issue. See Stock split 329 330 Index Book value, 27, 173, 229. See also Net tangible assets BPS. See Basis point (BPS) Breakpoint, 27-28 Broker-dealer, 28, 127, 174-175 Buffett, Warren, 92, 113 Bull market, 29, 134, 149 Business cycle, 29-30. See also specific trends Buy. See Bid Buy side, 30 Buy to cover, 30-31. See also Short covering Buy-and-hold. See Passive investing Buyback, 31. See also Short covering Buying on margin. See Margin Buy/sell orders. See under Stop Buy-write. See Covered call CAGR. See Compound annual growth rate (CAGR) Call, 26, 33, 51-52, 56-57, 240, 282 Call option, 34, 117, 134, 214-215, 285-286 Call period, 33 Callable bond, 34 Candlestick, 34-35 Capital, 35. See also Shareholders’ equity; specific types of capital Capital Asset Pricing Model (CAPM), 9, 35-36, 37, 266-267 Capital gain, 36-37 Capital market line (CML), 37 Capital stock.


pages: 318 words: 87,570

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio by Sal Arnuk, Joseph Saluzzi

algorithmic trading, automated trading system, Bernie Madoff, buttonwood tree, buy and hold, commoditize, computerized trading, corporate governance, cuban missile crisis, financial innovation, Flash crash, Gordon Gekko, High speed trading, latency arbitrage, locking in a profit, Mark Zuckerberg, market fragmentation, Ponzi scheme, price discovery process, price mechanism, price stability, Sergey Aleynikov, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, stocks for the long run, stocks for the long term, transaction costs, two-sided market, zero-sum game

We wrote Broken Markets quite simply to try to explain the markets’ complexity to an audience that does not only include the most sophisticated industry insiders. Although we wish our markets operated in a manner simple enough that the majority of us could understand it, unfortunately, today’s markets do not operate in simple and intuitive ways. Hopefully, we can illuminate the murkiness to help you understand the highway upon which your investments are traveling. If you are a buy-and-hold investor or a retail trader, we want you to come away understanding new dangers in our market structure that never existed before. We want you to understand that your costs are not just a commission or a bid-ask spread. Your every investment move, order, and trade is recorded and sold/provided to hyper-efficient, short-term HFT firms by the exchanges, similar to how your Internet-browsing is recorded by your search engine provider.

Achieving best execution has never been more challenging. What Ails Us About High Frequency Trading? October 5, 2009 “What the _____ is going on?” our client asked. “This is screwing our investors!” It was the mid-1990s, and it was our first experience with High Frequency Trading (HFT), which has since grown to become one of the hottest controversies in securities trading today. Our client was a classic, buy and hold institutional investor, managing money for 401ks and pensions. At the time, we were agency institutional traders working at Instinet. Our client had begun to notice how the Instinet top-of-book, which was not part of any national quote, was generating automated orders from a handful of firms that shadowed our institutional clients. These automated orders would match or better our clients’ orders by an eighth or sixteenth (no decimals back then).


pages: 323 words: 92,135

Running Money by Andy Kessler

Andy Kessler, Apple II, bioinformatics, Bob Noyce, British Empire, business intelligence, buy and hold, buy low sell high, call centre, Corn Laws, Douglas Engelbart, family office, full employment, George Gilder, happiness index / gross national happiness, interest rate swap, invisible hand, James Hargreaves, James Watt: steam engine, joint-stock company, joint-stock limited liability company, knowledge worker, Leonard Kleinrock, Long Term Capital Management, mail merge, Marc Andreessen, margin call, market bubble, Maui Hawaii, Menlo Park, Metcalfe’s law, Mitch Kapor, Network effects, packet switching, pattern recognition, pets.com, railway mania, risk tolerance, Robert Metcalfe, Sand Hill Road, Silicon Valley, South China Sea, spinning jenny, Steve Jobs, Steve Wozniak, Toyota Production System, zero-sum game

But “interesting opportunity.” Hmmmm. Those are always the magic words. “OK, fine, see you at noon,” I said. I made Fred come along. We were running our fund out of a dumpy office above an arts store in Palo Alto (low overhead). Anyone who visited probably thought we were running some investment-scam bucket shop instead of a hedge fund. I dunno, some days I wondered if we weren’t. Our fund was different from most. We were buy and hold—stocks only. I’d rather eat pork bellies than trade them. We invested mostly in small public companies and a few interesting private companies. I wasn’t so sure about this one. I’d had no plans to go anywhere that day, so I was wearing jeans and, I’m pretty sure, a clean shirt. Fred and I hit Sunnyvale and parked close to a nondescript steel- Ssangyong Sweat 3 and-glass box like those that house every company in the Valley.

But they don’t like risk. Well, too bad. I think what I learned is that wealth comes not just from taking risk but from constantly taking risks. The four-door office isn’t a metaphor, it’s reality. You can be a long-term investor, but you constantly have to adjust your sights to the next big thing. We may be in the midst of a long cycle like the British 100-year industrial boom, but that doesn’t mean you can buy and hold and be on the golf course by noon. What startles me is that those who generate wealth in Silicon Valley run at 100 miles per hour. They don’t own anything of value like a textile mill or an auto factory. They own a process, the 234 Running Money ability to constantly update their products and take advantage of that waterfall, some massive price declines and then move on to the next product or process.


Deep Value by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Andrei Shleifer, availability heuristic, backtesting, business cycle, buy and hold, corporate governance, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, fixed income, intangible asset, joint-stock company, margin call, passive investing, principal–agent problem, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, Rory Sutherland, shareholder value, Sharpe ratio, South Sea Bubble, statistical model, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tim Cook: Apple

Activism focused on the capital structure increased pay-out ratios by more than 10 percent and 160% 3% 120% 2% 80% 1% 40% 0% 0% Fi –40% 13 D t-1 t-1 t-1 t-1 t-1 t-2 –1% t-2 lli ng t+ 2 t+ 4 t+ 6 t+ 8 t+ 10 t+ 12 t+ 14 t+ 16 t+ 18 t+ 20 4% t-4 200% t-6 5% 0 t-8 240% 2 6% 4 280% 6 7% 8 320% 0 Abnormal Buy-and-Hold Return 8% Share Turnover Relative to (t-100, t-40) 179 How Hannibal Profits From His Victories Abnormal Share Turnover (Right) Abnormal Buy&Hold Return (Left) FIGURE 9.1â•… Excess Buy-and-Hold Returns Around Schedule 13D Filing Source: Alon P. Brav, Wei Jiang, Randall S. Thomas, and Frank Partnoy. “Hedge Fund Activism, Corporate Governance, and Firm Performance (May 2008).” Journal of Finance, Vol. 63, pp. 1729, 2008. reduced debt. Finally, corporate governance-related activism reduced agency costs as targeted companies tended to reduce assets compared to the average target.


pages: 512 words: 162,977

New Market Wizards: Conversations With America's Top Traders by Jack D. Schwager

backtesting, beat the dealer, Benoit Mandelbrot, Berlin Wall, Black-Scholes formula, butterfly effect, buy and hold, commodity trading advisor, computerized trading, Edward Thorp, Elliott wave, fixed income, full employment, implied volatility, interest rate swap, Louis Bachelier, margin call, market clearing, market fundamentalism, money market fund, paper trading, pattern recognition, placebo effect, prediction markets, Ralph Nelson Elliott, random walk, risk tolerance, risk/return, Saturday Night Live, Sharpe ratio, the map is not the territory, transaction costs, War on Poverty

Essentially, I would look for people with the ability to admit mistakes and take losses quickly. Most people view losing as a hit against their self-esteem. As a result, they postpone losing. They think of all sorts of reasons for not taking losses. They select a mental stop point and then fail to execute it. They abandon their game plan. What do you think are the greatest misconceptions people have about the market? In my opinion, the greatest misconception is the idea that if you buy and hold stocks for long periods of time, you’ll always make money 268 / The New Market Wizard Let me give you some specific examples. Anyone who bought the stock market at any time between the 1896 low and the 1932 low would have lost money. In other words, there’s a thirty-six-year period in which a buyand-hold strategy would have lost money—and that doesn’t even include the opportunity loss on the funds.

Actually, I believe that anything can happen, but certainly if it has happened before, it can happen again. From 1929 to 1932, the market dropped an average of 94 percent. In fact, it has even happened in more modern times—during 1973-74, the “nifty fifty” stocks lost over 75 percent of their value. Is your point that we could get a bear market that would be far worse than most people could imagine? Exactly, and people who have the notion that buying and holding for the long term is the way to go can easily go bankrupt. Wouldn’t your own duration and magnitude rules lead you astray if we get a market that goes down 80 or 90 percent? Not at all. Remember that I use these statistical studies as only one among many tools. How do you handle losing streaks? We all go through periods when we’re out of sync with the market. When I’m doing things correctly, I tend to expand my rate of involvement in the market.

Based on his experience in training thirty-eight traders, Sperandeo concluded that intelligence was virtually irrelevant in predicting success. A far more important trait to winning as a trader, he says, is the ability to admit mistakes. He points out that people who tie their self-esteem to being right in the markets will find it very difficult to take losses when the market action indicates that they are wrong. One sacred cow that Sperandeo believes is really a bum steer is the standard advice to use a buy-and-hold strategy in the stock market. Sperandeo provides some examples of very extended periods in which such a strategy would have been disastrous. PART V Multiple-Market Players Tom Basso MR. SERENITY T o be frank, Torn Basso was not on my list of interview subjects for this book. Although his track record is solid, it is by no means striking. As a stock account manager, he has averaged 16 percent annually since 1980, approximately 5 percent above the S&P 500 return.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus, zero-sum game

If someone is not sure how cold it is outside and she looks out the window to see everyone wearing down coats, she might choose to wear one too. The decision is not automatic—she might choose to wear only a sweater—but in this case a decision to wear a warm coat is partly dependent on others’ decisions. The last element is adaptation. In complex systems, adaptation means more than change; rather it refers specifically to learning. Investors who repeatedly lose money on Wall Street themes such as “buy and hold” may learn over time that they need to consider alternative strategies. This learning can be collective in the sense that lessons are shared quickly with others without each agent having to experience them directly. Agents that are diverse, connected, interdependent and adaptive are the foundation of a complex system. To understand how a complex system operates, it is necessary to think about the strength of each of these four elements.

bancors bank bailouts, 2008 Bank for International Settlements bank holidays bank lending Bank of England Bank of the United States Banque de France Barro, Robert base money Bear Stearns beggar-thy-neighbor competitive devaluations behavioral economics Belgium Bernanke, Ben on gold and the Great Depression money policies of speech of 2002 Bernstein, Jared bilateral trade relations Black, Fischer black markets black swans (catastrophic events) Blair, Dennis C. Blessing, Karl blue fuel (natural gas) Brazil Bretton Woods era, 1944–1973, Buffett, Warren Burns, Arthur Bush, George W. buy and hold strategy Canada capital controls implementation capital flight capital markets capitalism, state Carter, Jimmy catastrophic collapse catastrophic events central banks gold and aftermath of Panic of 2008 IMF as a global central bank and reserve currencies role in Great Depression See also Federal Reserve, U.S. certainty, in economics Chaisson, Eric J.


pages: 317 words: 106,130

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bernie Madoff, Black Swan, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index fund, interest rate swap, invisible hand, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

Academic and industry research papers have consistently found that the buywrite strategy on major equity indices such as the Russell 2000 and the S&P 500 Risk Budgeting and Asset Allocation 211 typically outperform the underlying indices on a risk-adjusted basis. For example, see Kapadia, Nikunj, and Szado (2007), and Hill, Balasubramanian, Gregory, and Tierens (2006, 29−46). 3. The favorable and unfavorable periods refer to the performance of the buy-write strategy in comparisons to a buy and hold Russell 2000 investment. The annualized return for the Russell in the unfavorable period (February 20, 2003, to November 16, 2006) and favorable periods (January 1996 to February 2003) was 24.82% and 3.84%, respectively. The volatility in the unfavorable period was 15.34% compared with 22.69% for the favorable period. 4. As discussed in Chapter 10, Madoff’s investment strategy was primarily a long collar strategy. 212 THE NEW SCIENCE OF ASSET ALLOCATION CHAPTER 10 Myths of Asset Allocation rom time to time, we have to challenge our strongly held beliefs.

But some hedge funds also provide a break on the decline in equity values during periods of equity decline by buying stock when individuals are “herd selling” and, in many instances, selling stock because they believe the stock market is “herd buying.” Managers like Julian Robertson were not buyers of growth Myths of Asset Allocation 223 internet stocks during the tech bubble, but concentrated on buy and hold/ value based equities, that is, buying out-of-favor undervalued stocks that investors wished to sell. ALTERNATIVE INVESTMENT STRATEGIES ARE SO UNIQUE THAT THEY CANNOT BE REPLICATED The growth in alternative investment has encouraged a number of firms to offer a series of products called replication indices/benchmark products. These products have the goal of providing returns that capture the underlying return of basic fund strategies.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, buy and hold, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

Since the introduction of money thousands of years ago, financial intermediaries with more information have been taking advantage of lenders and borrowers with less. —Frank Partnoy, 2009 An army of the financial industry’s bank analysts, brokers and sales people are busy enticing retail investors to give them their money or, at least, to trade on the securities market. The investors, thus persuaded to ignore the time-tested advice of buy and hold, make much less money in the stock exchange than they could, while the financial institutions who are exploiting the power of their expert status increase their fees and their profits from trading against naïve investors. Retail investors tend to buy when prices are high and sell when prices are low. When the market valuation is low, investors tend to be underinvested and thus benefit only moderately from the following upswing.

Individual investors have less information and skill than institutional investors. They are therefore at a disadvantage if they trade with institutional investors. Thus the standard recommendation of economically disinterested advisors is to refrain from frequent trading, especially as it is well known that 80 percent of individual investors lose on average, which interestingly is the same ratio for gambling (Barber et al. 2004). Investors should buy and hold diversified portfolios, 56 ECONOMISTS AND THE POWERFUL such as low-cost mutual or index tracking funds. Instead, they trade actively, trying to pick the winners or trying to time the market by disinvesting when they think prospects are bad and investing again when they think prospects are good. It is hard to overemphasize how costly this is – and how beneficial to the institutional counterparties of these uninformed traders.


pages: 463 words: 105,197

Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Eric Posner, E. Weyl

3D printing, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, anti-communist, augmented reality, basic income, Berlin Wall, Bernie Sanders, Branko Milanovic, business process, buy and hold, carbon footprint, Cass Sunstein, Clayton Christensen, cloud computing, collective bargaining, commoditize, Corn Laws, corporate governance, crowdsourcing, cryptocurrency, Donald Trump, Elon Musk, endowment effect, Erik Brynjolfsson, Ethereum, feminist movement, financial deregulation, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, guest worker program, hydraulic fracturing, Hyperloop, illegal immigration, immigration reform, income inequality, income per capita, index fund, informal economy, information asymmetry, invisible hand, Jane Jacobs, Jaron Lanier, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, labor-force participation, laissez-faire capitalism, Landlord’s Game, liberal capitalism, low skilled workers, Lyft, market bubble, market design, market friction, market fundamentalism, mass immigration, negative equity, Network effects, obamacare, offshore financial centre, open borders, Pareto efficiency, passive investing, patent troll, Paul Samuelson, performance metric, plutocrats, Plutocrats, pre–internet, random walk, randomized controlled trial, Ray Kurzweil, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Rory Sutherland, Second Machine Age, second-price auction, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, special economic zone, spectrum auction, speech recognition, statistical model, stem cell, telepresence, Thales and the olive presses, Thales of Miletus, The Death and Life of Great American Cities, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, trickle-down economics, Uber and Lyft, uber lyft, universal basic income, urban planning, Vanguard fund, women in the workforce, Zipcar

Effortless Capitalism The logic of shareholder capitalism suggests that investors wish to do as little work as possible while gaining a maximal stable return. Starting in the 1950s, economists developed financial ideas that came to be known as “portfolio theory” based on these principles.13 The major insight was that for the average investor, it makes more sense to buy shares in a diverse group of corporations mimicking the whole economy than to pick stocks based on conjectures about which companies are best managed. When an investor buys and holds just one stock, she bears the risk that the stock price will fall for reasons specific to that stock, such as its management being incompetent or deceitful. Investors can avoid these stock-specific risks by diversifying widely across the economy. Further theoretical development reinforced these conclusions. The so-called efficient capital markets hypothesis emphasized that anyone trying to pick an “undervalued” stock is deluding herself.

Beginning in the 1970s, a huge demand developed for such funds, in part because of the shift of pension savings into the stock market spurred by various government reforms and in part because governments, persuaded by financial theory, encouraged investors to park their savings in such low-cost, diversified funds. The overall effect was that institutional investors, which controlled these funds, became the largest owners, and thus the largest controllers (at least in principle), of the major corporations. Who are the institutional investors, anyway? They include companies that manage mutual funds and index funds, asset managers, and other firms that buy and hold equities on behalf of their customers. The largest names are those we mentioned above: Vanguard, BlackRock, State Street, and Fidelity. Index fund operations are relatively mechanical, so their costs are low; today they comprise probably less than a quarter of the offerings of institutional investors.16 Figure 4.2 displays the growth of the fraction of the US public stock market controlled by institutional investors.


pages: 139 words: 33,246

Money Moments: Simple Steps to Financial Well-Being by Jason Butler

Albert Einstein, asset allocation, buy and hold, Cass Sunstein, diversified portfolio, estate planning, financial independence, fixed income, happiness index / gross national happiness, index fund, intangible asset, longitudinal study, loss aversion, Lyft, Mark Zuckerberg, mortgage debt, passive income, placebo effect, Richard Thaler, ride hailing / ride sharing, Steve Jobs, time value of money, traffic fines, Travis Kalanick, Uber and Lyft, uber lyft, Vanguard fund, Yogi Berra

Jack Bogle is the founder of Vanguard, which with around £3 trillion is the second-largest mutual fund manager in the world. This is what he has to say about investing: ‘The index fund is a most unlikely hero for the typical investor. It is no more (nor less) than a broadly diversified portfolio, typically run at rock-bottom costs, without the putative benefit of a brilliant, resourceful, and highly skilled portfolio manager. The index fund simply buys and holds the securities in a particular index, in proportion to their weight in the index. The concept is simplicity writ large.’48 So there really is no need to pay high annual charges to have your money managed by a manager who makes decisions on what companies to buy, when and how much. An index or tracker fund approach should be your default. PRINCIPLE 3: DON’T PUT ALL YOUR INVESTMENT EGGS IN ONE BASKET.


Saudi America: The Truth About Fracking and How It's Changing the World by Bethany McLean

addicted to oil, American energy revolution, Asian financial crisis, buy and hold, corporate governance, delayed gratification, Donald Trump, family office, hydraulic fracturing, Jeff Bezos, Mark Zuckerberg, Masdar, oil shale / tar sands, peak oil, Silicon Valley, sovereign wealth fund, Upton Sinclair, Yom Kippur War

Some of the returns that the private equity firms have generated have come from selling one company to another, like in the case of Double Eagle, or in taking a company they’ve funded public. For a long time, the value the public market was willing to accord a fracker was based not on a multiple of profits, which is a standard way of valuing a company, but rather as a multiple of the acreage a company owns. It was a bit like the old dotcom days, when internet companies were valued on the number of eyeballs. The attitude is invest-and-flip, not buy-and-hold. “I view it as a greater fool business model,” one private equity executive tells me. “But it’s one that has worked for a long time.” In the summer of 2017, finger-pointing began regarding who was to blame for the red ink in the shale business. True, investors who expect profits are disappointed in shale companies. Or as Doug Terreson, a one-time petroleum engineer turned top-ranked energy analyst, now with Evercore ISI, asks, “If shale is such a great business, why isn’t it creating value for shareholders?”


pages: 356 words: 105,533

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market by Scott Patterson

algorithmic trading, automated trading system, banking crisis, bash_history, Bernie Madoff, butterfly effect, buttonwood tree, buy and hold, Chuck Templeton: OpenTable:, cloud computing, collapse of Lehman Brothers, computerized trading, creative destruction, Donald Trump, fixed income, Flash crash, Francisco Pizarro, Gordon Gekko, Hibernia Atlantic: Project Express, High speed trading, Joseph Schumpeter, latency arbitrage, Long Term Capital Management, Mark Zuckerberg, market design, market microstructure, pattern recognition, pets.com, Ponzi scheme, popular electronics, prediction markets, quantitative hedge fund, Ray Kurzweil, Renaissance Technologies, Sergey Aleynikov, Small Order Execution System, South China Sea, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stochastic process, transaction costs, Watson beat the top human players on Jeopardy!, zero-sum game

Tradebot often had to throttle back as Archipelago’s computers hit the spin cycle, making a hash of his fine-tuned models. “I can’t manage that risk,” he told Selway. Cummings pushed Selway to make fixes, constantly comparing Archipelago to Island—usually unfavorably. He became so demanding that Selway began to worry that Archipelago would become the plaything of big-volume traders such as Tradebot while overlooking the needs of regular buy-and-hold investors. It marked the beginning of the dynamic that years later would lead to the very problems that Haim Bodek faced at Trading Machines, a market in which exchanges catered to the every whim of high-speed traders, eager to win their business. Selway could sense the market forces shifting. Fear the Bot, he told himself. It was a losing battle. Cummings paid a visit to Archipelago’s offices on the twentieth floor of the Hartford Plaza North building in Chicago’s Loop, where he met Jerry Putnam.

Housed in a single Dell computer tower a few feet from Greenberg’s desk, Star did one thing, and only one thing: pick stocks for Rebellion, the small hedge fund they’d founded in 2005. Star picked stocks by scanning a dizzying array of statistics, from the price of commodities such as oil and corn to the performance of international currencies to the latest ticks of thousands of stocks around the world. More important, Star had learned its stock-picking strategies on its own. And as time went on, Star kept learning. Star was akin to a digital Warren Buffett, a buy-and-hold computer program able to comb through nearly all tradable stocks in the world and determine which were the best and which the worst. It represented the next evolution in computer trading, pushing the process yet another step toward full automation. While Haim Bodek was experimenting with a man-machine “advanced chess” trading model, Rebellion was leaving the entire process up to the machine itself.


pages: 416 words: 106,532

Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond: The Innovative Investor's Guide to Bitcoin and Beyond by Chris Burniske, Jack Tatar

Airbnb, altcoin, asset allocation, asset-backed security, autonomous vehicles, bitcoin, blockchain, Blythe Masters, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, disintermediation, distributed ledger, diversification, diversified portfolio, Donald Trump, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fiat currency, financial innovation, fixed income, George Gilder, Google Hangouts, high net worth, Jeff Bezos, Kenneth Rogoff, Kickstarter, Leonard Kleinrock, litecoin, Marc Andreessen, Mark Zuckerberg, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, packet switching, passive investing, peer-to-peer, peer-to-peer lending, Peter Thiel, pets.com, Ponzi scheme, prediction markets, quantitative easing, RAND corporation, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ross Ulbricht, Satoshi Nakamoto, Sharpe ratio, Silicon Valley, Simon Singh, Skype, smart contracts, social web, South Sea Bubble, Steve Jobs, transaction costs, tulip mania, Turing complete, Uber for X, Vanguard fund, WikiLeaks, Y2K

Future utility value can be thought of as speculative value, and for this speculative value investors are keeping 5.5 million bitcoin out of the supply. At the start of April 2017, there were just over 16 million bitcoin outstanding. Between international merchants needing 10 million bitcoin, and 5.5 million bitcoin held by the top 1,000 investors, there are only roughly 500,000 bitcoin free for people to use. A market naturally develops for these bitcoin because maybe another investor wants to buy-and-hold 5 bitcoin, or a merchant wants to send US$100,000 of bitcoin to Mexico. Since these people must buy that bitcoin from someone else, that someone else needs to be convinced to let that bitcoin go, and so a negotiation begins. On a broader scale, all these negotiations occur on exchanges around the world, and a market to value bitcoin is made. If demand continues to go up for bitcoin, then with a disinflationary supply schedule, so too will its price (or velocity).

Relying on the advice of financial professionals can be effective because they can provide research and direction. Yet while innovative investors may take advice from experienced professionals, the final decisions are their own. They adapt their investing approach, strategies, and even selections based on what is occurring around them. This is especially vital in the age of exponential change that we’re living in. Buy and hold works, until it doesn’t. Investing for the long term works until there’s a need for income in retirement. Times change. The markets go up and the markets go down, sometimes in drastic ways. Situations change. A sick relative or job loss can create havoc with any financial plan. Innovative investors are all about choosing their own investing philosophy, their own investing approach, and having their own viewpoint on what is a suitable investment for their own situation.


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, plutocrats, Plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

These days, after a decade of frantic growth in mortgage-backed securities and other complex instruments traded off exchanges, that clarity is gone. Large parts of American financial markets have become a hall of mirrors. 12 Ordinary investors are starting to pay a price for what is fast becoming a tattered pretense. Information is deficient, not efficient; the theory behind the EMH has spurred a dubious shift toward passive index funds and the “buy and hold” approach and away from market timing and active management. The EMH assumption that the stock market provides the best guide to the value of corporate assets is undercut by the lack of attention to private debt in U.S. and British data collection. In addition, the investment theory taught in U.S. business schools may be useless with respect to East Asia, where complex social networks differ from those of the West.

Since the 1970s, the United States had pursued a series of implicit burden-sharing arrangements. As we have seen, one with the Saudis and OPEC provided that oil would be priced in dollars and that the Persian Gulf producers would recycle their profits by investing in U.S. government bonds and other assets. A second, even more informal, had foreign nations aided or protected militarily by the United States—Japan, Korea, and Taiwan—indirectly share those costs by buying and holding huge quantities of U.S. treasury and agency debt in their reserves and otherwise supporting the dollar. In still another, even less formal arrangement nicknamed “Bretton Woods II” in 2003, China and other high-saving nations that exported vast quantities of goods to the United States, unofficially collaborated by holding large central bank balances in U.S. treasury debt to support the dollar.


pages: 464 words: 117,495

The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management by Alexander Elder

additive manufacturing, Atul Gawande, backtesting, Benoit Mandelbrot, buy and hold, buy low sell high, Checklist Manifesto, computerized trading, deliberate practice, diversification, Elliott wave, endowment effect, loss aversion, mandelbrot fractal, margin call, offshore financial centre, paper trading, Ponzi scheme, price stability, psychological pricing, quantitative easing, random walk, risk tolerance, short selling, South Sea Bubble, systematic trading, The Wisdom of Crowds, transaction costs, transfer pricing, traveling salesman, tulip mania, zero-sum game

That, of course, is the total opposite of how amateurs act: they jump in or out when prices begin to run, but grow bored and not interested when prices are sleepy. Chart patterns reflect swings of mass psychology in the financial markets. Each trading session is a battle between bulls, who make money when prices rise, and bears, who profit when they fall. The goal of a serious technical analyst is to discover the balance of power between bulls and bears and bet on the winning group. If bulls are much stronger, you should buy and hold. If bears are much stronger, you should sell and sell short. If both camps are about equal in strength, a wise trader stands aside. He lets bulls and bears fight with each other, and enters a trade only when he is reasonably sure which side is likely to win. Prices and volume, along with the indicators that track them, reflect crowd behavior. Technical analysis is similar to poll taking. Both combine science and art: They are partly scientific because we use statistical methods and computers; they are partly artistic because we use personal judgment and experience to interpret our findings

In the two years since I wrote the world's first popular e-book on investing in this technology, AM stocks have become investors' favorites. A technical pattern has emerged, with rallies driven by amateurs piling in and sharp declines as they panic and bail out. The 13-day Force Index does a good job of catching those waves. When the 13-day Force Index crosses above its zero line (marked by vertical green arrows), it shows that buying volume is coming in. That's where a longer-term trader buys and holds. When the 13-day Force declines below its zero line and stays there, it shows that bears predominate. Near the right edge of the screen, we see a record low of Force Index, but then bears begin to weaken, as Force Index starts inching towards zero. Keep your powder dry as you wait for an accumulation pattern to emerge and be confirmed by Force Index crossing above zero. This see-saw movement of stocks passing from strong hands into weak ones near the tops and back again near the lows goes on forever.


pages: 387 words: 112,868

Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money by Nathaniel Popper

4chan, Airbnb, Apple's 1984 Super Bowl advert, banking crisis, Ben Horowitz, bitcoin, blockchain, Burning Man, buy and hold, capital controls, Colonization of Mars, crowdsourcing, cryptocurrency, David Graeber, Edward Snowden, Elon Musk, Extropian, fiat currency, Fractional reserve banking, Jeff Bezos, Julian Assange, Kickstarter, life extension, litecoin, lone genius, M-Pesa, Marc Andreessen, Mark Zuckerberg, Occupy movement, peer-to-peer, peer-to-peer lending, Peter Thiel, Ponzi scheme, price stability, QR code, Ross Ulbricht, Satoshi Nakamoto, Silicon Valley, Simon Singh, Skype, slashdot, smart contracts, Startup school, stealth mode startup, the payments system, transaction costs, tulip mania, WikiLeaks

In May, Pete Thiel’s Founders Fund announced that it was putting $2 million into BitPay, the payment processing company that allowed merchants to accept Bitcoin and end up with dollars in their bank—taking advantage of the Bitcoin network’s quick and cheap transactions. But the company that was attracting the most attention was Coinbase, founded by the veterans of Airbnb and Goldman Sachs. The twentysomething cofounders had clean-cut looks and soft-spoken ways that naturally engendered confidence. Investors liked that the pair avoided the ideological talk of overthrowing the Fed and instead sold their company as a safe and easy place for consumers to buy and hold coins that wouldn’t be subject to endless delays and scrutiny from the authorities. They also had real professional experience at well-known companies, something that had been in short supply in the Bitcoin world up to this point. After consultations with Wences, Micky decided to team up with the New York venture capitalist Fred Wilson to put $5 million into Coinbase. It was the largest publicized investment in a Bitcoin company to date, by a wide margin, and the first time an established venture capitalist like Wilson had put serious money into the space.

Some of the most influential Bitcoin players were gathered at the San Carlos Airport outside San Jose. They were there to board privately chartered flights to Truckee, California, the closest town to Dan Morehead’s vacation house on the shore of Lake Tahoe. Morehead had been helping Pete Briger examine the Bitcoin opportunities available to Fortress. He had set up a sort of mini hedge fund that would buy and hold Bitcoins and sell shares to rich investors, while also looking to make investments in Bitcoin startups. In October, he invited leading virtual-currency advocates to his home in Tahoe for the first-ever Bitcoin Pacifica, a weekend of socializing and conversation about his favorite digital money. Among the people boarding the planes were the two founders of Bitstamp. Morehead had paid to fly them in from Slovenia and was hoping to finalize a $10 million investment in the exchange.


pages: 354 words: 118,970

Transaction Man: The Rise of the Deal and the Decline of the American Dream by Nicholas Lemann

Affordable Care Act / Obamacare, Airbnb, airline deregulation, Albert Einstein, augmented reality, basic income, Bernie Sanders, Black-Scholes formula, buy and hold, capital controls, computerized trading, corporate governance, cryptocurrency, Daniel Kahneman / Amos Tversky, dematerialisation, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, fixed income, future of work, George Akerlof, gig economy, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, index fund, information asymmetry, invisible hand, Irwin Jacobs, Joi Ito, Joseph Schumpeter, Kenneth Arrow, Kickstarter, life extension, Long Term Capital Management, Mark Zuckerberg, mass immigration, means of production, Metcalfe’s law, money market fund, Mont Pelerin Society, moral hazard, Myron Scholes, new economy, Norman Mailer, obamacare, Paul Samuelson, Peter Thiel, price mechanism, principal–agent problem, profit maximization, quantitative trading / quantitative finance, Ralph Nader, Richard Thaler, road to serfdom, Robert Bork, Robert Metcalfe, rolodex, Ronald Coase, Ronald Reagan, Sand Hill Road, shareholder value, short selling, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, TaskRabbit, The Nature of the Firm, the payments system, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, transaction costs, universal basic income, War on Poverty, white flight, working poor

He talked rapidly, joked, cajoled, prodded, trying to get the firm moving faster. His operation at Morgan Stanley required a sales force, which Morgan Stanley hadn’t had, and more trading capacity and additional capital. “Fixed income” is a Wall Street term that covers instruments that pay investors at a set rate—for example, a ten-year government bond that can be redeemed at the end of that time for the amount it cost, plus interest. The name connotes cautious, buy-and-hold investors, but as time went on, what it came to mean was almost completely different. Stocks are bought and sold on public exchanges, so their price at every moment is a matter of record. But if you own a bond and decide to sell it before its maturity date, you have to find someone to buy it. The price isn’t public; it’s set through a rapid private negotiation—as in, Do you want it at fifty-three dollars, or not?

One of them was the most influential financier of the late twentieth century, Michael Milken of Drexel Burnham Lambert. That Milken—a guy in his thirties from a middle-class background, working out of Beverly Hills, California, for a formerly third-bracket investment firm—could be so important was a sign of how much and how quickly the financial world had changed. Milken saw that the bond markets were no longer the province of buy-and-hold trust officers and insurance companies; he created a market for high-risk, high-yield “junk bonds” that in the old days nobody would have wanted. Selling junk bonds to the new breed of fixed-income traders on Wall Street generated much of the capital that fueled the mergers and acquisitions business in the 1980s, and of course the nature of the financing meant that successful acquirers of companies were heavily in debt.


pages: 519 words: 118,095

Your Money: The Missing Manual by J.D. Roth

Airbnb, asset allocation, bank run, buy and hold, buy low sell high, car-free, Community Supported Agriculture, delayed gratification, diversification, diversified portfolio, estate planning, Firefox, fixed income, full employment, hedonic treadmill, Home mortgage interest deduction, index card, index fund, late fees, mortgage tax deduction, Own Your Own Home, passive investing, Paul Graham, random walk, Richard Bolles, risk tolerance, Robert Shiller, Robert Shiller, speech recognition, stocks for the long run, traveling salesman, Vanguard fund, web application, Zipcar

That's because the "hot" funds don't stay hot year after year—they cool down. So while index funds are usually in the middle of the pack in any given one-year period, they shine over the long term. During the recent stock market tumble, some folks shouted, "Look! Buy-and-hold investing is dead!" They took the stock market's decline as evidence that passive investing with index funds doesn't work. Well, it doesn't work if you sell after a fall, but if you hold onto your investments, you're fine—you haven't lost anything but time. In fact, many savvy investors viewed the market crash as a chance to buy—and hold onto—even more shares of their index funds. Investing is a game of years and decades, not months. What your investments did this year is far less important than what they'll do over the next decade (or two, or three). Don't let one year panic you, and don't chase after the latest hot investments.


pages: 413 words: 117,782

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences by Steven G. Mandis

activist fund / activist shareholder / activist investor, algorithmic trading, Berlin Wall, bonus culture, BRICs, business process, buy and hold, collapse of Lehman Brothers, collateralized debt obligation, commoditize, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, Emanuel Derman, financial innovation, fixed income, friendly fire, Goldman Sachs: Vampire Squid, high net worth, housing crisis, London Whale, Long Term Capital Management, merger arbitrage, Myron Scholes, new economy, passive investing, performance metric, risk tolerance, Ronald Reagan, Saturday Night Live, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Nature of the Firm, too big to fail, value at risk

For example, in 1992, when I started, I worked on the sale of one of a company’s divisions to a private equity firm. We must have contacted fewer than a dozen private equity firms, because there were not many of them around. Nor were there many large hedge funds. Later in the 1990s, however, private equity firms and hedge funds began to boom. Generally, these firms were much more transactional and generated large fees in the short term compared with Goldman’s traditional corporate clients or “buy and hold” mutual funds. People at hedge funds tended to be more transaction oriented than relationship oriented. Similarly, private equity firms tend to be transactional; buying and selling companies and taking them public are shorter-term transactions than traditional corporate client business. Goldman executives decided to focus on this growing industry and even started a group in the mid- to late 1990s to cater to this client base.

Many of the private equity firms felt they already had people (many of them former bankers) who were smarter and more skilled than those in the banks in the kinds of deals the firms were doing. In an interview, one private equity client described most investment bankers who maintained a relationship with his firm as “order takers.” Hedge funds also changed the landscape. Unlike many traditional mutual funds, which had a “buy and hold” mentality, many hedge funds went in and out of securities with high frequency. They typically borrowed money from investment banks to buy securities, and they shorted securities. All of these activities generate significant fees, and so Goldman organized groups to focus on these growing clients and their special needs. I remember working on a special project to analyze Goldman’s top fee-paying clients, and I was shocked by how many were hedge funds.


Commodity Trading Advisors: Risk, Performance Analysis, and Selection by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah

Asian financial crisis, asset allocation, backtesting, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, compound rate of return, constrained optimization, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, discrete time, distributed generation, diversification, diversified portfolio, dividend-yielding stocks, fixed income, high net worth, implied volatility, index arbitrage, index fund, interest rate swap, iterative process, linear programming, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, p-value, Pareto efficiency, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, stochastic process, survivorship bias, systematic trading, technology bubble, transaction costs, value at risk, zero-sum game

However, more recently, Merrill and Thorley (1996) reignited the debate by noting that “the differences between practitioners and theo- 1Samuelson (1971, 1972, 1979) addressed a similar fallacy involving the virtues of investing to maximize the geometric mean return as the “dominating” strategy for investors with long horizons. 390 PROGRAM EVALUATION, SELECTION, AND RETURNS rists . . . are often rooted in semantic issues about risk” (p. 15). In addition, the two camps do not really focus on the same problem. Time diversification advocates are concerned with the impact of increasing the time horizon for a buy and hold strategy, while their opponents are looking at a dynamic investment problem in which a given time horizon is chopped up into several periods. Hence, their divergent opinions are not really surprising. In our view, CTAs provide a more interesting testing field for the theory of time diversification than equities. The reason is that the majority of them are trend followers and that in the long run, trends are likely to emerge (upward or downward).

Ravenscraft. (1999) “The Performance of Hedge Funds: Risk, Return and Incentives.” Journal of Finance, Vol. 54, No. 3, pp. 833–874. Adler, N., L. Friedman, and Z. S. Stern. (2002) “Review of Ranking Methods in the Data Envelopment Analysis Context.” European Journal of Operational Research, Vol. 140, No. 2, pp. 249–265. Agarwal, V., and N. Y. Naik. (March 2002). “Characterizing Systematic Risk of Hedge Funds with Buy-and-Hold and Option-Based Strategies.” Working Paper, London Business School, U.K. Agarwal, V., and N. Y. Naik. (2004) “Risks and Portoflio Decisions Involving Hedge Funds.” Review of Financial Studies, Vol. 17, No. 1, pp. 63–98. Ali, A. I., and L. M. Seiford. (1990) “Tnslation Invariance in Data Envelopment Analysis,” Operations Research Letters, Vol. 9, No. 6, pp. 403–405. Ali, P. U. (2000) “Unbundling Credit Risk: The Nature and Regulation of Credit Derivatives.”


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

“The fact that these funds have done so well over the last few years is creating a chicken-and-egg cycle—more institutional money flows in, activists take more actions, and returns go up,” says Donna Dabney, former executive director of the Conference Board Governance Center. Yet the gains of activists, born of short-term tricks like buybacks and mergers, can be illusory. Very often such stock-boosting strategies aren’t so much growing the firms at the grassroots level as they make them seem more attractive to the market. Moreover, plenty of buy-and-hold investors, like Warren Buffett, would say that several years of good returns is nothing, and that companies should be managed not for short-term profits but for shareholders who truly stick around for the long haul (indeed, Buffett has told Tim Cook to ignore activist demands for a bigger buyback). Icahn has taken the long view with a few of his investments—like industrial-cleaning company Philip Services, which he has held since 1998—but not many.

If the people who run these firms can be convinced to focus on long-term growth over short-term gain, we could see a huge benevolent ripple effect throughout our entire economy: finance itself as an industry would shrink, but more of the wealth of corporate America would flow back to investors, and our economy would grow more strongly. “Money management, by definition, extracts value from the returns earned by our business enterprises,” says Bogle.47 Indeed, most mutual fund managers are essentially takers, not makers. But if more of them use their power to buy and hold shares of firms that practice good corporate governance and follow business strategies that support the real economy, then finance could potentially become not an impediment to growth but in fact a true supporter of it. It’s a bold goal, but one that authentic wealth makers like Bogle believe is attainable. Indeed, he believes it’s something that the father of modern capitalism, Adam Smith, would have favored.


pages: 455 words: 138,716

The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi

banking crisis, Bernie Madoff, butterfly effect, buy and hold, collapse of Lehman Brothers, collateralized debt obligation, Corrections Corporation of America, Credit Default Swap, credit default swaps / collateralized debt obligations, Edward Snowden, ending welfare as we know it, fixed income, forensic accounting, Gordon Gekko, greed is good, illegal immigration, information retrieval, London Interbank Offered Rate, London Whale, naked short selling, offshore financial centre, Ponzi scheme, profit motive, regulatory arbitrage, short selling, telemarketer, too big to fail, War on Poverty

His South Asian education had left him with a chemical engineering degree, but in Ontario in the early 1970s, he made ends meet by selling air conditioners and furnaces, even selling greeting cards door to door. Then, when he graduated from business school in 1974, a professor helped Watsa get a job with Confederation Life, an insurance company in Toronto. Over the course of the next ten years, managing funds in the insurance business, Watsa learned about investing and became obsessed with the buy-and-hold long-term investment strategies that would eventually come to be associated with the likes of John Templeton and Warren Buffett. But it was exposure to popular economics writer Ben Graham’s book Security Analysis that Watsa calls his “road to Damascus” moment—he was so enthralled with Graham’s ideas that he eventually named his first son Ben. A small, carefully dressed man with a distantly beatific manner and deep cocoa-brown skin covering his almost perfectly round bald head, Watsa seems almost religiously devoted to the ideas of Graham and other value investors.

When I flew to Toronto and met him in person, he came across as a True Believer of the first order. The CEO was actually rattled momentarily when I confessed I’d never read Ben Graham, and as if concerned for my welfare, he urged me to read his books as soon as possible. Graham’s ideas stress the simple practice of finding the right price for a company, waiting for that price to fall a little to the point of being undervalued, and then buying and holding that stock with the attitude that you are now part owner of a business, one in whose success you should be invested for the long haul. By 1985, Watsa was a proponent of these stock-picking methods and was sure he could do something with them on a grand scale. But he still had almost no money of his own. He did, however, have a reputation in the Canadian insurance business and a few influential friends, including executives at the first firm he worked for, Confederation.


pages: 1,202 words: 424,886

Stigum's Money Market, 4E by Marcia Stigum, Anthony Crescenzi

accounting loophole / creative accounting, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Black-Scholes formula, Brownian motion, business climate, buy and hold, capital controls, central bank independence, centralized clearinghouse, corporate governance, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, disintermediation, distributed generation, diversification, diversified portfolio, financial innovation, financial intermediation, fixed income, full employment, high net worth, implied volatility, income per capita, intangible asset, interest rate derivative, interest rate swap, large denomination, locking in a profit, London Interbank Offered Rate, margin call, market bubble, market clearing, market fundamentalism, money market fund, mortgage debt, Myron Scholes, offshore financial centre, paper trading, pension reform, Ponzi scheme, price mechanism, price stability, profit motive, Real Time Gross Settlement, reserve currency, risk tolerance, risk/return, seigniorage, shareholder value, short selling, technology bubble, the payments system, too big to fail, transaction costs, two-sided market, value at risk, volatility smile, yield curve, zero-coupon bond, zero-sum game

The decline appeared to relate to a decline in inflation expectations, a major driver in the direction of long-term interest rates. REPOS AND REVERSES A variety of bank and nonbank dealers act as market makers in governments, mortgage securities, agencies, CDs, and bankers’ acceptances (BAs). Because dealers, by definition, buy and sell for their own accounts, active dealers inevitably end up holding some securities. They will, moreover, buy and hold substantial positions if they believe that interest rates are likely to fall and that the value of these securities is therefore likely to rise. Speculation and risk taking are an inherent and important part of being a dealer. While dealers have large amounts of capital, the positions they take are often a large multiple of that amount. As a result, dealers have to borrow to finance their positions.

Relative value, in addition to depending on all the factors we enumerate, may also depend partly on the temperament of the portfolio manager—whether he has the psychology of a trader, as some do, or whether he is more inclined to make a reasoned bet and let it stand for some time. As one investor noted, it makes a difference, “The 3-month bill will, except in very tight markets, trade at yield levels close to the corresponding long issue, which is the 6-month bill. So if you are looking for the most return for your dollar on a buy-and-hold strategy, you buy the 3-month bill and ride it for three months. If, however, you want to trade the portfolio—to buy something with the idea that its price will rise—you are better off staying in the active issue, which would be the 6-month bill.” Credit Risk Most companies, when they have money and are trying to increase yield, will start reaching out on the credit spectrum—buying A-2 or P-2 paper.2 A few do so in an intelligent and reasoned way, devoting considerable resources to searching out companies that are candidates for an upgrading of their credit rating to A-1 or P-1 and whose paper thus offers more relative value than that of A-1 and P-1 issuers.

The top part of the table, which refers TABLE 14.2 Summary of Treasury securities outstanding, February 28, 2006 (in millions of dollars) to marketable Treasury debt, is of most interest for present purposes. It shows that the foreign investors are the biggest holders of Treasuries, followed by the Federal Reserve. The next largest holders are state and local governments, followed by the household sector. What is interesting about the breakdown is that the largest holders collectively have a tendency to buy and hold their Treasury securities. This is one of the reasons why Treasury yields have been low in recent years—with so many natural buyers, there haven’t been too many willing sellers. BOOK-ENTRY SECURITIES In 1976, the Treasury announced that it would move over time to a system under which virtually the entire marketable federal debt would be represented by book-entry securities instead of engraved pieces of paper.


Beat the Market by Edward Thorp

beat the dealer, buy and hold, compound rate of return, Edward Thorp, margin call, Paul Samuelson, RAND corporation, short selling, transaction costs

The potential dilution from these warrants was 2.2/30, or 7.3%. The study shows that the larger the potential dilution, the lower the warrant price, other things being equal. Also, the higher the dividend rate on the common stock, the lower the warrant price tends to be. Dividends make the common more attractive compared to the warrant. Some who hope for a rise in the common, and who would normally buy warrants, may instead buy and hold the common because they receive dividends while they wait. A stock which pays high dividends is believed to have less chance for future price appreciation, or growth, than a stock paying lower dividends. This makes the warrant less valuable, and is a second possible explanation of why higher dividends increase tends to lower the normal price curve, increasing the profit in a hedged position.


pages: 178 words: 52,637

Quality Investing: Owning the Best Companies for the Long Term by Torkell T. Eide, Lawrence A. Cunningham, Patrick Hargreaves

air freight, Albert Einstein, backtesting, barriers to entry, buy and hold, cashless society, cloud computing, commoditize, Credit Default Swap, discounted cash flows, discovery of penicillin, endowment effect, global pandemic, haute couture, hindsight bias, low cost airline, mass affluent, Network effects, oil shale / tar sands, pattern recognition, shareholder value, smart grid, sovereign wealth fund, supply-chain management

Challenges In quality investing, the four most significant challenges are: battling short-term thinking; conquering prevailing preferences for ‘hard’ numerical data over subjective assessments of quality; accepting that quality companies are not always the most exciting investments; and accepting that quality stocks will often appear to be expensive. We discuss each challenge in turn. Long-term compounding versus short-term pressures One of the greatest challenges of the quality investing philosophy is the need to adopt and sustain a long-term outlook – one measured in years, not quarters or days. In our experience, the best investment results tend to follow from buying and holding quality businesses for the long term. Yet it is difficult to embrace such an outlook in a business and investment culture that is riveted on short-term outcomes. When participants measure results by the quarter or year, it is unsurprising that managers and investors concentrate on short-term outcomes. For publicly traded companies, the stock market offers a continual reckoning which entices participants to make investment decisions every day.


pages: 468 words: 145,998

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry M. Paulson

asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, buy and hold, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Doha Development Round, fear of failure, financial innovation, fixed income, housing crisis, income inequality, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, Northern Rock, price discovery process, price mechanism, regulatory arbitrage, Ronald Reagan, Saturday Night Live, short selling, sovereign wealth fund, technology bubble, too big to fail, trade liberalization, young professional

These ties led investors all over the world to believe that securities issued by Fannie and Freddie were backed by the full faith and credit of the U.S. That was not true, and the Clinton and Bush administrations had both said as much, but many investors chose to believe otherwise. In this murkiness, Fannie and Freddie had prospered. They made money two ways: by charging fees for the guarantees they wrote, and by buying and holding large portfolios of mortgage securities and pocketing the difference—or, in bankers’ talk, the “spread”—between the interest they collected on those securities and their cost of funds. The implicit government backing they enjoyed meant that they paid incredibly low rates on their debt—just above the Treasury’s own. The companies also got a break on capital. Congress required them to keep only a low level of reserves: minimum capital equal to 0.45 percent of their off-balance-sheet obligations plus 2.5 percent of their portfolio assets, which largely consisted of mortgage-backed securities.

But Wang seemed lukewarm and concerned about the safety of any Chinese investment. I knew that CIC had lost heavily on its existing Morgan Stanley holding, and that had been a source of great controversy inside China. I told him that the U.S. government viewed Morgan Stanley as systemically important. But his unenthusiastic tone convinced me to drop the matter—China was already providing tremendous support to the U.S. by buying and holding Treasuries and GSE securities. If a deal for Morgan Stanley had been possible, Wang would have signaled it. Later I called Steve Hadley at the White House and let him know that I didn’t believe China was going to invest in Morgan Stanley, and that the president’s call to Hu would be unnecessary. And when I got to John the next day and told him that the Chinese didn’t seem to be interested, he wasn’t surprised.


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, business cycle, buy and hold, capital asset pricing model, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fear of failure, financial innovation, fixed income, full employment, index fund, intangible asset, invisible hand, Joseph Schumpeter, locking in a profit, Long Term Capital Management, low cost airline, low cost carrier, moral hazard, mortgage debt, Myron Scholes, Right to Buy, risk-adjusted returns, risk/return, secular stagnation, shareholder value, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, zero-coupon bond

The most intrepid investors in relative value manage hedge funds where they purchase the relatively less expensive securities and sell short the relatively more expensive ones. This enables them potentially to profit on both sides of the ledger, long and short. Of course, it also exposes them to double-barreled losses if they are wrong.13 It is harder to think about absolute value than relative value. When is a stock cheap enough to buy and hold without a short sale as a hedge? One standard is to buy when a security trades at an appreciable—say, 30%, 40%, or greater—discount from its underlying value, calculated either as its liquidation value, going-concern value, or private-market value (the value a knowledgeable third party would reasonably pay for the business). Another standard is to invest when a security offers an acceptably attractive return to a long-term holder, such as a low-risk bond priced to yield 10% or more, or a stock with an 8% to 10% or higher free cash flow yield at a time when “risk-free” U.S. government bonds deliver 4% to 5% nominal and 2% to 3% real returns.

On company standing: “The experience of the past decade indicates that dominant or at least substantial size affords an element of protection against the hazards of instability.” (p. 178) On interest coverage: “The present-day investor is accustomed to regard the ratio of earnings to interest charges as the most important specific test of safety.” (p. 128 on accompanying CD) On capital structure: “The biggest company may be the weakest if its bonded debt is disproportionately large.” (p. 179) 5. “Buy-and-hold” investing is inconsistent with the responsibilities of the professional investor, and the creditworthiness of every issuer represented in the portfolio must be revisited no less than quarterly. Even before the market collapse of 1929, the danger ensuing from neglect of investments previously made, and the need for periodic scrutiny or supervision of all holdings, had been recognized as a new canon in Wall Street.

., 7 Budd Manufacturing Company, 246n Buffalo Sabres, 274 Buffett, Warren, 40, 53, 54, 58, 137–138, 273, 287, 345, 396, 622, 629, 713–714, 715, 720 Bulgaria, 175 Bunte Brothers, 674 Burchill Act, 233n Burlington, 212 Burtchett, E. F., 193n Bush, George H. W., 286 Bush Terminal Building Company, 421 “Business man’s investment,” 167 Butler Bros., 675 Butte and Superior Copper Company, 677, 679 Butte and Superior Mining Company, 491 “Buy-and-hold” investing, 133 Buyer as element in security analysis, 76 C Cable Television Hall of Fame, 274 Calumet and Hecla Consolidated Copper Company, 487–488 Campeau, Robert, 43 Canada, 174, 175, 233n Canadian Pacific Railway, 158n, 210n, 211, 226 Capellas, Michael, 279 Capital Administration Company, 550 Capital Consumption and Adjustment (Fabricant), 454n Capital Income Debentures, 115n Capital structure, 406–407, 507–519 arbitrary variations in, alteration of value of enterprise by, 508 limitation on comparison in same field, 658, 659 optimum, principle of, 508–510 shortage of sound industrial bonds and, 510 speculative (see Speculative capital structure) top-heavy, earnings appraisal and, 511–512 total market value of securities and, 334–335 Capitalization, allowance for changes in, 503–505 Cash flows, 56 Cash-asset value, 553–554 Cassel, Gustave, 3 Castro, Janice, 271n Caterpillar Tractor, 90n Cates, Staley, 267n Celanese Corporation of America, 92n, 94, 309 Celluloid Corporation, 309 Central Branch Union Pacific Railway, 153 Central Leather, 606 Central Railroad of New Jersey, 451 Central States Electric Corporation, 306, 307, 313–314, 318, 647, 693n Century Communications, 274–275 Century Ribbon Mills, Inc., 327, 328 Cerberus Capital Management, 280 Cerro de Paso Copper Corp., 465 Chamberlain, Lawrence, 102n Chance, value of analysis and, 72–73 Chandler (Federal Bankruptcy) Act of 1938, 208n, 230n, 231–232, 234 Chandler Railroad Readjustment Act of 1939, 238n Chapter 11 of the Bankruptcy Code, 271 Chesapeake and Ohio Railway Company, 158n, 293, 448, 461, 645, 646, 693n Chesapeake Corporation, 313, 509n, 645, 646, 693n Chevron, 271 Chicago, Burlington and Quincy Railroad Company, 158n, 445, 447 Chicago, Milwaukee, St.


pages: 225 words: 61,388

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa by Dambisa Moyo

affirmative action, Asian financial crisis, Bob Geldof, Bretton Woods, business cycle, buy and hold, colonial rule, correlation does not imply causation, credit crunch, diversification, diversified portfolio, en.wikipedia.org, European colonialism, failed state, financial innovation, financial intermediation, Hernando de Soto, income inequality, information asymmetry, invisible hand, Live Aid, M-Pesa, market fundamentalism, Mexican peso crisis / tequila crisis, microcredit, moral hazard, Ponzi scheme, rent-seeking, Ronald Reagan, sovereign wealth fund, The Chicago School, trade liberalization, transaction costs, trickle-down economics, Washington Consensus, Yom Kippur War

This has broadened a previously narrow base to encompass an almost insatiable demand from mutual funds, pension schemes, hedge funds, insurance companies and private asset managers around the world. Moreover, as economies have stabilized, and operate under better management, investors themselves have evolved from more short-term speculators (jumping in and out to garner short-term gains) into longer-term players happy to buy and hold developing-country assets for longer periods, and even up to maturity. While it is true that the Asian crisis of 1997, the Russian debacle in 1998 and the Argentinian default of 2001 all led to a sudden outflow of capital from the emerging markets, these proved to be hiccups in what has been a strong and growing trend of emerging-market interest. And even in those countries where money flowed out on the back of crises, in just one decade investor money has returned.


pages: 179 words: 59,704

Meet the Frugalwoods: Achieving Financial Independence Through Simple Living by Elizabeth Willard Thames

"side hustle", Airbnb, asset allocation, barriers to entry, basic income, buy and hold, carbon footprint, delayed gratification, dumpster diving, East Village, financial independence, hedonic treadmill, IKEA effect, index fund, indoor plumbing, loss aversion, McMansion, mortgage debt, passive income, payday loans, risk tolerance, Stanford marshmallow experiment, universal basic income, working poor

Historically, the stock market has generated a 7 percent average annual return. And yes, the market does go up and down because that’s the very nature of the stock market. But the thing to remember is that history demonstrates that the market always eventually goes up. Even after the Great Recession, the market rebuilt itself. Not immediately, but over time. Successful investing entails the following: buying and holding diversified, low-fee stocks for decades, avoiding the temptation to time the market, not pulling money in and out of the market, and not following the market on a daily basis. Invest and hold (for years upon years) and, more likely than not, your money will make more money. This is an oversimplification of investing, and there are other variables such a rebalancing and asset allocation, as well as decreasing your exposure to risk as you near traditional retirement age, but this is the basic gist.


pages: 543 words: 157,991

All the Devils Are Here by Bethany McLean

Asian financial crisis, asset-backed security, bank run, Black-Scholes formula, Blythe Masters, break the buck, buy and hold, call centre, collateralized debt obligation, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Exxon Valdez, fear of failure, financial innovation, fixed income, high net worth, Home mortgage interest deduction, interest rate swap, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, market fundamentalism, Maui Hawaii, money market fund, moral hazard, mortgage debt, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative trading / quantitative finance, race to the bottom, risk/return, Ronald Reagan, Rosa Parks, shareholder value, short selling, South Sea Bubble, statistical model, telemarketer, too big to fail, value at risk, zero-sum game

So said a big time Kidder Peabody trader named Mike Vranos back in 1994, according to colleagues who talked about him to the Wall Street Journal on May 20, 1994 “This list [of potential buyers] may be a little skewed toward sophisticated hedge funds with which we should not expect to make too much money since (a) most of the time they will be on the same side of the trade as we will, and (b) they know exactly how things work... vs. buy-and-hold ratings buyers who we should be focused on a lot more to make incremental $$$ next year....” So wrote a young Goldman Sachs salesman named Fabrice Tourre in an internal e-mail on December 28, 2006 On one level, the creation of synthetic CDOs was the apotheosis of the previous twenty-five years of modern finance. They were stuffed with risk, yet, thanks to the complex probabilistic risk models developed by Wall Street’s quants, large chunks of them were considered as safe as Treasury bonds.

The stew was now complete. On another level, synthetic CDOs were a classic example of how things never really changed on Wall Street. The sellers of synthetic CDOs had a huge informational advantage over the buyers, just as bond sellers have historically had an advantage over bond buyers. Buying a synthetic CDO was like playing poker with an opponent who knew every card in your hand. Conflicts abounded. Those “buy-and-hold ratings-based investors,” as Tourre described them—or the “dumb guys,” to use Mike Vranos’s less polite words—weren’t necessarily less intelligent; they were simply less plugged in, and either unwilling or unable to do the analysis necessary to compensate for that. Stretching to get the extra yield that synthetic CDOs seemed to offer, lacking a clear understanding of what they were buying, they were the perfect willing dupes.


pages: 261 words: 70,584

Retirementology: Rethinking the American Dream in a New Economy by Gregory Brandon Salsbury

Albert Einstein, asset allocation, buy and hold, carried interest, Cass Sunstein, credit crunch, Daniel Kahneman / Amos Tversky, diversification, estate planning, financial independence, fixed income, full employment, hindsight bias, housing crisis, loss aversion, market bubble, market clearing, mass affluent, Maui Hawaii, mental accounting, mortgage debt, mortgage tax deduction, negative equity, new economy, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, side project, Silicon Valley, Steve Jobs, the rule of 72, Yogi Berra

Although there is much skill, reason, and understanding involved in making a good investment, these findings reflect how number numbness keeps investors from understanding the odds and role of chance in their investing. There’s nothing any single investor can do about the facts presented here, and it’s not dumb luck that has produced these kinds of returns over time. But the numbers can be intimidating, and a short-term loss can scare an investor away. Such findings as these make a pretty good case for the buy-and-hold strategy of investing, but the stock market is only one part of a retirement planning strategy you could consider. There are any number of other ways you can accumulate a nest egg—all those ways simply have to fall within your risk tolerance and comfort zone. Such a stance can keep you from succumbing to a mind trick called hindsight bias. “People who experience hindsight bias misapply current hindsight to past foresight,” according to Hersh Shefrin in his book Beyond Greed and Fear.


pages: 317 words: 71,776

Inequality and the 1% by Danny Dorling

Affordable Care Act / Obamacare, banking crisis, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Boris Johnson, Branko Milanovic, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, centre right, collective bargaining, conceptual framework, corporate governance, credit crunch, David Attenborough, David Graeber, delayed gratification, Dominic Cummings, double helix, Downton Abbey, en.wikipedia.org, Etonian, family office, financial deregulation, full employment, Gini coefficient, high net worth, housing crisis, income inequality, land value tax, longitudinal study, low skilled workers, lump of labour, mega-rich, Monkeys Reject Unequal Pay, Mont Pelerin Society, mortgage debt, negative equity, Neil Kinnock, Occupy movement, offshore financial centre, plutocrats, Plutocrats, precariat, quantitative easing, race to the bottom, Robert Shiller, Robert Shiller, TaskRabbit, The Spirit Level, The Wealth of Nations by Adam Smith, trickle-down economics, unpaid internship, very high income, We are the 99%, wealth creators, working poor

Of the empty 111,000, 66 per cent are simply vacant, while 34 per cent are officially listed as second homes. A further 950,000 occupied homes in Scotland contain only one adult.61 At the other extreme, in Kensington and Chelsea, the residential population fell between 2001 and 2011 as an increasing share of the most expensive property was held empty. There is a huge problem with housing in the UK because people buy and hold on to housing as an investment. In doing this, they are copying (in very small measure) the property portfolios of the 1 per cent. Most people try as hard as they can to get a mortgage and to buy, because they think that doing so will make them safer in the long term. Renting, including even long-term-tenancy social housing, is now universally regarded as insecure. If the 1 per cent hold on to their property and work hard to prevent it being taxed, that has a great influence on the behaviour of the rest of us.


pages: 218 words: 68,648

Confessions of a Crypto Millionaire: My Unlikely Escape From Corporate America by Dan Conway

Affordable Care Act / Obamacare, Airbnb, bank run, basic income, bitcoin, blockchain, buy and hold, cloud computing, cognitive dissonance, corporate governance, crowdsourcing, cryptocurrency, disruptive innovation, distributed ledger, double entry bookkeeping, Ethereum, ethereum blockchain, fault tolerance, financial independence, gig economy, Gordon Gekko, Haight Ashbury, high net worth, job satisfaction, litecoin, Marc Andreessen, Mitch Kapor, obamacare, offshore financial centre, Ponzi scheme, prediction markets, rent control, reserve currency, Ronald Coase, Satoshi Nakamoto, Silicon Valley, smart contracts, Steve Jobs, supercomputer in your pocket, Turing complete, Uber for X, universal basic income, upwardly mobile

He did, but the car fell silent for the rest of the ride to Milan, where we spent our final night in a swanky hotel before flying home the next morning. *** As we prepared to reenter the real world with its ubiquitous Internet connections, I thought of our exit points and asked myself if I should have sold earlier. The timing of when to buy and sell crypto is an excruciating decision. My trouble illustrates the obvious difficulties of selling at the right time, but the buy and hold decision is just as daunting. Sometimes a person’s enthusiasm for a decentralized world isn’t wed to a conviction to invest (or gamble, depending on your perspective). Thanks to my experience with technologies that went viral, determination to get out of the rat race, addictive personality, ability to handle risk, plus the availability of funds at just the right time and a wife who let me spend them, I was destined to go big once I got the crypto bug.


pages: 612 words: 179,328

Buffett by Roger Lowenstein

asset allocation, Bretton Woods, buy and hold, cashless society, collective bargaining, computerized trading, corporate raider, credit crunch, cuban missile crisis, Eugene Fama: efficient market hypothesis, index card, index fund, interest rate derivative, invisible hand, Jeffrey Epstein, John Meriwether, Long Term Capital Management, moral hazard, Paul Samuelson, random walk, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, The Predators' Ball, traveling salesman, Works Progress Administration, Yogi Berra, young professional, zero-coupon bond

Then it got hard to find stuff and he became a franchise investor; he bought great businesses at reasonable prices. And then he said, ‘I can no longer find good businesses at even acceptable prices, and I will take advantage of my size and teach the world a lesson about long-term investing.’ We think he screwed up. It’s stupid.” Buffett and Munger doubted that they could have done better trying to dance in and out.32 For one thing, a buy-and-hold investor put off the tax man—over time, a very big saving.‖ For another, their long-term approach created opportunities: a Mrs. B or Ralph Schey was more inclined to sell to an owner such as Buffett. And, knowing that divorce was not an option, Buffett was a bit—quite a bit—more circumspect in choosing a partner. To the extent that he, or any investor, is not thinking about how and when he will get out, he will be more selective on the way in.

As he expressed it to Business Week, selling a familiar stock was “like dumping your wife when she gets old.”33 This was a strong comment from a guy who, in fact, had refused to dump his wife after she had moved out on him. Buffett revisited this metaphor in one of his letters: here, selling a good stock was like marrying for money—a mistake in most cases, “insanity if one is already rich.”34 Buy-and-hold did have a financial logic, but at Buffett’s extreme it can only be seen, as he put it, as a “quirk” of character, appealing for “a mixture of personal and financial considerations.”35 He liked to keep things—stocks, “pals,” anything that lent a sense of permanence. To turn around and sell because someone offered “2× or 3×” was “kind of crazy.”36 Any other investor, such as his young critic, would have deemed that Buffett was the crazy one.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

asset-backed security, Bernie Madoff, business cycle, buttonwood tree, buy and hold, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, mega-rich, merger arbitrage, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra, zero-sum game

—heirs to a Texas oil fortune established by their father, Clint W. Murchison Sr. Levy and Goldman’s involvement with the Murchison brothers had its origins in the March 1933 bankruptcy filing of the Missouri Pacific Railroad. The Missouri Pacific bankruptcy went on for twenty-three years, making it one of the longest running on record. During that time, investors could buy and sell its debt or buy and hold it, with an eye toward getting control of the company when Missouri Pacific emerged from bankruptcy in the hands of its former creditors. Sometime after the war, the Murchison brothers became the principal owners of the general mortgage bonds of Missouri Pacific. They were recommended to Levy and Goldman Sachs since they “were seeking the assistance of a Wall Street arbitrageur …,” the Times reported, “and Mr.

At the end of December 2006, one Goldman vice president tried to steer his colleague away from trying to sell the increasingly squirrelly securities to sophisticated investors, who he figured should know better. It was just the fact that “[t]his list [of potential buyers] might be a little skewed towards sophisticated hedge funds with which we should not expect to make too much money since (a) most of the time they will be on the same side of the trade as we will, and (b) they know exactly how things work and will not let us work for too much $$$, vs. buy-and-hold rating-based buyers who we should be focused on a lot more to make incremental $$$ next year.” Another way for Goldman to protect itself was to buy credit-default swaps—insurance policies that paid off when the debt of other companies lost value—on the debt of individual companies as well as on individual mortgage-backed securities, such as GSAMP Trust 2006-S2. A third way for Goldman to hedge its exposure to the mortgage market was for Goldman’s traders to short the ABX index—the very trade that Birnbaum was now advocating in the wake of his meeting with Paulson.

But there also seemed to be some concern at the firm’s highest levels that the group’s recent success had made them a bit cocky. “It would help to manage these guys if u would not answer these guys and keep bouncing them back to Tom [Montag] and I,” Mullen wrote to Winkelried and Cohn. Cohn responded, “Got that and am not answering” but then had to admit the trade had merit. “I do like the idea but you call,” he replied to Mullen. Montag then weighed in. “Just to be clear,” he wrote, “[t]his is buy and hold not buy and sell strategy,” suggesting that the firm’s capital would be committed for some time. Cohn got that. In the end, Sparks and Birnbaum got the green light to “opportunistically … buy assets” at the same time that the mortgage trading group was “significant[ly] covering [its] short positions,” according to a presentation given to the Goldman board of directors in September 2007. By the end of August (and Goldman’s third quarter), there was no denying the Birnbaum juggernaut.


The Handbook of Personal Wealth Management by Reuvid, Jonathan.

asset allocation, banking crisis, BRICs, business cycle, buy and hold, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, market bubble, merger arbitrage, negative equity, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

Perhaps this may create significant opportunities for some multi-strategy operations going forward. 2008 hedge fund review Hedge funds are often thought to be absolute return vehicles; however, the underlying assets in which they trade are often the same equities, bonds and commodities found in many long-only manager portfolios. Of course, the structure of the trades are often far removed from the more traditional fundamental buy-and-hold techniques found in their long-only peers’ portfolios. Given this characteristic, perhaps hedge funds should be viewed as ‘better risk adjusted returns’ rather than absolute returns; of course their stated mandate implicitly remains the production of positive returns in all market conditions. The year 2008 will go down in history as being one of the most important in the evolution of the hedge fund industry.


pages: 333 words: 76,990

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

"Robert Solow", asset allocation, banking crisis, banks create money, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, Fall of the Berlin Wall, financial innovation, fixed income, Flash crash, forward guidance, Francis Fukuyama: the end of history, George Akerlof, housing crisis, index fund, invention of the printing press, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, Live Aid, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, oil shock, open economy, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

There was significant optimism that US economic dominance would allow a new breed of US corporations to become global market leaders and multinationals. Many of the companies that were favoured did enjoy very high returns (rather different from the tech bubble of the late 1990s, when the market was dominated by new companies with no returns) and a belief that these returns could be maintained into the long-term future. For that reason, they were often referred to as ‘one-decision’ stocks. Investors commonly were happy to buy and hold them irrespective of the price. There was a popular shift away from value investing towards growth investing. As a result, valuations increased hugely. By 1972, when the S&P 500 had a P/E of 19 times, the average across the Nifty Fifty was over twice this level. Polaroid traded at a P/E of over 90 times, and Walt Disney and McDonald's at over 80 times forward expected earnings. Despite these lofty valuations, Professor Jeremy Siegel (1998) argued that most of the stocks did actually grow into their valuations and achieved very strong returns.


pages: 258 words: 71,880

Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street by Kate Kelly

bank run, buy and hold, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, fixed income, housing crisis, index arbitrage, Long Term Capital Management, margin call, moral hazard, quantitative hedge fund, Renaissance Technologies, risk-adjusted returns, shareholder value, technology bubble, too big to fail, traveling salesman

An argumentative, six-foot-four former football player who had worked at Salomon Brothers before Bear, Lewis’s rough-and-tumble persona set the stage for generations of executives to come. Lewis focused on distressed quasi-public investments like railroads and utilities, making a fortune when business began picking up. Then, in the 1950s, he pioneered the practice of making “block” trades, or buying and selling multiple shares of stock in a single transaction. He was a strong believer in the “buy and hold” strategy, refusing to sell even losing positions. As the years wore on, this created friction with a young protégé, Alan “Ace” Greenberg. The son of a clothier from Oklahoma City, Greenberg had been hired as a clerk at Bear in 1949 and had grown into his job as a successful stock trader. He embraced a simple ethos, handed down to him by his dad: never hang on to losing inventory, because as little as it’s worth today, it’ll be worth less tomorrow.


pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

"Robert Solow", Airbnb, airport security, Al Roth, Alvin Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, business cycle, buy and hold, centralized clearinghouse, Chuck Templeton: OpenTable:, clean water, conceptual framework, constrained optimization, continuous double auction, creative destruction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, Gunnar Myrdal, helicopter parent, information asymmetry, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Pareto efficiency, Paul Samuelson, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uber lyft, uranium enrichment, Vickrey auction, Vilfredo Pareto, winner-take-all economy

Often enough, that “expression of preferences”—just how much you want something—means the price you’re willing to pay. Some inmates in Stalag VII-A, especially those who could trade with the German guards, valued coffee, which commanded a high price in the currency of cigarettes because it was much in demand. You give a grocery store money for peanut butter. Traders exchange promissory notes for pork bellies in a pit at a Chicago commodities market. You buy and hold stocks for your retirement fund and check their value (occasionally or obsessively) on the finance page. The prices that emerge in these marketplaces as a result of all this trading does a remarkable job of capturing the availability of all of these goods and services, relative to our wants and desires. As Austrian economist Friedrich Hayek put it, “Prices are an instrument of communication and guidance which embody more information than we directly have.”


pages: 829 words: 186,976

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

"Robert Solow", airport security, availability heuristic, Bayesian statistics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Swan, Broken windows theory, business cycle, buy and hold, Carmen Reinhart, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Freestyle chess, fudge factor, George Akerlof, global pandemic, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, Laplace demon, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, negative equity, new economy, Norbert Wiener, PageRank, pattern recognition, pets.com, Pierre-Simon Laplace, prediction markets, Productivity paradox, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, wikimedia commons

He would pursue this strategy for ten years, until the last trading day of 1985, at which point he would cash out his holdings for good, surely assured of massive profits. How much money would this investor have at the end of the ten-year period? If you ignore dividends, inflation, and transaction costs, his $10,000 investment in 1976 would have been worth about $25,000 ten years later using the Manic Momentum strategy. By contrast, an investor who had adopted a simple buy-and-hold strategy during the same decade—buy $10,000 in stocks on January 2, 1976, and hold them for ten years, making no changes in the interim—would have only about $18,000 at the end of the period. Manic Momentum seems to have worked! Our investor, using a very basic strategy that exploited a simple statistical relationship in past market prices, substantially beat the market average, seeming to disprove the efficient-market hypothesis in the process.

Economists like Fama think this is a problem when applying standard statistical tests to analyze patterns in stock prices. 39. Index funds would not have been widely available in 1976; the analysis assumes that the investor’s returns would track that of the Dow Jones Industrial Average. 40. This is much worse than the market-average return. Although the 2000s were a poor decade for stocks, a buy-and-hold investor would have had about $9,000 rather than $4,000 left over by the end of the period. 41. Carlota Perez, “The Double Bubble at the Turn of the Century: Technological Roots and Structural Implications,” Cambridge Journal of Economics, 33 (2009), pp. 779–805. http://www.relooney.info/Cambridge-GFC_14.pdf. 42. Based on a comparison of revenues from technology companies in the Fortune 500 to revenues for all companies in the Fortune 500 as of 2010.


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, disruptive innovation, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, income inequality, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, plutocrats, Plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

Shareholder capitalism incentivizes mergers that destroy shareholder value. It works this way: managers are rewarded for spiking share values in the current reporting quarter, affording them the opportunity to cash out options. And nothing spikes earnings per share better than a merger that dramatically enhances revenues. But what happens to shareholders, particularly those who have adopted the Wall Street mantra of “buy and hold?” Economists Ulrike Malmendier, Enrico Moretti, and Florian Peters of the University of California, Berkeley, examined all contested US mergers between 1985 and 2009 where at least two suitors vied. Published in April 2012 by the National Bureau of Economic Research, their analysis examined market evaluations of the successful suitors (acquirors) and losing bidders before and after mergers.

The average holding period has declined from seven years in the 1950s to six months today.22 And Jesse Eisinger of the investigative journal ProPublica has written that in 2012, shares were being held an average of only four months.23 A major accelerant of investor short-termism is the shift in composition of exchange participants toward money managers anxious to show quarterly gains; impatient money managers now hold 70 percent of all shares of American corporations, compared to just 8 percent in the 1950s, outweighing traditional buy and hold investors. Thus, the vast majority of share traders have become a Greek chorus for quarterly capitalism and the short-termism of CEOs, with little interest and even less incentive to follow more detailed elements of corporate decision making. It’s as though America is competing in the Super Bowl (against Japanese and northern Europe competitors), with our guy Tom Brady limited to three-yard dump-off passes.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

Asian financial crisis, banking crisis, Bretton Woods, business cycle, buy and hold, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, plutocrats, Plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

The “tiger economies” of Asia had collapsed, market populists told us, because they had relied on the expertise of elites rather than the infinite wisdom of the people. Similarly, the economies of Western Europe were stagnant because the arrogant aristocrats every red-blooded American knows run those lands were clinging to old welfare-state theories. Meanwhile, the NASDAQ was soaring because the buy-and-hold common man had finally been allowed to participate. And when the House of Morgan was swallowed up by Chase Manhattan, we were told this was because it was a snooty outfit that had foolishly tried to resist the democracy of markets. More important, market populism proved astonishingly ver-satile as a defense of any industry in distress. It was the line that could answer any critic, put over any deregulatory initiative, roll back any tax.


pages: 411 words: 80,925

What's Mine Is Yours: How Collaborative Consumption Is Changing the Way We Live by Rachel Botsman, Roo Rogers

Airbnb, barriers to entry, Bernie Madoff, bike sharing scheme, Buckminster Fuller, buy and hold, carbon footprint, Cass Sunstein, collaborative consumption, collaborative economy, commoditize, Community Supported Agriculture, credit crunch, crowdsourcing, dematerialisation, disintermediation, en.wikipedia.org, experimental economics, George Akerlof, global village, hedonic treadmill, Hugh Fearnley-Whittingstall, information retrieval, iterative process, Kevin Kelly, Kickstarter, late fees, Mark Zuckerberg, market design, Menlo Park, Network effects, new economy, new new economy, out of africa, Parkinson's law, peer-to-peer, peer-to-peer lending, peer-to-peer rental, Ponzi scheme, pre–internet, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, Simon Kuznets, Skype, slashdot, smart grid, South of Market, San Francisco, Stewart Brand, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thorstein Veblen, Torches of Freedom, transaction costs, traveling salesman, ultimatum game, Victor Gruen, web of trust, women in the workforce, Zipcar

Tyler shows Jack that acquiring more and more stuff is a meaningless pursuit devoid of purpose and fulfillment. “God damn it . . . Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.” The main theme of Fight Club runs counter to much of what consumer advertising preys on; we won’t find happiness or the meaning of our lives in the shopping mall or in the click of a mouse. Research has proved that people who can afford to buy and hold on to more material goods are not necessarily more satisfied with their lives. Indeed, the reverse is often true. Economist Richard Layard has researched the relationship between growth, hyper-consumerism, and happiness. His findings are illustrated by a graph on which one line represents per capita income and personal consumption since 1950 and shows a soaring increase (it has more than doubled) while the other line, marking Americans and Britons who describe themselves as “very happy” in an annual Gallup survey, remains flat.41 In fact, the number of people describing themselves as “very happy” peaked in 1957 just as the conspicuous cycle of “work and spend,” and a revolution of rising materialistic expectations, began.


pages: 287 words: 81,970

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments by Charles Goyette

bank run, banking crisis, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, business cycle, buy and hold, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop - Herbert Stein's Law, index fund, Lao Tzu, margin call, market bubble, McMansion, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs

Even in that unlikely case, you will still do very well indeed with these recommendations. A period of new political enlightenment will demand a redeemable currency, oil will still make the world go around, a growing population will still need food and water, and interest rates cannot stay near zero in an environment in which money is not created out of thin air. In other words these are investments that you can buy and hold through the dollar meltdown. They will do well if we are dragged kicking and screaming to our senses by a breakdown, just as they will perform well if a light should dawn before it gets any darker. CHAPTER ELEVEN Investing in Gold Glittering Opportunity To be long gold is, in a grand thematic way, to be short the socialization of risk. —James Grant O gold! I still prefer thee unto paper, which makes bank credit like a bank of vapor.


pages: 219 words: 15,438

The Essays of Warren Buffett: Lessons for Corporate America by Warren E. Buffett, Lawrence A. Cunningham

buy and hold, compound rate of return, corporate governance, Dissolution of the Soviet Union, diversified portfolio, dividend-yielding stocks, fixed income, George Santayana, index fund, intangible asset, invisible hand, large denomination, low cost airline, low cost carrier, oil shock, passive investing, price stability, Ronald Reagan, the market place, transaction costs, Yogi Berra, zero-coupon bond

Berkshire and its shareholders, in combination, would pay a much smaller tax if Berkshire operated a partnership or "s" corporation, two structures often used for business activities. For a variety of reasons, that's not feasible for Berkshire to do. However, the penalty our corporate form imposes is mitigated-though far from eliminated-by our strategy of investing for the long term. Charlie and I would follow a buy-and-hold policy even if we ran a tax-exempt institution. We think it the soundest way to invest, and it also goes down the grain of our personalities. A third reason to favor this policy, however, is the fact that taxes are due only when gains are realized. Through my favorite comic strip, Li'l Abner, I got a chance during my youth to see the benefits of delayed taxes, though I missed the lesson at the time.


pages: 290 words: 83,248

The Greed Merchants: How the Investment Banks Exploited the System by Philip Augar

Andy Kessler, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, business cycle, buttonwood tree, buy and hold, capital asset pricing model, commoditize, corporate governance, corporate raider, crony capitalism, cross-subsidies, financial deregulation, financial innovation, fixed income, Gordon Gekko, high net worth, information retrieval, interest rate derivative, invisible hand, John Meriwether, Long Term Capital Management, Martin Wolf, new economy, Nick Leeson, offshore financial centre, pensions crisis, regulatory arbitrage, Sand Hill Road, shareholder value, short selling, Silicon Valley, South Sea Bubble, statistical model, Telecommunications Act of 1996, The Chicago School, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, tulip mania, value at risk, yield curve

He was a smart guy but he had no clue.’21 Wiser heads might have prevailed but they were blinded by greed: ‘The older analysts should have known better because they had seen what happened at the end of the eighties. These people were just bought; they couldn’t resist temptation. Anyone who said no was simply replaced; in 2000 one analyst at the firm made $12 million, several were at $10 million and several more were at $8 million.’ Long Term Performance Investors would have been better off buying an index tracker fund than adopting a buy and hold strategy for IPOs. Between 1980 and 2001, based on the first day closing price, the total return of US IPOs was 23 per cent less than the value-weighted market index and 5 per cent less than a sample of similar sized and styled stocks. In other words, apart from the first day opening premium of 19 per cent, the IPOs underperformed. The best strategy would have been to sell them after the opening day.22 As I shall discuss in a later chapter, the longer term underperformance of IPOs helps to explain why issuers did not complain at leaving so much on the table.


pages: 801 words: 209,348