stocks for the long run

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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

It is an easy thing to look at the above data and convince yourself that you will be able to stay the course through the tough times. But actually doing it is an entirely different affair. Examining historical returns and imagining losing 50% or 80% of your capital is like practicing an airplane crash in a simulator. Trust me, there is a big difference between how you’ll behave in the simulator and how you’ll perform during the real thing. During bull markets, everyone believes that he is committed to stocks for the long term. Unfortunately, history also tells us that during bear markets, you can hardly give stocks away. Most investors are simply not capable of withstanding the vicissitudes of an all-stock investment strategy. The data for the U.S. markets displayed in Figures 1-9 to 1-14 are summarized in Table 1-1. It’s pretty clear that there’s a relationship between return and risk—you enjoy high returns only by taking substantial risk.

Had you begun your retirement in 1966, the combination of poor inflation-adjusted returns and mandatory withdrawals would likely have devastated your assets—there would have been little or no savings left to enjoy the high returns that followed. Bonds are even worse, since their returns do not mean revert—a series of bad years is likely to be followed by even more bad ones, as happened during the 1970s. This is the point made by Jeremy Siegel in his superb treatise, Stocks For The Long Run. Professor Siegel pointed out that stocks outperformed bonds in only 61% of the years after 1802, but that they bested bonds in 80% of ten-year periods and in 99% of 30-year periods. Looked at from another perspective, in the 30 years from 1952 to 1981, stocks returned 9.9% and bonds returned only 2.3%, while inflation annualized out at 4.3%. Thus, during this period, the bond investor lost 2% of real value on an annualized basis, while the stock investor made a 5.6% real annualized return.

Keynes, John M., The Economic Consequences of the Peace. Harcourt Brace, 1920. Modigliani, Franco, and Miller, Merton H., “The Cost of Capital, Corporation Finance, and the Theory of Investment.” American Economic Review, Vol. 48, No. 3 (June) 1958. Nocera, Joseph, A Piece of the Action. Simon and Schuster, 1994. Norwich, John J., A History of Venice. Alfred A. Knopf, 1982. Siegel, Jeremy J., Stocks for the Long Run. McGraw-Hill, 1998. Strouse, Jean, Morgan: American Financier. Random House, 1999. Chapter 2 Bogle, John C., Common Sense on Mutual Funds. Wiley, 1999. Chancellor, Edward, Devil Take the Hindmost. Penguin, 1999. Clayman, Michelle, “In Search of Excellence: The Investor’s Viewpoint.” Financial Analysts Journal. May/June 1987. Crowther, Samuel, and Raskob, John J., interview, Ladies’ Home Journal.


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

This includes me, and your next-door neighbor who is a stockbroker. Really, we make no money and what can you tell someone who wants you to look at their portfolio and tell them all of their initial ideas are great and not touch them? I have had some of these clients and they confuse me. I had a client who bought Citigroup all the way back when it hit the skids in 1994 for a few bucks after double-digit decline over the prior year. He bought the stock for the long term. After an 800 percent increase in value, the end of 2007 brought with it a serious decline in a few banking stocks, Citigroup being one of them. I suggested he let some loose. Why? He was sure that a short-term movement didn’t mean anything. As the losses piled up and the picture looked worse, I kept suggesting that he reallocate the money, or even buy a banking index to diversify the pain.

This is rigged. You should always be careful with a hold rating. Why do you want to hold? Don’t you want a strong buy? Did your strong conviction opportunistic buy become a hold? What makes it a hold now? You get the picture. When you own a stock that you consider a hold, it should either be getting near the point to take profits, or on a death watch. Be in or out, don’t linger. If you are in a stock for the long run, these ratings should not make any difference to your decision-making process. Thus, if you dare to care about ratings like buy, sell, or hold just watch the first one and leave the last two in the dust. So, although it seemed easy enough to get a hold of research, it was not helpful, nor did it lead me in any direction. There were plenty of people on the trading floor of the firm I worked for with sales pitches that appeared to work.


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

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. The most successful made substantial gains, in large part due to tactical risk management techniques.

So why has institutional money management not moved toward the optimal solution of more bonds and less stocks, despite the existence of accessible and cheap leverage for the past 30-odd years? Part of the reason might be that asset returns in the 1980s and 1990s actually validated the 60-40 approach, as stocks had a very strong run over these two decades. Stocks have paid investors everything they required and more, naturally leading to an “if it ain’t broke, don’t fix it” attitude. It does not help matters when luminaries such as Jeremy Siegel extol “stocks for the long run” or renowned Yale endowment manager David Swensen endorses an “equity-centric” portfolio. Why do they do this? Because stocks have historically outpaced bonds over the long term, and this is indeed true. However, what is missing in this argument is the risk side of the equation. Yes, stocks return more than bonds, but they are riskier, too. In fact, over the last 30 years, risk-adjusted bonds have significantly outperformed equities.


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

STOCKS FOR THE LONG RUN This page intentionally left blank F o u r t h E d i t i o n STOCKS FOR THE LONG RUN The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies JEREMY J. SIEGEL Russell E. Palmer Professor of Finance The Wharton School University of Pennsylvania New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2008, 2002, 1998, 1994 by Jeremy J. Siegel. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-164392-3 The material in this eBook also appears in the print version of this title: 0-07-149470-7.

For more information about this title, click here C O N T E N T S Foreword xv Preface xvii Acknowledgments xxi PART 1 THE VERDICT OF HISTORY Chapter 1 Stock and Bond Returns Since 1802 3 “Everybody Ought to Be Rich” 3 Financial Market Returns from 1802 5 The Long-Term Performance of Bonds 7 The End of the Gold Standard and Price Stability 9 Total Real Returns 11 Interpretation of Returns 12 Long-Term Returns 12 Short-Term Returns and Volatility 14 Real Returns on Fixed-Income Assets 14 The Fall in Fixed-Income Returns 15 The Equity Premium 16 Worldwide Equity and Bond Returns: Global Stocks for the Long Run 18 Conclusion: Stocks for the Long Run 20 Appendix 1: Stocks from 1802 to 1870 21 Appendix 2: Arithmetic and Geometric Returns 22 v vi Chapter 2 Risk, Return, and Portfolio Allocation: Why Stocks Are Less Risky Than Bonds in the Long Run 23 Measuring Risk and Return 23 Risk and Holding Period 24 Investor Returns from Market Peaks 27 Standard Measures of Risk 28 Varying Correlation between Stock and Bond Returns 30 Efficient Frontiers 32 Recommended Portfolio Allocations 34 Inflation-Indexed Bonds 35 Conclusion 36 Chapter 3 Stock Indexes: Proxies for the Market 37 Market Averages 37 The Dow Jones Averages 38 Computation of the Dow Index 39 Long-Term Trends in the Dow Jones 40 Beware the Use of Trend Lines to Predict Future Returns 41 Value-Weighted Indexes 42 Standard & Poor’s Index 42 Nasdaq Index 43 Other Stock Indexes: The Center for Research in Security Prices (CRSP) 45 Return Biases in Stock Indexes 46 Appendix: What Happened to the Original 12 Dow Industrials?

Stocks must remain “the best investment for all those seeking steady, longterm gains” or our system will come to an end, and with a bang, not a whimper. Peter Bernstein P R E F A C E I wrote the first edition of Stocks for the Long Run with two goals in mind: to document the returns on the major classes of financial assets over the past two centuries and to offer strategies that maximize long-term portfolio growth. My research definitively showed that over long periods of time, the returns on equities not only surpassed those on all other financial assets but were far safer and more predictable than bond returns when inflation was taken into account. I concluded that stocks were clearly the asset of choice for investors seeking long-term growth. I am both honored and flattered by the tremendous reception that the core ideas of Stocks for the Long Run have received. Since the publication of the first edition 13 years ago, I have given hundreds of lectures on the markets and the economy both in the United States and abroad.


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

It is the hope that this latest edition will fortify those who will inevitably waver when pessimism once again grips economists and investors. History convincingly demonstrates that stocks have been and will remain the best investment for all those seeking long-term gains. Jeremy J. Siegel November 2013 ACKNOWLEDGMENTS It is never possible to list all the individuals and organizations that have praised Stocks for the Long Run and encouraged me to update and expand past editions. Many who provided me with data for the first four editions of Stocks for the Long Run willingly contributed their data again for this fifth edition. David Bianco, Chief U.S. Equity Strategist at Deutsche Bank, whose historical work on S&P 500 earnings and profit margins was invaluable for my chapter on stock market valuation, and Walter Lenhard, senior investment strategist at Vanguard, once again obtained historical data on mutual fund performance for Chapter 23.

My new Wharton colleague, Jeremy Tobacman, helped me update the material on behavioral finance. This edition would not have been possible without the hard work of Shaun Smith, who also did the research and data analysis for the first edition of Stocks for the Long Run in the early 1990s. Jeremy Schwartz, who was my principal researcher for The Future for Investors, also provided invaluable assistance for this edition. A special thanks goes to the thousands of financial advisors from dozens of financial firms, such as Merrill Lynch, Morgan Stanley, UBS, Wells Fargo, and many others who have provided me with critical feedback in seminars and open forums on earlier editions of Stocks for the Long Run. As before, the support of my family was critical in my being able to write this edition. Now that my sons are grown and out of the house, it was my wife Ellen who had to pay the whole price of the long hours spent revising this book.

Research has revealed that there are predictable times during which the stock market, and certain groups of stocks in particular, do particularly well. The analysis in the first edition of Stocks for the Long Run, published in 1994, was based on long data series analyzed through the early 1990s. The calendar anomalies reported in that edition invited investors to outperform the market by adopting strategies to these unusual calendar events. However, as more investors learn of and act on these anomalies, the prices of stocks may adjust so that much, if not all, of the anomaly is eliminated. That certainly would be the prediction of the efficient market hypothesis. In this edition of Stocks for the Long Run, I also look at the evidence since 1994 to determine whether the anomaly survived or not. The results are surprising. Some anomalies have weakened and even reversed, while others remain as strong as they have always been.


pages: 319 words: 106,772

Irrational Exuberance: With a New Preface by the Author by Robert J. Shiller

Andrei Shleifer, asset allocation, banking crisis, Benoit Mandelbrot, business cycle, buy and hold, computer age, correlation does not imply causation, Daniel Kahneman / Amos Tversky, demographic transition, diversification, diversified portfolio, equity premium, Everybody Ought to Be Rich, experimental subject, hindsight bias, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, Long Term Capital Management, loss aversion, mandelbrot fractal, market bubble, market design, market fundamentalism, Mexican peso crisis / tequila crisis, Milgram experiment, money market fund, moral hazard, new economy, open economy, pattern recognition, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, urban decay, Y2K

Although the term Nifty Fifty was used earlier, the exact date when the “Nifty Fifty” list was clearly and authoritatively identified appears to be 1977, with the Forbes article. However, the article defines the list as the stocks with the highest price-earnings ratio in 1972, whereas Siegel uses 1970 as the starting date for his analysis. 8. Jeremy J. Siegel, Stocks for the Long Run, 2nd ed. (New York: McGraw-Hill, 1998), pp. 105–14. 9. Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds (London: Bentley, 1841), p. 142. 10. Peter Garber, Famous First Bubbles: The Fundamentals of Early Manias (Cambridge, Mass.: MIT Press, 2000). 11. Siegel, Stocks for the Long Run, p. 107. 12. See Jeremy J. Siegel, “Are Internet Stocks Overvalued? Are They Ever,” Wall Street Journal, April 19, 1999, p. 22. This article appears to have caused a mini-crash in Internet stocks the day it appeared: the NASDAQ, which is heavy on high-tech stocks, dropped 5.6% that day, representing its third largest percentage drop in ten years. 13.

Doesn’t such evidence clearly speak against market efficiency, at least for some stocks? And if some stocks can be overpriced, then does it not follow that the market as a whole can be overpriced, given that those stocks are part of the market? Questioning the Examples of Obvious Mispricing Still, despite the apparent obviousness of some examples of mispricing, there are those who question the examples. Jeremy Siegel, in his book Stocks for the Long Run, points out that some of the most E F F ICIE N T MARKE TS , RANDOM WALKS, AND BUBB LES 177 widely cited examples of mispricings in years gone by really made sense in the long run. Siegel cites a list of fifty stocks that were apparently called the “Nifty Fifty” as early as 1970 or 1972: glamorous stocks for which people had high expectations and that traded at very high price-earnings ratios.

“Learning” about Risk It is commonly said that people have recently learned that the stock market is much less risky than they once thought it was, and that the stock market has always outperformed other investments. Their “learning” is allegedly the result of widespread media coverage in the past few years of the historical superiority of stocks as investments, and of the publication in 1994 of the first edition of Jeremy Siegel’s book Stocks for the Long Run. According to this view, people have realized that, in light of historical statistics, they have been too fearful of stocks. Armed with this new knowledge, investors have now bid stock prices up to a higher level, to their rational or true level, where the stocks would have been all along had there not been excessive fear of them. Stocks, selling now at a higher price, will pay a correspondingly lower yield—but that is all right with investors, since they now know that stocks are not all that risky.


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

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.

I call this new way of thinking the Adaptive Markets Hypothesis.2 The term “adaptive markets” refers to the multiple roles that evolution plays in shaping human behavior and financial markets, and “hypothesis” is meant to connect and contrast this framework with the Efficient Markets Hypothesis, the theory adopted by the investment industry and most finance academics. Efficient markets mean that there’s no such thing as a free lunch, especially on Wall Street: if financial market prices fully incorporate all relevant information already, trying to beat the market is a hopeless task. Instead, you should all put your money into passive index funds that diversify as broadly as possible, and stay invested in stocks for the long run. Sound familiar? This is the theory that we teach in business schools today, and it was taught to your broker, your financial adviser, and your portfolio manager. In 2013, University of Chicago finance professor Eugene F. Fama was awarded the Nobel Prize in Economic Sciences specifically for this notion of market efficiency.3 The Adaptive Markets Hypothesis is based on the insight that investors and financial markets behave more like biology than physics, comprising a population of living organisms competing to survive, not a collection of inanimate objects subject to immutable laws of motion.

Using statistical estimates derived from Principle 2 and the CAPM, portfolio managers can construct diversified long-only portfolios of fi nancial assets that offer investors attractive risk-adjusted rates of return at low cost. Principle 4: Asset Allocation. Choosing how much to invest in broad asset classes is more important than picking individual securities, so the asset allocation decision is sufficient for managing the risk of an investor’s savings. Principle 5: Stocks for the Long Run. Investors should hold mostly equities for the long run. Principle 1 is straightforward: the only way investors would willingly take on a higher-risk asset is if they’re given an incentive for doing so, and that incentive comes in the form of higher expected return. That’s why 250 • Chapter 8 U.S. Treasury bills have such low returns, and why investing in small-cap companies and tech startups have such high expected returns.


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

They would focus only on the yield of repeated die rolls. What about long-term stock market returns? Much of the ink spilled on market prognostications is based on degrees of belief, with the resulting probabilities heavily colored by recent experience. Degrees of belief have a substantial emotional component. We can also approach the stock market from a propensity perspective. According to Jeremy Siegel’s Stocks for the Long Run, U.S. stocks have generated annual real returns just under 7 percent over the past 200 years, including many subperiods within that time.4 The question is whether there are properties that underlie the economy and profit growth that support this very consistent return result. We can also view the market from a frequency perspective. For example, we can observe the market’s annual returns from 1926 through 2006.

The problem is that while we know that some companies will grow rapidly in the future, spurring upside revisions and attractive shareholder returns, we have no systematic way to identify those companies. Therein lies a great opportunity. EXHIBIT 27.4 Sales Growth CAGR Source: FactSet and author analysis. To demonstrate that growth is good but that it’s hard to take advantage of it, we turn to Jeremy Siegel’s excellent analysis of the Nifty Fifty in his investment classic Stocks for the Long Run.6 The Nifty Fifty were the leading growth stocks in the early 1970s and had high growth rate expectations and price/earnings (P/E) multiples in excess of forty. In the subsequent bear market of 1973-1974, these stocks as a group dropped sharply. Siegel asks a basic question: Were the Nifty Fifty overvalued in 1972 based on their subsequent total shareholder returns? Based on his analysis, the answer is no.

Fisher and Meir Statman, “Cognitive Biases in Market Forecasts,” Journal of Portfolio Management 27, no. 1 (Fall 2000): 72-81. 9 Mercer Bullard, “Despite SEC Efforts, Accuracy in Fund Names Still Elusive,” The Street.com, January 30, 2001. See http://www.thestreet.com/funds/mercerbullard/1282823.html. 5. Risky Business 1 Gerd Gigerenzer, Calculated Risks (New York: Simon & Schuster, 2002), 28-29. 2 John Rennie, “Editor’s Commentary: The Cold Odds Against Columbia,” Scientific American, February 7, 2003. 3 Gigerenzer, Calculated Risks, 26-28. 4 Jeremy J. Siegel, Stocks for the Long Run, 3rd ed. (New York: McGraw Hill, 2002), 13. 5 Michael J. Mauboussin and Kristen Bartholdson, “Long Strange Trip: Thoughts on Stock Market Returns,” Credit Suisse First Boston Equity Research, January 9, 2003. 6 See chapter 3. 6. Are You an Expert? 1 J. Scott Armstrong, “The Seer-Sucker Theory: The Value of Experts in Forecasting,” Technology Review 83 (June-July 1980): 16-24. 2 Atul Gawande, Complications: A Surgeon’s Notes on an Imperfect Science (New York: Picador, 2002), 35-37. 3 Paul J.


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

Risk and Return 19 Asset Classes in the 1970–1998 Period The previously discussed 1926–1998 database for U.S. assets provides a reliable estimate of the expected long-term return and risk in U.S. stocks and bonds. In fact, there are data on the long-term returns and risks of these assets going back 200 years, albeit considerably less detailed and accurate; the inflation-adjusted returns and SD data are very similar to the 1926–1998 data. (For an excellent discussion of stock returns throughout the entire 200 years of U.S. history, see Jeremy Siegel’s Stocks for the Long Run.) Unfortunately, the 1926 –1998 database is confined to U.S. equities and high-quality bonds and is thus much too limited to be of real use to the modern investor, who has available a much wider variety of capital markets to choose from. There is great advantage to be gained from wide diversification among as many potential investment categories as possible. All investors, small and large, require accurate estimates of the returns and risks of each of these investments.

Clearly, the redeemable bond would carry a considerably higher price and lower yield because it is immunized against the shock of a short-term increase in rates. And yet on the GH planet, where investors only care about long-term return, it would be priced identically to the conventional 30-year bond, since both have the same return to maturity. Even conceding GH’s point that investors are increasingly focused on stocks for the long run and will manage to push the Dow up past 36,000, one has to ask just how free of risk stocks would be at that point. The authors ignore a rather inconvenient fact: that recent market history has dramatic effects on DR. In 1928, just as today, everybody was a “long-term investor,” and the DR for stocks was quite low (although probably not as low as it is today). Five years later, with the attrition rate of buy-and-holders approaching 100%, the DR was dramatically higher.

Over the past several decades, global bond managers have made excess returns purchasing unhedged high-yielding bonds of developed nations with negative forward spreads,reaping advantage when the underlying currency fails to depreciate as much as forecast by the forward spread.This market inefficiency is probably the result of the fact that governments are major players in the currency game; governments are different from individual and institutional investors in that their primary goal is not profit, but rather currency defense. Lastly, hedging cost needs to be considered when evaluating historical data. As pointed out by Jeremy Siegel in Stocks for the Long Run, in 1910 the pound was worth $4.80. It has since fallen to one-third that value. One might think that hedging the currency would have increased one’s return from British stocks. Wrong. Since for almost all of that period British interest rates were higher than those in the United States, the hedging costs were considerable; you’d have been much better off not hedging. The question of how much currency hedging is best is one of the thorniest questions faced by investors; neither mean-variance analysis nor spreadsheet analysis provides any clear-cut answers.


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

The money that doesn’t go toward expensive cars, the latest tech gadgets, and credit-card payments (assuming you have paid off your credit debts) can compound dramatically in the stock market if you’re patient. And the longer your money is invested in the stock market, the lower the risk. We know that stock markets can fluctuate dramatically. They can even move sideways for many years. But over the past 90 years, the U.S. stock market has generated returns exceeding nine percent annually.3 This includes the crashes of 1929, 1973–1974, 1987, and 2008–2009. In Stocks for the Long Run, University of Pennsylvania’s Wharton School finance professor Jeremy Siegel suggests a dominant historical market, such as the U.S., isn’t the only source of impressive long-term returns. Despite the shrinking global importance of England, its stock market returns since 1926 have been very similar to that of the U.S. Meanwhile, not even two devastating world wars for Germany have hurt its long-term stock market performance, which also rivals that of the United States.4 My suggestion isn’t going to be to choose one country’s stock market over another.

Jay Steele, Warren Buffett, Master of the Market (New York:Avon Books, 1999), 17. 2. Andrew Kilpatrick, Of Permanent Value, The Story of Warren Buffett (Birmingham, Alabama: Andy Kilpatrick Publishing Empire, 2006), 226. 3. The Value Line Investment Survey—A Long-Term Perspective Chart 1920–2005 and Morningstar Performance Tracking of DOW Jones ETF from 2005 to 2011. 4. Jeremy Siegel, Stocks for The Long Run, 3rd ed. (New York: McGraw-Hill, 2002), 18. RULE 3 Small Percentages Pack Big Punches In 1971, when the great boxer Muhammad Ali was still undefeated, U.S. basketball star Wilt Chamberlain suggested publicly that he stood a chance beating Ali in the boxing ring. Promoters scrambled to organize a fight that Ali considered a joke. Whenever the ultraconfident Ali walked into a room with the towering Chamberlain within earshot, he would cup his hands and holler through them: “Timber-r-r-r-r!”

By building a responsible portfolio of stock and bond indexes, you’ll create more stability in your account while providing opportunities to take advantage of stock market silliness. The next chapter will show you in detail how to achieve this in the simplest, possible way. Notes 1. John C. Bogle, The Little Book of Common Sense Investing (Hoboken, New Jersey: John Wiley & Sons, 2007), 51. 2. Ibid. 3. John C. Bogle, Common Sense on Mutual Funds (Hoboken, New Jersey: John Wiley & Sons, 2010), 28. 4. Jeremy Siegel, Stocks for the Long Run (New York: McGraw-Hill, 2002), 217–218. 5. Ken Fisher, The Only Three Questions That Count (Hoboken, New Jersey: John Wiley & Sons, 2007), 279. 6. Ibid. 7. “Coca-Cola Report,” The Value Line Investment Survey, November 9, 2001, 1551. 8. “Long Term Performance of Major Developed Equity Markets,” Management and Factset Research Systems, accessed April 15, 2011, http://www.fulcrumasset.com/files/Long%20Term%20Equity%20Performance.PDF. 9.


pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

Benoit Mandelbrot, Black-Scholes formula, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, John Nash: game theory, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Ponzi scheme, price anchoring, Ralph Nelson Elliott, random walk, Richard Thaler, Robert Shiller, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, ultimatum game, Vanguard fund, Yogi Berra

If the stock does not pay dividends or if you plan on selling it and thereby realizing capital gains, its price should be roughly equal to the discounted value of the price you can reasonably expect to receive when you sell the stock plus the discounted value of any dividends. It’s probably safe to say that most stock prices are higher than this. During the 1990 boom years, investors were much more concerned with capital gains than they were with dividends. To reverse this trend, finance professor Jeremy Siegel, author of Stocks for the Long Run, and two of his colleagues recently proposed eliminating the corporate dividend tax and making dividends deductible. The bottom line of bottom-line investing is that you should pay for a stock an amount equal to (or no more than) the present value of all future gains from it. Although this sounds very hard-headed and far removed from psychological considerations, it is not. The discounting of future dividends and the future stock price is dependent on your estimate of future interest rates, dividend policies, and a host of other uncertain quantities, and calling them fundamentals does not make them immune to emotional and cognitive distortion.

Perhaps because of Monopoly, certainly because of WorldCom, and for many other reasons, the focus of this book has been the stock market, not the bond market (or real estate, commodities, and other worthy investments). Stocks are, of course, shares of ownership in a company, whereas bonds are loans to a company or government, and “everybody knows” that bonds are generally safer and less volatile than stocks, although the latter have a higher rate of return. In fact, as Jeremy Siegel reports in Stocks for the Long Run, the average annual rate of return for stocks between 1802 and 1997 was 8.4 percent; the rate on treasury bills over the same period was between 4 percent and 5 percent. (The rates that follow are before inflation. What’s needless to say, I hope, is that an 8 percent rate of return in a year of 15 percent inflation is much worse than a 4 percent return in a year of 3 percent inflation.) Despite what “everybody knows,” Siegel argues in his book that, as with Monopoly’s hotels and railroads, stocks are actually less risky than bonds because, over the long run, they have performed so much better than bonds or treasury bills.

Malkiel, Burton, A Random Walk Down Wall Street, New York, W. W. Norton, 1999 (orig. 1973). Mandelbrot, Benoit, “A Multifractal Walk Down Wall Street,” Scientific American, February 1999. Paulos, John Allen, Once Upon a Number, New York, Basic Books, 1998. Ross, Sheldon, Probability, New York, Macmillan, 1976. Ross, Sheldon, Mathematical Finance, Cambridge, Cambridge University Press, 1999. Siegel, Jeremy J., Stocks for the Long Run, New York, McGraw-Hill, 1998. Shiller, Robert J., Irrational Exuberance, Princeton, Princeton University Press, 2000. Taleb, Nassim Nicholas, Fooled by Randomness, New York, Texere, 2001. Thaler, Richard, The Winner’s Curse, Princeton, Princeton University Press, 1992. Tversky, Amos, Daniel Kahneman, and Paul Slovic, Judgment Under Uncertainty: Heuristics and Biases, Cambridge, Cambridge University Press, 1982.


pages: 375 words: 105,067

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen

American ideology, asset allocation, Bernie Madoff, buy and hold, Cass Sunstein, Credit Default Swap, David Brooks, delayed gratification, diversification, diversified portfolio, Donald Trump, Elliott wave, en.wikipedia.org, estate planning, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, London Whale, longitudinal study, Mark Zuckerberg, money market fund, mortgage debt, oil shock, payday loans, pension reform, Ponzi scheme, post-work, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, Stanford marshmallow experiment, stocks for the long run, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise

Working Paper for Center for Retirement Research at Boston College,” December 2009, http://crr.bc.edu/working-papers/will-automatic-enrollment-reduce-em; Emily Brandon, “How Automatic Enrollment Affects Your 401(k) Match,” US News & World Report, January 27, 2010,http://money.usnews.com/money/blogs/planning-to-retire/2010/01/27/how-401k-automatic-enrollment-affects-your-401k-match; Anne Tergesen, “401(k) Law Suppresses Saving for Retirement,” Wall Street Journal, July 7, 2011, http://online.wsj.com/article/SB10001424052702303365804576430153643522780.html The average annual return: Tom Lauricella, “Investors Hope the ’10s Beat the ’00s,” Wall Street Journal, December 20, 2009, http://online.wsj.com/article/SB10001424052748704786204574607993448916718.html. One of the books: Jeremy J. Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long Term Investment Strategies (New York: McGraw-Hill, 1994); Speaking fees for Jeremy Siegel, All American Speakers bureau, http://www.allamericanspeakers.com/speakers/Jeremy-Siegel/3941. “We got lucky”: “Rethinking Stocks for the Long Run—Uncertainty Compounds with Time,” AdvisorAnalyst.com, August 15, 2011, http://advisoranalyst.com/glablog/2011/08/15/pastor-rethink-stocks-for-the-long-run-uncertainty-compounds-with-time/. a study of world stock markets: Barry Ritholtz, “Bonds Beat Stocks: 1981-2011,” The Big Picture, October 31, 2011, http://www.ritholtz.com/blog/2011/10/bonds-beat-stocks-1981-2011/; Buttonwood blog: “Buy, Hold, Regret,” The Economist, September 13, 2011, http://www.economist.com/node/21528907.

Sometimes we need to sell stocks and other investments at less-than-optimal times. But more important, it turns out even the experts can’t agree on whether stocks are a good investment for the long haul. In other words, most of us are investing for retirement based on an unproven assumption. One of the books that set the stage for the stock market celebration that was the 1990s was Wharton professor Jeremy Siegel’s Stocks for the Long Run. Published in 1994, just as the market was about to undergo its epic run-up, the book found that beginning in the early nineteenth century there was no ten-year period in which bond returns had beaten out stock returns. Siegel’s book was immediately seized upon by everyone from the pundits to the financial services industry as proof that the stock market worked. It really worked. There was no bad time to purchase stocks, just periods where the gains would come quicker or slower.

See also 401(k) plans; individual investors advertising targeting women, 160–61 average returns, 52, 93, 95 versus bond returns, 94, 95 bull market, 20–21 compounded interest, 96–97 crashes, 30, 90, 130, 157 doomsday scenarios, 138–43 investor expectations, 7–8, 21, 25, 82, 93–94 long-term investment, 93–97 New York Stock Exchange ads, 15–16, 160–61 optimistic forecasts, 10, 38, 83–84 Stocks for the Long Run (Siegel), 93–94 Struthers, Ric, 202 Stulen, Leo, 115 Sugrue, Thomas, 175 suitability standard, 105 Sylvia Porter’s Money Book (Porter), 17, 23 target-date funds, 89–93, 97 televised financial news. See CNBC Tessler, Bari, 221 Thakor, Manisha, 29, 159, 163 Thaler, Richard, 77, 88, 117, 199 therapy. See financial therapy Thomas, Michael, 16 Thorne, Deborah, 73 Tigrent, Inc., 184, 188–89, 190 Tirupattur, Vishwanath, 192–93 Tobias, Andrew, 33 Twenge, Jean, 228 Two Income Trap, The (Warren and Tyagi), 58 Tyagi, Amelia, 58 Ugoretz, Mark, 100 Ujifusa, Grant, 33 unemployment, 54–55, 60 U.S. government.


pages: 490 words: 117,629

Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen

asset allocation, asset-backed security, buy and hold, capital controls, cognitive dissonance, corporate governance, diversification, diversified portfolio, fixed income, index fund, law of one price, Long Term Capital Management, market bubble, market clearing, market fundamentalism, money market fund, passive investing, Paul Samuelson, pez dispenser, price mechanism, profit maximization, profit motive, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Steve Ballmer, stocks for the long run, survivorship bias, technology bubble, the market place, transaction costs, Vanguard fund, yield curve, zero-sum game

Equity ownership beats holding bonds or cash, hands down. Similar results can be found in Jeremy Siegel’s Stocks for the Long Run. The third edition of Siegel’s classic study of capital markets returns shows U.S. stocks producing an 8.3 percent per annum compound return over the two centuries spanning 1802 to 2001. In a hard-to-believe statistic, one dollar invested in the stock market at the outset of the nineteenth century, with all gains and dividends reinvested, grows to $8.8 million at the beginning of the twenty-first century! Table 1.1 Equity Ownership Drives Long-Term Returns Sources: Ibbotson Associates. Stocks, Bonds, Bills, and Inflation 2004 Yearbook (Chicago: Ibbotson Associates, 2004); Jeremy Siegel, Stocks for the Long Run (New York: McGraw Hill, 2002). Bonds generate less spectacular results. The compound annual return for long-term government bonds of 4.9 percent per annum proves sufficient to cause one dollar to produce a portfolio worth $14,000 after a two-century holding period.

Ibbotson Associates, Stocks, Bonds, Bills, and Inflation 2004 Yearbook (Chicago: Ibbotson Associates, 2003): 28. 2. Jeremy Siegel, Stocks for the Long Run (New York: McGraw Hill,2002): 6. 3. William N. Goetzmann and Philippe Jorion, “A Century of Global Stock Markets,” NBER Working Paper Series, Working Paper 5901 (National Bureau of Economic Research, 1997), 16. 4. Robert Arnott, “Dividends and the Three Dwarfs,” Financial Analysts Journal 59, no. 2, (2003): 4. 5. James K. Glassman and Kevin A. Hassett, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market (New York: Random House, 1999). 6. Siegel, Stocks for the Long Run, 210. 7. “Jack’s Booty,” editorial, Wall Street Journal, 10 September 2002. 8. Leslie Wayne and Alex Kuczynski, “Tarnished Image Places Welch in Unlikely Company,” New York Times, 16 September 2002. 9.

Treasury bonds and venture capital and RJR Nabisco Ross, Stephen Russell Indexes Russia Rydex Global Advisors Salomon Brothers Samuelson, Paul savings and loan crisis Scudder Investments Securities and Exchange Commission (SEC) and failure of for-profit mutual funds and hidden causes of poor mutual-fund performance mutual-fund fees and mutual-fund portfolio turnover and tax-exempt bonds and Securities Exchange Act Securities Industry Association (SIA) Security Brokerage Security selection core asset classes and domestic equities and ETFs and hedge funds and mutual-fund fees and mutual-fund portfolio turnover and Shiller, Robert Siedle, Edward Siegel, Jeremy Small business ownership Social Security Soft-dollar kickbacks ETFs and and failure of for-profit mutual funds as hidden cause of poor mutual-fund performance mutual-fund portfolio turnover and Southeastern Asset Management assets under management limited by co-investment at fees of investment strategy of long-term focus of portfolio concentration of principal orientation of shareholder communication of stable client base of Spitzer, Eliot Stale-price trading and failure of for-profit mutual funds as hidden cause of poor mutual-fund performance insider trading and late trading and market timing and SEC and Standard & Poor’s (S&P) Corporation Depositary Receipts (SPDRs) and 1500 Index MidCap 400 Index of REIT Index of SmallCap 600 Index of Standard & Poor’s (S&P) 500 Index chasing performance and ETFs and and failure of for-profit mutual funds leveraged buyouts and mutual-fund fees and mutual-fund portfolio management evaluation and mutual-fund portfolio turnover and rebalancing and Vanguard and venture capital and Stanford University State Street Investment Corporation ETFs and Stock market crashes Stock options Stocks, see equity, equities, equity bias Stocks for the Long Run (Siegel) Strong, Richard Strong Financial Corporation “Survival” (Brown, Goetzmann, and Ross) Survivorship bias hedge funds and Taxes asset allocation and basic investment principles and on capital gains chasing performance and deferral dividends and ETFs and on incomes interest and mutual-fund fees and mutual-fund performance deficit and mutual-fund portfolio management evaluation and mutual-fund portfolio turnover and portfolio construction and potential liabilities and real estate and rebalancing and retirement plans and tax-exempt bonds and Teachers Insurance and Annuity Association (TIAA), Real Estate Account of Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) not-for-profit operations of rebalancing and Technology, technology bubble: ETFs and mutual funds and see also Internet, Internet bubble Tenneco Thrift Savings Plan Time horizons mutual-fund portfolio turnover and portfolio construction and stale-price trading and Tobin, James Total Stock Market VIPERs Treasury Inflation-Protected Securities (TIPS), U.S.


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 the returns and volatility for T-bonds are much lower than those for stocks. More important, the data also suggest the greater risk-reduction in the T-bond portfolio cannot be large enough to offset the portfolio’s lower returns. The Sharpe ratio of the T-bond portfolio is 0.35 versus 0.53 for the equity portfolio. This result should not be surprising, given Jeremy Siegel’s popular book, Stocks for the Long Run, in which he basically confirms that equities far outperform T-bonds over the long haul.7 Looking, however, at the various stocks and Tbonds combinations, it appears a mixture provides a higher return-to-risk ratio. A portfolio consisting of 60 percent equities and 40 percent T-bonds yields the highest Sharpe ratio. Chapter 2 The Case for Cyclical Asset Allocation 25 Table 2.6 Sample period risk-adjusted average annual returns, standard deviation, and Sharpe ratio for selected T-bond/equity portfolios.

Financial Analysts Journal 31, No. 2 (March/April 1975): 60–9. ———. “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk.” Journal of Finance 19 (1964): 425–42. ———. “The Sharpe Ratio.” Journal of Portfolio Management (Fall 1994): 49–58. Bibliography 299 Shilling, A. Gary. “Market Timing: Better than a Buy-and-Hold Strategy.” Financial Analysts Journal 48, No. 2 (March/April 1992): 46–50. Siegel, Jeremy J. Stocks for the Long Run, Second Edition. McGraw-Hill, 1998. Siegel, Laurence. “Distinguishing True Alpha from Beta.” CFA Institute Conference Proceedings—Points of Inflection: New Directions for Portfolio Management (February 2004). Sinquefield, Rex A. “Active Versus Passive Management.” Schwab Institutional Conference in San Francisco (October 12, 1995). Solnik, Bruno H. “An Equilibrium Model of the International Capital Market.”

See strategic asset allocation sample period length of, 285n reasons for choosing, 284n sample-selection bias, 27, 30, 40 Samuelson, Paul, 211 Savings and Loan (S&L) crisis, 76 self-reporting bias, 228 Sharpe ratio, 2-3, 21 for benchmark portfolio, 114 for equal- and cap-weighted portfolios, 179 location portfolios, 61-63 location-based asset allocation, 35 size-based asset allocation, 32, 123 style-based asset allocation, 28, 121 T-bond/equity portfolios, 38, 119 Sharpe, William, 57 Siegel, Jeremy (Stocks for the Long Run), 25 single asset buy-and-hold, 12-13 Sinquefield, Rex A., 164-165, 169 size cycles, 54-55 active versus passive management during, 170-172, 175, 271-272 combining active and passive management, 180-182 equal-weighted versus cap-weighted indexes, 175-180 hedge funds and, 235-239 market breadth and, 168-170, 237-238 in value-timing strategy, 243-250 size-based asset allocation cyclical asset allocation and, 31-32, 123 optimal mixes, 23-24 small-cap stocks active management tested against passive management, 166-168 annual returns, 19 elasticity, 184, 187-189 location effect and, 193-198, 202-204, 213, 273-274 optimal mix with large-cap stocks, 23-24, 31-32, 123 performance of, 16, 41 regulatory fixed costs, 184-185 risk measurement, 20 size cycles, 54-55 active versus passive management during, 170-172, 175, 271-272 Index 313 equal-weighted versus cap-weighted indexes, 175-180 and market breadth, 168-170, 237-238 in value-timing strategy, 243-250 Smith, Adam, 169 stagflation, 99 Standards and Poor (S&P), 77 stock indices, constructing, xx-xxi, 272-273 Stocks for the Long Run (Siegel), 25 strategic asset allocation (SAA), xx, 13 active versus passive management, 252-255 as benchmark, 104 historical allocations, 104-108, 113-115 lifecycle allocations, 115-116 market allocations, 108-115, 266-269 cyclical asset allocation (CAA) versus, 59-65, 141-142 optimal mixes, 21-26 style cycles, 55-57 style differences, value versus growth stocks, 272-273 style-based asset allocation, 18 cyclical asset allocation and, 26-30, 121 optimal mixes, 22-23 supply shifts, 217-224 supply-and-demand analysis.


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

John Maynard Keynes, General Theory (New York: Harcourt, Brace, 1936), 157. 10. Amir Barnea, Robert A. Haugen, and Lemma W. Senbet, Agency Problems and Financial Contracting (Englewood Cliffs, N.J.: Prentice-Hall, 1985). 11. Andrei Shleifer and Robert W. Vishny, “The Limits of Arbitrage,” Journal of Finance (March 1997): 37. 12. Jeremy J. Siegel, Stocks for the Long Run, 2nd ed. (New York: McGraw-Hill, 1998), 45. 13. Pablo Galarza, “It’s Still Stocks for the Long Run,” Money, Dec. 2004. 14. Robert J. Shiller, “Price-Earnings Ratios as Forecasters of Returns: The Stock Market Outlook in 1996,” paper posted on Shiller’s Web site, July 21, 1996, www.econ.yale.edu/%7Eshiller/data/peratio.html. The original paper was John Y. Campbell and Robert J. Shiller, “Stock Prices, Earnings, and Expected Dividends,” Journal of Finance (July 1988): 661–76. 15.

That was a fundamentals-based recipe for higher stock prices, but it coexisted with and was hard to separate from a dramatic change in public attitudes about the stock market evinced by that belief in buying on the dips. Roger Ibbotson’s data yearbooks and historical charts were a factor in the attitude shift. So was an acclaimed 1994 book by Wharton School finance professor Jeremy Siegel, Stocks for the Long Run. Siegel’s book was yet another in the long line of stock vs. bond comparisons begun in 1924 by Edgar Lawrence Smith and continued most recently by Ibbotson and Sinquefield. The main new twist was that Siegel extended his data all the way back to 1802. He also did not ignore the disconcerting parallels to Smith, and to Irving Fisher. He gave Fisher—in particular his October 1929 pronouncement that “stock prices have reached what looks to me to be a permanently high plateau”—a prominent place in his narrative.

See also S&P 500 standard deviation, 6 Standard Oil, 15 Standard Statistics Co., 15, 16–17, 19, 38, 116 Stanford Business School, 135 Stanford Center for Advanced Study in Behavioral Sciences, 106–7 State Street Global, 112, 143 Statistical Research Group, 47–48, 52 Statman, Meir, 186–87, 200, 359n. 25 Stern, Joel, 163–64, 222, 270 Stigler, George, 90, 92, 95, 159, 182 Stiglitz, Joseph, 181, 196, 202, 207, 288, 328 Stocks for the Long Run (Siegel), 256 Strong, Benjamin, 20, 24 The Structure of Scientific Revolutions (Kuhn), 107, 203 Stulz, René, 251–52 subprime lending, 313–15 subsidies, 194 Summers, Lawrence, 328 and Black, 200 and the efficient market hypothesis, 203 and Fama, 207 and market crashes, 232 and the National Bureau of Economic Research, 183 and overvaluations, 269–70 and political appointments, 252 and Samuelson, 198, 358n. 19 and the Santa Fe conference, 302 and Shiller, 198–99 and Shleifer, 248, 250–51, 363n. 4 Sumner, William Graham, 9, 10, 12, 31, 93 Sun Life Canada, 27 Sunstein, Cass, 295 superior intrinsic-value analysis, 97 supply-demand graphs, 30 Surowiecki, James, 307 Taleb, Nassim Nicholas, 239 taxes, 244, 274–77, 280 tech bubble, 261–62 Technical Analysis of Stock Trends (Edwards and Magee), 68 technological advance, 120, 258.


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

Appendix B * * * HISTORICAL RETURNS Table 10: Historical Returns on Asset Classes, 1926–2013 Series Compound Annual Return* Average Annual Return** Standard Deviation Real (after inflation) Compound Annual Return* Sharpe Ratio† Large Company Stocks 10.1% 12.1% 20.2% 6.9% 0.43 Small Company Stocks 12.3% 16.9% 32.3% 9.1% 0.41 Long-Term Corporate Bonds 6.0% 6.3% 8.4% 2.9% 0.33 Long-Term Government Bonds 5.5% 5.9% 9.8% 2.4% 0.24 Intermediate-Term Government Bonds 5.3% 5.4% 5.7% 2.3% 0.33 US Treasury Bills 3.5% 3.5% 3.1% 0.5% ——— Inflation 3.0% 3.0% 4.1% ——— ——— * Geometric Mean ** Arithmetic Mean † Arithmetic From: Ibbotson, Stocks, Bonds, Bills and Inflation, Yearbook, Morningstar, 2014. Siegal’s Stocks for the Long Run gives US returns from 1801. Dimson et al. give returns for sixteen countries and an analysis. The return series depends on the time period and on the specific index chosen. I’ve used Ibbotson as my standard because detailed annually updated statistics have been readily available. Table 11: Historical Returns (%) to Investors, 1926–2013 * Geometric Mean From: Ibbotson, Stocks, Bonds, Bills and Inflation, Yearbook, Morningstar, 2014. Siegal’s Stocks for the Long Run gives US returns from 1801. Dimson et al. give returns for sixteen countries and an analysis. The return series depends on the time period and on the specific index chosen.

Table 12: Schedule of Assumed Costs Which Reduce Historical Returns (%) Stocks Bonds Bills Passive Active Passive Active Passive Active Management Costs 0.2 1.2 0.2 0.7 0.2 0.7 Trading Costs 0.2 1.2 0.1 0.3 0.1 0.1 Estimated Tax Rate on Remainder 20.0 35.0 35.0 35.0 35.0 35.0 Table 13: Annual Returns (%), 1972–2013 Compound Annual Return* Average Annual Return** Standard Deviation Equity REITs 11.9 13.5 18.4 Large Company Stocks 10.5 12.1 18.0 Small Company Stocks 13.7 16.1 23.2 Long-Term Corporate Bonds 8.4 8.9 10.3 Long-Term Government Bonds 8.2 8.9 12.4 Intermediate-Term Government Bonds 7.5 7.7 6.6 US Treasury Bills 5.2 5.2 3.4 Inflation 4.2 4.3 3.1 * Geometric Mean ** Arithmetic Mean Comparative historical returns from investing in income-generating real estate are indicated in table 13, which lists total returns from publicly traded Real Estate Investment Trusts for the period 1972–2013. From: Ibbotson, Stocks, Bonds, Bills and Inflation, Yearbook, Morningstar, 2014. Siegal’s Stocks for the Long Run gives US returns from 1801. Dimson et al. give returns for sixteen countries and an analysis. The return series depends on the time period and on the specific index chosen. Appendix C * * * THE RULE OF 72 AND MORE The rule of 72 gives quick approximate answers to compound interest and compound growth problems. The rule tells us how many periods it takes for wealth to double with a specified rate of return, and is exact for a rate of 7.85 percent.

New York: Crown, 2010. Poundstone, William. Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street. New York: Hill and Wang, 2005. Schroeder, Alice. The Snowball: Warren Buffett and the Business of Life. New York: Bantam, 2008. Segel, Joel. Recountings: Conversations with MIT Mathematicians. Wellesley, MA: A K Peters/CRC Press, 2009. Siegel, Jeremy J. Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. New York: McGraw-Hill, 2008. Taleb, Nassim Nicholas. The Black Swan: The Impact of the Highly Improbable. New York: Random House, 2007. ———. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. New York: Random House, 2005. Thorp, Edward O., and Sheen T. Kassouf. Beat the Market: A Scientific Stock Market System.


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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

And they feel that the abandonment of historical price-earnings ratios means that the future is being discounted too far. If the economy does not have an inflationary binge, they warn, many of today’s stocks are much too high.” The editor of the Financial Analysts Journal stated the matter much more succinctly, observing that “some financial analysts called [the reversal of the traditional stock-bond yield relationship] a financial revolution …” Dividend and Nominal Bond Yields, 1871-1996 From Stocks for the Long Run (1994) by J. Siegel. Reprinted with the permission of The McGraw-Hill Companies. But the stock market continued to gain ground even after the “great yield reversal” occurred. In fact, stock dividends would never again rise above long-term government bond interest rates. Fears of inflation were not only pushing investors to buy stocks but were also causing bond buyers to demand higher yields.

In other words, if you start low, you’ll have a rise, and if you have a rise, you’ll have satisfaction and that will bring a further rise, and so on. It won’t go on forever. It may go too far, but never forever.”12 Were the Nifty Fifty really overpriced in late 1972, or was the “conventional wisdom” wrong again, as it had been after the 1929 crash? An interesting insight is provided by Wharton professor Jeremy Siegel in his 1999 book, Stocks for the Long Run. Siegel studies the performance of a representative list of Nifty Fifty stocks over the 25-year period following the December 1972 market peak, and concludes that on a risk-adjusted basis the returns of the group roughly matched the market return over that period as measured by the Standard & Poor’s Industrials. Siegel concluded that the Nifty Fifty as a group were not grossly overpriced in 1972, the conventional wisdom of later years notwithstanding.

., p. 218. 7 Institutional Investor, June 1980. 8 Institutional Investor, January 1979. 9 Institutional Investor, June 1980. 10 Marshall Blume, Jeremy Siegel, and Dan Rottenburg, Revolution on Wall Street, p. 92. 11 Sanjoy Basu, Journal of Finance 32 (3), 1977. 12 Robert Shiller, American Economic Review, June 1981. 13 Peter Bernstein, Capital Ideas, p. 211. 14. RETURN OF THE BULL 1 Peter Bernstein, Capital Ideas, p. 69. 2 Hayne Leland, Journal of Finance 35 (2), May 1980. 3 Peter Lynch, One Up on Wall Street (New York: Simon & Schuster, 1989), p. 34. 4 Ibid., p. 35. 5 Ibid., p. 34. 6 Ibid., p. 13. 7 Ibid., p. 19. 8 Ibid., p. 44. 9 Jeremy Siegel, Stocks for the Long Run (New York: McGraw-Hill, 1998), p. 277. 10 Lynch, p. 36. 11 Bernstein, Against the Gods, p. 299. 12 Burton Malkiel, A Random Walk Down Wall Street, p. 377. 13 Mark Stevens, The Insiders (New York: G. P. Putnam’s Sons, 1987), p. 56. 14 Ibid. 15 Ibid., p. 14. 16 James Stewart, Den of Thieves (New York: Simon & Schuster, 1992), p. 345. 17 Ibid., p. 347. 18 Ibid., p. 340. 15.


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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

It may sound complicated, but it simply involves earning a return not only on your original investment but also on the accumulated interest that you reinvest. Jeremy Siegel, author of the excellent investing book Stocks for the Long Run, has calculated the returns from a variety of financial assets from 1800 to 2014. His work shows the incredible power of compounding. One dollar invested in stocks in 1802 would have grown to almost $18 million by the end of 2013. This amount far outdistanced the rate of inflation as measured by the consumer price index (CPI). The figure below also shows the much more modest returns that have been achieved by U.S. Treasury bills and gold. Source: Siegel, Stocks for the Long Run, 5th ed. If you want a get-rich-quick investment strategy, this is not the book for you. I’ll leave that for the snake oil salesmen. You can only get poor quickly.

., 125, 208, 354–55 claim represented by, 339 common, see common stocks concept, see concept stocks future of, 345–48 high-beta, 223 holding period of, 350, 352–55 of Internet companies, see Internet low-beta, 223 “one-decision,” 69 price-to-book value ratios of, 264 projecting returns for individual, 347–48 return on, 344–46, 351, 353 return on, in 1980s, 341, 342 small, 310 Stocks for the Long Run (Siegel), 292 stock valuation: assessing levels of, 329–36 dividend payout and, 123, 126 from 1960s into 1990s, 56–79 future expectations and, 31–33 in historical perspective, 35–36, 37–55, 329 Internet bubble and, 81–83, 89–90 price-dividend multiples in, 330–32, 341, 344 theories of, 30–33, 394 variability and, 129 stop-loss order, 142 structured investment vehicles (SIVs), 100 Stuff Your Face, Inc., 70 Substitute-Player Step, 379, 398–400 Sullivan, Arthur, 134 Sunbeam, 167 Super Bowl indicator, 148 support area, 116, 142 support levels, 116 SwapIt.com, 85 Swedroe, Larry, 235–36 swings, 210–11 synergism, 60–66 systematic risk, 211–15 beta as a measure of, see beta defined, 210–11 non-beta elements of, 224–26 takeovers, 25 TAO, 398 taxes, 255, 256, 311–13, 367 and annuities, 375 avoidance of, 300–305 capital gains, 158, 246, 331, 382–83 estate, 305 gift, 305 income, 158, 292, 298, 300, 311–13, 317–18, 320, 339, 365n, 378 overtrading and, 255 property, 314 retirement plans and, 293, 300–304 state, 305 technical analysis, 26, 110–33, 134–58, 408 buy-and-hold strategy compared to, 140, 143, 158 castle-in-the-air theory and, 110, 132–33, 134 defined, 110 fundamental analysis used with, 130–33 fundamental analysis vs., 110–11, 118–19 gurus, 151–54 implications for investors of, 158 limitations of, 116–17, 135–36, 154–58, 160 random-walk theory and, 137–41, 154–57 rationale for, 115–16 types of systems of, 141–51 see also chartists; stock charts Technical Analysis of Stock Trends (Magee), 113, 144 telecom companies, 90, 95 Teledyne, Inc., 64 Telegraph, 173 television, Internet bubble and, 92 term4sale.com, 296 term bonds, 317 Texas Instruments, 57 Thaler, Richard, 247–48 theGlobe.com, 86 Theory of Investment Value, The (Williams), 31 Thorp, Edward O., 156n 3Com, 83 Time, 97 timing penalty, 242–43, 254, 255 Total Bond Market index funds, 386 total capitalization, 261, 271, 265 Total Stock Market Portfolio, 261, 386, 387, 391, 410 Total World index funds, 391 trading, limiting of, 395–98 tranches, 99 Treasury, U.S., 316, 319, 344–45, 352, 353 Treasury bills, 152, 293, 298, 299 rate of return on, 194–96, 351 treasurydirect.gov, 300 Treasury inflation-protection securities (TIPS), 306, 308, 316, 319–20, 386 trends, 113–15, 144–45 perpetuation of, 115 Tri-Continental Corporation, 54 “tronics” boom, see new issues, of 1959–62 T.


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

Evidence of Illusory Trends in Sports Financial markets are not the only arena in which observers are plagued by the illusion of order. Many sports fans and athletes believe in performance trends, periods of hot and cold performance. What baseball fan or 85 The Illusory Validity of Subjective Technical Analysis X X X X FIGURE 2.18 Real and randomly generated stock charts. Siegel, Jeremy J., Stocks for the Long Run, 3rd Edition, Copyright 2002, 1998, 1994, McGraw-Hill; the material is reproduced with the permission of The McGrawHill Companies. player does not think batting slumps or hitting streaks are real? Basketball fans, players, coaches, and sports commentators speak of the so-called hot hand, a trend of above-average shooting accuracy. These beliefs are widely held because trends in athletic performance seem so obvious.

Some peer-reviewed academic journals include Journal of Finance, Financial Management Journal, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and Review of Financial Studies. 477 478 NOTES 16. Outside of academia, there has been a move to greater emphasis on objective methods of TA, but often the results are not evaluated in a statistically rigorous manner. 17. F.D. Arditti, “Can Analysts Distinguish Between Real and Randomly Generated Stock Prices?,” Financial Analysts Journal 34, no. 6 (November/ December 1978), 70. 18. J.J. Siegel, Stocks for the Long Run, 2nd ed. (New York: McGraw-Hill, 1998), 243. 19. G.R. Jensen, R.R. Johnson, and J.M. Mercer, “Tactical Asset Allocation and Commodity Futures: Ways to Improve Performance,” Journal of Portfolio Management 28, no. 4 (Summer 2002). 20. C.R. Lightner, “A Rationale for Managed Futures,” Technical Analysis of Stocks & Commodities (2003). Note that this publication is not a peer-reviewed journal but the article appeared to be well supported and its findings were consistent with the peer-reviewed article cited in the prior note. 21.

Roberts, “Stock Market ‘Patterns’ and Financial Analysis: Methodological Suggestions,” Journal of Finance 14, no. 1 (March 1959), 1–10. 8. F.D. Arditti, “Can Analysts Distinguish Between Real and Randomly Generated Stock Prices?,” Financial Analysts Journal 34, no. 6 (November/ December 1978), 70. An informal test of the same nature is discussed by Notes 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 481 J.J. Siegel, Stocks for the Long Run, 3rd ed. (New York: McGraw-Hill, 2002), 286. Gilovich, How We Know. Shermer, M., Why People Believe Weird Things: Pseudoscience, Superstition, and Other Confusions of Our Time (New York: W.H. Freeman, 1997). Gilovich, How We Know. Ibid., 10. H.A. Simon, “Invariants of Human Behavior,” Annual Review of Psychology 41 (January 1990), 1–20. Shermer, Why People Believe, 26. Ibid., 26. C. Sagan, The Demon-Haunted World: Science as a Candle in the Dark (New York: Random House, 1995), 6.


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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

Of stories and stocks The flipside to the “If I’d just bought Apple when it IPO’d” narrative is that buying individual stocks is, in isolation, a truly risky endeavor. According to JP Morgan, 40% of stocks have suffered “catastrophic losses” since 1980, meaning that they fell by 70% or more! But what happens when we pool those risky individual names into a diversified portfolio? Jeremy Siegel found in Stocks for the Long Run that in every rolling 30-year period from the late 1800s to 1992, stocks outperformed both bonds and cash. In rolling ten-year periods, stocks beat cash over 80% of the time and there was never a rolling 20-year period in which stocks lost money. Bonds and cash, considered safe by most measures of risk, actually failed to keep up with inflation most of that time. As Siegel says of this twisted logic, “You have never lost money in stocks over any 20-year period, but you have wiped out half your portfolio in bonds [after inflation].

The most commonly used of these is some variant of a 200-day moving average, where an asset class is held as long as it is above the 200-day average of its price and sold when it dips below. Much like momentum in physics, the theory with price momentum is that both strength and weakness will persist. Jeremy Siegel applied this approach to both the Dow Jones Industrial Average (DJIA) and NASDAQ in his classic, Stocks for the Long Run. Siegel’s test bought the index when it closed at least 1% above the 200-day moving average and moved to Treasury bills when it closed at least 1% below. Using this simple, mechanical strategy, Siegel notes modest outperformance when applied to the DJIA and a healthy 4% per annum outperformance when tested on the NASDAQ from 1972 to 2006. Taking a similar approach, Meb Faber tested a ten-month moving average (ten-month SMA) approach in his ‘A Quantitative Approach to Tactical Asset Allocation,’ now the second most downloaded paper on The Social Science Research Network.


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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

Starting with very-long-run data series, and using the US – the world's biggest stock market – as an example, the total return for US equities since 1860 has averaged about 10%, over anything from a 1-year to a 20-year time horizon, as shown in exhibit 2.1. For 10-year US government bonds, often viewed as a ‘risk-free’ asset (because the debt is backed by a government that does not default on its debt), returns have averaged between 5% and 6% over the same holding periods. In his famous book Stocks for the Long Run, Jeremy J. Siegel (1994) argued that real returns (nominal returns adjusted for inflation) in equities had been remarkably stable over many different periods and different economic regimes: ‘over all major sub periods: 7.0 percent per year from 1802 through 1870, 6.6 percent from 1871 through 1925, and 7.2 percent per year since 1926’. Exhibit 2.1 Average annualised total returns for different holding periods (since 1860) SOURCE: Goldman Sachs Global Investment Research. 1 year 5 years 10 years 20 years S&P 500 11% 12% 10% 10% US 10y bond 5% 6% 5% 5% Although the long-run returns for equity holders are therefore reassuring, risk and volatility are much higher than for less-risky assets, such as government bonds (which have a guaranteed nominal return).

Do stock prices move too much to be justified by subsequent changes in dividends?. NBER Working Paper No. 456 [online]. Available at https://www.nber.org/papers/w0456 Shiller, R. J. (2000). Irrational exuberance. Princeton, NJ: Princeton University Press. Shiller, R. J. (2003). From efficient markets theory to behavioral finance. Journal of Economic Perspectives, 17(1), 83–104. Siegel, J. (1994). Stocks for the long run (2nd ed.). New York, NY: Irwin. Siegel, J. (1998). Valuing growth stocks: Revisiting the nifty fifty. The American Association of Individual Investors Journal [online]. Available at https://www.aaii.com/journal/article/valuing-growth-stocks-revisiting-the-nifty-fifty SINTEF. (2013). Big data, for better or worse: 90% of world's data generated over last two years. ScienceDaily [online].


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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

He looks two years ahead, foreseeing the “catastrophic” bear market of 1973–1974, in which U.S. stocks lost 37% of their value.1 He also looks more than two decades into the future, eviscerating the logic of market gurus and best-selling books that were not even on the horizon in his lifetime. The heart of Graham’s argument is that the intelligent investor must never forecast the future exclusively by extrapolating the past. Unfortunately, that’s exactly the mistake that one pundit after another made in the 1990s. A stream of bullish books followed Wharton finance professor Jeremy Siegel’s Stocks for the Long Run (1994)—culminating, in a wild crescendo, with James Glassman and Kevin Hassett’s Dow 36,000, David Elias’ Dow 40,000, and Charles Kadlec’s Dow 100,000 (all published in 1999). Forecasters argued that stocks had returned an annual average of 7% after inflation ever since 1802. Therefore, they concluded, that’s what investors should expect in the future. Some bulls went further. Since stocks had “always” beaten bonds over any period of at least 30 years, stocks must be less risky than bonds or even cash in the bank.

Today, about two-thirds of executive compensation comes in the form of options and other noncash awards; thirty years ago, at least two-thirds of compensation came as cash. 22 Apple Computer Inc. proxy statement for April 2001 annual meeting, p. 8 (available at www.sec.gov). Jobs’ option grant and share ownership are adjusted for a two-for-one share split. * By the late 1990s, this advice—which can be appropriate for a foundation or endowment with an infinitely long investment horizon—had spread to individual investors, whose life spans are finite. In the 1994 edition of his influential book, Stocks for the Long Run, finance professor Jeremy Siegel of the Wharton School recommended that “risk-taking” investors should buy on margin, borrowing more than a third of their net worth to sink 135% of their assets into stocks. Even government officials got in on the act: In February 1999, the Honorable Richard Dixon, state treasurer of Maryland, told the audience at an investment conference: “It doesn’t make any sense for anyone to have any money in a bond fund

As Graham hints on p. 65, even the stock indexes between 1871 and the 1920s suffer from survivorship bias, thanks to the hundreds of automobile, aviation, and radio companies that went bust without a trace. These returns, too, are probably overstated by one to two percentage points. 2 Those cheaper stock prices do not mean, of course, that investors’ expectation of a 7% stock return will be realized. 3 See Jeremy Siegel, Stocks for the Long Run (McGraw-Hill, 2002), p. 94, and Robert Arnott and William Bernstein, “The Two Percent Dilution,” working paper, July, 2002. * See Graham’s “Conclusion” to Chapter 2, p. 56–57. * Graham’s objection to high-yield bonds is mitigated today by the widespread availability of mutual funds that spread the risk and do the research of owning “junk bonds.” See the commentary on Chapter 6 for more detail


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

In Valuing Wall Street, Smithers and Wright (2000) define the stable value of the historic real return on common stocks as “Siegel’s constant,” or s. They explain: “We cannot know with certainty what the true value of s actually is, but we know that it cannot lie too far from our best estimate of 6¾ percent… Why s is, or appears to be, so stable is an important challenge.” Siegel’s constant is cited more frequently in Smithers and Wright’s index than any other word, phrase, or author. In his foreword to Siegel’s (1998) book, Stocks for the Long Run, Peter Bernstein writes: “The most powerful part of Professor Siegel’s argument is how effectively he demonstrates the consistency of results from equity ownership when measured over periods of 20 years or longer.” After noting that even Germany and Japan bounced back after the Second World War, Bernstein continues: “Indeed, he would be on frail ground if that consistency were not so visible in the historical data and if it did not keep reappearing in so many different guises.”

Given the 0.9 percent annualized real return on US treasury bills reported in chapter 5, this premium is consistent with Siegel’s “constant” of s = 6¾ percent. Second, for all investment holding periods of around twenty years or more, equity premia have been positive or within a fraction of a percentage point of zero. Allowing for the 0.9 percent real return on bills, Figure 14-1 confirms Siegel’s (1998) observation of the superiority of stocks for the long run, where the “long run” is defined as twenty years or more. To what extent should we rely on such patterns persisting into the future? As we said earlier, one of the critical factors that influences these results is sampling error. Sampling error arises because we observe only a limited number of historical outcomes. Looking to the future, there are an infinite number of possible stock market returns.

Journal of Finance 19: 425–42 Sharpe, W.F., 1994, The Sharpe ratio. Journal of Portfolio Management 21(1): 49–58 Shiller, R.J., 1981, Do stock prices move too much to be justified by subsequent changes in dividends? American Economic Review 71: 421–35 Shiller, R.J., 2000, Irrational Exuberance. NJ: Princeton University Press Shleifer, A., 2000, Inefficient Markets. Oxford UK: Oxford University Press Siegel, J.J., 1998, Stocks for the Long Run, second edition. NY: McGraw Hill Siegel, J.J., 1999, The shrinking equity premium. Journal of Portfolio Management 26(1): 10– 17 Siegel, J.J., and R. Thaler, 1997, The equity premium puzzle. Journal of Economic Perspectives 11: 191–200 Siegel, L.B., and Montgomery, D., 1995, Stocks, bonds, and bills after taxes and inflation. Journal of Portfolio Management 21(2): 17–25 Smithers, A., and S.


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

If you hold them for longer than a year before you sell them, then you will get taxed at the capital gains rate (see the table above), which is typically lower than your income tax rate. A quick note on selling versus withdrawing: In a taxable account, you get taxed when you sell even if you don’t withdraw the money, but in a tax-advantaged account, you get taxed only after you sell and withdraw. Yet another reason why you should be holding stocks for the long term: If you can keep your taxable income below $75,900 if you are married or $37,950 if you are single, then you won’t pay any tax on your investment withdrawals from your taxable accounts. No taxes. This is one of the massive benefits of keeping your income low (or at least mastering your tax deductions). Tax-free withdrawals means you need less money saved to reach financial independence.

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.


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

Moreover, recent academic research has shown that individuals’ tolerance for risk increases as their wealth increases and as they become more familiar with Asset Classes: What They Are and Where to Put Them 3. 4. 5. 6. 7. 8. 9. 10. 89 a particular asset class. The increasing amount of education on the benefits of alternative investments as well as the increase in personal wealth in recent years further supports the inclusion of alternative investments in investors’ portfolios. The classic example is Stocks for the Long Run (Siegel 2008), which was popular during the run-up for the stock market. For a review of the return and risk benefits of a wide range of alternative investments, see www.ingarm.org. At this site a series of papers on the Benefits of Hedge Funds, Managed Futures, Private Equity, Real Estate, and Commodities exists that summarizes the return and risk benefits of a range of alternative investment classes.

“Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk.” Journal of Finance 19, Issue 3 (September 1964): 425–442. Sharpe, W.F. “Mutual Fund Performance.” Journal of Business 39, No. S1 (January 1966): 119–138. Sharpe, W.F. “Asset Allocation: Management Style and Performance Measurement.” The Journal of Portfolio Management 18, No. 2 (Winter 1992): 7–19. Siegel, J.J. Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 4th ed. New York: McGrawHill, 2008. Szado, E., and T. Schneeweis. “Loosening the Collar.” CISDM Working Paper, 2009. Taleb, N. The Black Swan. New York: Random House, 2007. Tobin, James. “Liquidity Preference as Behavior Toward Risk.” Review of Economic Studies 25, Issue 2 (February 1958): 65–86. Tokat, Y., N.


pages: 358 words: 119,272

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

Although all 50 of these stocks were part of the S&P Composite Index, the PE of the broader index was just 18x at that time. It was thought the future earnings growth of these stocks could justify such extreme valuations. In the short term, this proved incorrect as the average price of a Nifty Fifty declined 62% in the 1973-1974 bear market. However, for those investors who hung on, the Fifty did deliver some of this promise. Professor Jeremy Siegel points out in his Stocks for the Long Run that the annual return on the Nifty Fifty from December 1972 to November 2001 was 11.62%, just below the 12.14% of the S&P Composite Index over the same period. Although equity prices rebounded strongly from the December 1974 low, 1974-82 was a period of further volatility, false dawns and poor returns. A general sense of despair hung over the financial markets in the second half of the 1970s.

Moore, Business Cycle Indicators (National Bureau of Economic Research, 1961) Ted Morgan, FDR (Grafton Books 1987) Alasdair Nairn, Engines That Move Markets:Technology Investing from Railroads to the Internet and Beyond (John Wiley & Sons, 2002) Wilbur Plummer, Social and Economic Consequences of Buying on the Instalment Plan 1927 (American Academy of Political Science, 1927) Donald T. Regan, For The Record: From Wall Street to Washington (Hutchison, 1988) Jeremy J. Siegel, Stocks For The Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies (McGraw-Hill, 3rd Ed., 2002) Mark Singer, Funny Money (Alfred A. Knopf, 1985) Robert Shaplen, Kreuger, Genius and Swindler (Alfred A Knopf, 1960) Robert J. Shiller, Irrational Exuberance (Princeton University Press, 2000) Robert J. Shiller, Market Volatility (MIT Press, 2001) Robert J. Shiller and Stanley B.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nelson Mandela, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, undersea cable, value at risk, Washington Consensus, Yom Kippur War

Sweden came next (3.71), followed by Switzerland (3.03), with Britain barely in the top ten on 2.28 per cent. Six out of the twenty-seven markets studied suffered at least one major interruption, usually as a result of war or revolution. Ten markets suffered negative long-term real returns, of which the worst were Venezuela, Peru, Colombia and, at the very bottom, Argentina (-5.36 per cent) .7 ‘Stocks for the long run’ is very far from being a universally applicable nostrum.8 It nevertheless remains true that, in most countries for which long-run data are available, stocks have out-performed bonds - by a factor of roughly five over the twentieth century.9 This can scarcely surprise us. Bonds, as we saw in Chapter 2, are no more than promises by governments to pay interest and ultimately repay principal over a specified period of time.

Minsky, ‘Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions’, American Economic Review, 54, 3 (May 1964), pp. 324-35; idem, ‘Financial Instability Revisited: The Economics of Disaster’, in idem (ed.), Inflation, Recession and Economic Policy (Brighton, 1982), pp. 117-61. 4 Kindleberger, Manias, p. 14. 5 ‘The Death of Equities’, Business Week, 13 August 1979. 6 ‘Dow 36,000’, Business Week, 27 September 1999. 7 William N. Goetzmann and Philippe Jorion, ‘Global Stock Markets in the Twentieth Century’, Journal of Finance, 54, 3 (June 1999), pp. 953-80. 8 Jeremy J. Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies (New York, 2000). 9 Elroy Dimson, Paul Marsh and Mike Stanton, Triumph of the Optimists: 101 Years of Global Investment Returns (Princeton, 2002). 10 Paul Frentrop, A History of Corporate Governance 1602-2002 (Brussels, 2003), pp. 49-51. 11 Ronald Findlay and Kevin H. O’Rourke, Power and Plenty: Trade, War, and the World Economy in the Second Millennium (Princeton, 2007), p. 178. 12 Frentrop, Corporate Governance, p. 59. 13 On the ambivalence of the Calvinist capitalist Dutch Republic, see Simon Schama, The Embarrassment of Riches: An Interpretation of Dutch Culture in the Golden Age (New York, 1997 [1987]). 14 John P.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

"Robert Solow", Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, business cycle, buy and hold, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, margin call, market bubble, McMansion, Menlo Park, money market fund, mortgage debt, Myron Scholes, new economy, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

Diana Corporation. Iomega. These rocket ships were headed straight to the moon but ran out of fuel. For those who were there, the flesh may crawl. For those who weren’t, it was just beginning. The Great Garbage Market of 1968 was invoked as comparison. But the garbage grew more expensive from 1996 to 2000. There were boosters other than Greenspan. Professor Jeremy Siegel had written a best seller: Stocks for the Long Run. He theorized that stocks are always the best-performing asset if you wait long enough. Or something like that. It didn’t matter. They bought the book and bought stocks. In The Autumn of the Middle Ages, Johan Huizinga wrote: “[T]he whole of intellectual life [of the late Middle Ages] sought concrete expression, as if the notion of gold was immediately minted into coin. There is an unlimited desire to bestow form on everything. … This tendency towards pictorial expression is constantly in jeopardy of becoming petrified.”52 In the autumn of the current age, the mind sought and found a new symbol: Alan Greenspan.

Johnson, Motor Vehicles, Appendix N, Table 3, Weight of material in a typical family vehicle, 1978 to 1996. 52 Economist Handbook of Facts and Numbers, 2009. Profile Books Ltd., 2008. Our age of turbulence has shackled Americans to financial markets to a degree that was—literally—unthinkable a generation ago. A large proportion of Americans knew nothing about the stock market or the concept of a bond or the structure of a mutual fund. They were perfectly content to save and watch their dollars accumulate. Such proposals as “stocks for the long run” were directed at a small segment of the population. The Federal Reserve—or, rather, central banking as a whole—is not the sole cause of disturbances, but neither is it what it pretends to be. Alan Greenspan condemned asset inflation during the 1950s and 1960s; by the 1990s, he claimed that it didn’t exist, and even if it did, there was nothing that the Federal Reserve could do, since it could not recognize a bubble.


pages: 363 words: 28,546

Portfolio Design: A Modern Approach to Asset Allocation by R. Marston

asset allocation, Bretton Woods, business cycle, capital asset pricing model, capital controls, carried interest, commodity trading advisor, correlation coefficient, diversification, diversified portfolio, equity premium, Eugene Fama: efficient market hypothesis, family office, financial innovation, fixed income, German hyperinflation, high net worth, hiring and firing, housing crisis, income per capita, index fund, inventory management, Long Term Capital Management, mortgage debt, passive investing, purchasing power parity, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, Silicon Valley, stocks for the long run, superstar cities, survivorship bias, transaction costs, Vanguard fund

Rosenberg, Barr, Kenneth Reid, and Ronald Lanstein, 1985, “Persuasive Evidence of Market Inefficiency,” Journal of Portfolio Management, 11 (3), pp. 9–16. Sharpe, William F., 1974, “Imputing Expected Security Returns from Portfolio Composition,” Journal of Financial and Quantitative Analysis, (June), 463– 472. Shiller, Robert J., 2000, Irrational Exuberance, Princeton: Princeton University Press. Siegel, Jeremy J., 1998, Stocks for the Long Run, 2nd Edition. New York: McGraw Hill. Siegel, Jeremy J., 2002, Stocks for the Long Run, 3rd Edition. New York: McGrawHill. Solnik, Bruno, and Dennis McLeavey, 2004. International Investments, Boston: Pearson Addison Wesley, 5th edition. Standard and Poor’s, 2008, S&P Global Stock Markets Factbook. Standard and Poor’s, 2009, S&P Global Stock Markets Factbook. Swankoski, Mark, 2005, “Asset Allocation: REITS—An Additional Source of Portfolio Diversification,” Smith Barney Consulting Group Research Publication (June).


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

It is quite remarkable that people think that somehow a scheme that weights stocks differently than capitalization can dominate a capitalization-weighted index. . . . New paradigms come and go. Betting against the market (and spending a considerable amount of money to do so) is indeed likely to be a hazardous undertaking.” * * * Finally, consider this affirmation of traditional indexing from Wharton School professor Jeremy Siegel, author of Stocks for the Long Run and adviser to WisdomTree Investments, the promoter of the dividend-driven factor model. “It can be shown that maximum diversification is achieved by holding each stock in proportion to its value to the entire market [italics added]. . . . Hindsight plays tricks on our minds . . . often distorts the past and encourages us to play hunches and outguess other investors, who in turn are playing the same game.


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

The equity premium over bonds was especially high from the 1950s to the 1970s as the persistent rise in inflation hurt bonds. This premium was only half a percent over the 19th century but 10 times higher in the 20th century [2]. Since the Civil War (1861–1865), U.S. equities almost never underperformed bonds over a 20-year window. This consistency of long-horizon outperformance was made famous by Jeremy Siegel’s book, Stocks for the Long Run, first published in 1994. However, the DMS data remind us that in other countries there have been many examples of negative 20-year equity premia—most recently, of course, in Japan. During the early 2009 trough, U.S. equities had underperformed bonds over 20 years. If stocks are compared with 20-year Treasuries (rather than the 10-year bonds used in Figure 8.2), they had even underperformed over a time span in excess of 40 years (November 30, 1968 to March 31, 2009), by far the longest window since the Civil War.

Endowments, foundations, and sovereign wealth funds are closest to having permanent capital, but the first two have recurring spending needs each year, whereas the sovereign wealth funds of some commodity-rich countries can expect their net inflows to grow for another decade and net outflows to start only in the distant future. Time diversification Time diversification—the idea that stock market investing becomes less risky with a longer horizon—is a contentious issue. Jeremy Siegel, who wrote several editions of a book entitled Stocks for the Long Run, has studied over two centuries of U.S. equity market returns and publicized the empirical fact that, although short-term returns are nearly as likely to be down as up, the probability of losing money over a 20-year window has been negligible. Realized variances of annualized returns over long horizons are significantly lower than those over short horizons. These results could reflect long-run mean reversion and/or exceptionally benign market experience in the U.S., but they may be more generally true.

Journal of Finance 41(3), 579–590. Shleifer, Andrei (2000), Inefficient Markets: An Introduction to Behavioral Finance, Oxford University Press. Shleifer, Andrei; and Robert W. Vishny (1997), “The limits of arbitrage,” Journal of Finance 52(1), 35–55. Sias, Richard (2007), “Causes and seasonality of momentum profits,” Financial Analysts Journal 63(2), 48–54. Siegel, Jeremy J. (2002), Stocks for the Long Run (Third Edition), New York: McGraw-Hill. Siegel, Laurence B. (2008), “Alternatives and liquidity,” Journal of Portfolio Management 35(1), 103–114. Siegel, Laurence B. (2009), “A riskless society is unattainable and infinitely expensive,” in Insights into the Global Financial Crisis (L.B. Siegel, Ed.), Research Foundation of the CFA Institute. Siegel, Laurence B.; and Paul D. Kaplan (1996), “Measuring the risk of real estate,” speech at the Chicago Quantitative Alliance, April.


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

Even with the brutal performance from 1973 to 1974, the fund earned 24.3% before fees over its lifetime. It's not just the highfliers that get cut in half. Anything that compounds for a long time must decompound at some point in time. The Dow is up 26, 400% since 1914, but it lost 30% on nine separate occasions. It lost 90% of its value during the Great Depression, and it wouldn't break through the 1929 highs until 1955. Talk about stocks for the long run! The Dow, which is the blue chip index, has suffered two massive drawdowns in the first decade of the twenty‐first century (–38% in the tech bubble and –54% in the great financial crisis). The takeaway for mere mortals like you and me is that if you seek big returns, whether they're compressed into a few years or over our investing lifetime, big losses are just part of the deal. Munger once said, “We have a passion for keeping things simple.”12 You can simplify all you want, but that still won't insulate you from large losses.


pages: 209 words: 53,175

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel

"side hustle", airport security, Amazon Web Services, Bernie Madoff, business cycle, computer age, coronavirus, discounted cash flows, diversification, diversified portfolio, Donald Trump, financial independence, Hans Rosling, Hyman Minsky, income inequality, index fund, invisible hand, Isaac Newton, Jeff Bezos, Joseph Schumpeter, knowledge worker, labor-force participation, Long Term Capital Management, margin call, Mark Zuckerberg, new economy, Paul Graham, payday loans, Ponzi scheme, quantitative easing, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Stephen Hawking, Steven Levy, stocks for the long run, the scientific method, traffic fines, Vanguard fund, working-age population

Sometimes this is because we’re overconfident. More often it’s because we’re not good at identifying what the price of success is, which prevents us from being able to pay it. The S&P 500 increased 119-fold in the 50 years ending 2018. All you had to do was sit back and let your money compound. But, of course, successful investing looks easy when you’re not the one doing it. “Hold stocks for the long run,” you’ll hear. It’s good advice. But do you know how hard it is to maintain a long-term outlook when stocks are collapsing? Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real time. The inability to recognize that investing has a price can tempt us to try to get something for nothing.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

Since that is pretty safe and lucrative as the long-term data suggest, why not do it but also enhance returns by availing oneself to the fruits of modern scientific methods? At long last the bull market provided an escape from the dreary nihilistic world of efficient market dogma. In 1996, near the end of the best long-term equity return period of several lifetimes spanned by the Ibbotson data, appeared one Jeremy Siegel with his “definitive guide to high-return, low-risk equities,” a book for the masses titled Stocks for the Long Run. Siegel has escaped from the world of academia into the lucrative world of Wall Street through establishing WisdomTree, a provider of ETFs and mutual funds. WisdomTree tweaks the major indicies to squeeze out a slightly better return with less volatility—all based upon statistical analysis thoughtfully proven through roughly 40 years of backtesting. The strategy is to exploit a structural flaw that requires index funds to buy more of stocks that go up and sell as underperformers go down;—instead it does the opposite by slightly overweighting holdings of high dividend yielding or low P/E stocks.

., 294–295 Smith, Adam, 264–265 Smyth, Douglas, 252 “Social credit,” 113 Social Investment Fund Network, 181–182 Socialism, and “I.O.U.S.A.,” 335–338. See also Capitalism; Fiat currency; Moral hazard Soros, George, 180–181, 184–185 Sowell, Thomas, 216 Specie, 36. See also Gold; Hard money INDEX Specie Circular, 49 Spitzer, Elliot, 322, 328 “Stamped money,” 113 Stanford, Allen, 330 Stanford Capital, 26 State Children’s Health Insurance Program (SCHIP), 202 Statistical arbitrage funds, 27–28 Stocks for the Long Run (Siegel), 31 Stolo, Licinius, 246 Strong, Benjamin, 64 Study of Administration (Wilson), 288 “Subprime Fiasco Exposes Manipulation by Mortgage Brokers” (Lubove, Taub), 148 Swaps, 125 Swope, Gerard, 317 Tabulae novae, 247 Taleb, Nassim Nicholas, 15, 16, 28, 280 Tallmadge, Benjamin, 3 Taub, Daniel, 148–149 Taxation: and federal budget deficit, 189–197 flat (or fair) tax, 202–204 history of, 197–202 overview, 188–189 Taylor Rule, 75–76 Taylor, John B., 75–76 Temin, Peter, 107–108, 114 Term Securities Lending Facility, 124–125 Theory of Moral Sentiments (Smith), 264 Tiberius, 249, 258 Tides Foundation, 180, 181 Torricelli Principle, 362 Trienans, Howard, 168 Troubled Asset Relief Program (TARP), 122, 128, 130, 139, 141, 143, 152, 214, 220, 235 Truman, Harry, 289 Index Turk, James, 350 Turner, Ted, 175 Turning Point Inc., 320 UBS, 22, 173 U.S.


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The Wealth Dragon Way: The Why, the When and the How to Become Infinitely Wealthy by John Lee

8-hour work day, Albert Einstein, barriers to entry, Bernie Madoff, butterfly effect, buy low sell high, California gold rush, Donald Trump, financial independence, high net worth, intangible asset, Kickstarter, Mark Zuckerberg, negative equity, passive income, payday loans, self-driving car, Snapchat, Stephen Hawking, Steve Jobs, stocks for the long run, stocks for the long term, Tony Hsieh, Y2K

He doesn't get caught up in the hype of what something might be worth one day (speculation) and he doesn't buy shares in a failing company with the intention of putting in place managers who could turn the business around and raise its value (development); he simply buys stocks that he thinks are undervalued by considering the market value of that company on that day. It makes sense to apply this tactic to buying property. But there's an even bigger advantage with property. Property is the most leveraged investment you can make. The difference between buying stocks and investing in property is that you can borrow most of the money to buy property. If you want to invest £100,000 in stocks for the long term, you need to find that £100,000. If you want to buy a property for £100,000, all you need is £20,000—and you can more or less guarantee that the bank will lend you the rest. If the company you bought shares in went bust, you would lose your entire £100,000. If your house fell down or got blown away in a freak storm, you would only lose £20,000. Additionally, say your shares increase in worth to £120,000.


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

Even over 30 years, bonds still had one period where the real return was –2.0%. Stocks Bonds T-Bills -50.0% +7.4% +7.6% -1.8% +10.8% +2.6% -2.0% +8.3% -3.0% +12.5% +8.8% +1.0% -3.1% +11.5% -5.1% +16.9% +12.4% -4.1% -5.4% +14.0% -8.2% -10.1% +17.7% +26.7% -11.0% -15.1% +21.6% +41.0% +35.1% +24.7% -15.9% -31.6% -25.0% -21.9% +0.0% -15.6% +23.7% +25.0% +66.6% +50.0% -38.4% Compound annual returns +75.0% Source: Stocks for the Long Run by Jeremy J. Siegel, reprinted with permission 1 2 5 10 20 30 Years of holding period Maximum and minimum real holding period returns, 1802-1997 If your company has an employee stock purchase plan, don’t overindulge at the company stock buffet. If your company starts to struggle, you could end up out of work and losing money in your retirement plan as well. Manage Your Portfolio 157 Face Your Fears: Understanding Investment Risks You can’t avoid risk no matter how you invest your money.


pages: 192 words: 75,440

Getting a Job in Hedge Funds: An Inside Look at How Funds Hire by Adam Zoia, Aaron Finkel

backtesting, barriers to entry, collateralized debt obligation, commodity trading advisor, Credit Default Swap, credit default swaps / collateralized debt obligations, discounted cash flows, family office, fixed income, high net worth, interest rate derivative, interest rate swap, Long Term Capital Management, merger arbitrage, offshore financial centre, random walk, Renaissance Technologies, risk-adjusted returns, rolodex, short selling, side project, statistical arbitrage, stocks for the long run, systematic trading, unpaid internship, value at risk, yield curve, yield management

New York: Random House Trade Paperbacks, 2000. Lynch, Peter. Beating the Street, New York: Fireside, 1994. Lynch, Peter and Rothschild, John. Learn to Earn. New York: John Wiley & Sons, Inc., 1996. Malkiel, Burton G. A Random Walk Down Wall Street. New York: W.W. Norton & Company, 2003. Nicholas, Joseph. Investing in Hedge Funds: Strategies for the New Marketplace. New York: Bloomberg Press, 2005. Siegel, Jeremy J. Stocks for the Long Run. New York: McGraw-Hill, 2002. Soros, George. The Alchemy of Finance. Hoboken, N.J: John Wiley & Sons, Inc., 1987. Swensen, David F. Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment. New York: The Free Press, 2000. Taleb, Nassim Nicholas. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. New York: Texere, 2004. Tuckman, Bruce.


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

Jeff McComas, “Early Retirement,” in The Bogleheads’ Guide to Retirement Planning, ed. Taylor Larimore, Mel Lindauer, Richard A. Ferri, and Laura F. Dogu (Hoboken, NJ: John Wiley and Sons, 2009). 2. Karsten Jeske, “The Ultimate Guide to Safe Withdrawal Rates—Part 1: Introduction,” Early Retirement Now. https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro. 3. Jeremy J. Siegel, Stocks for the Long Run (New York: McGraw-Hill Education, 2014). 4. Robert S. Weiss, The Experience of Retirement (Ithaca, NY: ILR Press, 2005). Chapter 7: Your Financial Roadmap to a Work-Optional Life 1. Thomas J. Stanley and William D. Danko, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy (New York: Simon & Schuster Pocket Books, 1996). Chapter 8: Accelerate Your Progress 1. Bureau of Labor Statistics, “Occupational Projections and Worker Characteristics, 2016–2026,” 2016. https://www.bls.gov/emp/tables/occupational-projections-and-characteristics.htm.


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

Trust and confidence will be restored. The many months of domestic equity outflows will start to come to an end. Investors will start to pile back into stocks because they will believe that markets are properly valuing securities and that their orders are not bait for ultra-high-speed traders. Research and stock picking will become relevant again as margin returns to brokers who deploy capital toward the valuation of stocks for the long term. Correlation among assets will fall to more normalized levels as investors focus on individual companies, instead of mindless ETF tracking devices. Ultimately, capital will find its way back to innovative, job-creating companies. A fantasy? No. It’s all up to you. Fight for Your Rights If you’ve read this book up to this point, chances are you are as outraged as we are and want to know what you can to do protect yourself.


pages: 444 words: 86,565

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum, Joshua Pearl, Joseph R. Perella

asset allocation, asset-backed security, bank run, barriers to entry, business cycle, capital asset pricing model, collateralized debt obligation, corporate governance, credit crunch, discounted cash flows, diversification, fixed income, intangible asset, London Interbank Offered Rate, performance metric, shareholder value, sovereign wealth fund, stocks for the long run, technology bubble, time value of money, transaction costs, yield curve

Schneider, Arnold. Managerial Accounting: Manufacturing and Service Applications. 5th ed. Mason, OH: Cengage Learning, 2009. Schwert, G. William. “Hostility in Takeovers: In the Eyes of the Beholder?” Journal of Finance 55 (2000): 2599-2640. Scott, David L. Wall Street Words: An A to Z Guide to Investment Terms for Today’s Investor. 3rd ed. Boston: Houghton Mifflin, 2003. Siegel, Jeremy J. Stocks for the Long Run. 4th ed. New York: McGraw-Hill, 2007. Sherman, Andrew J., and Milledge A. Hart. Mergers & Acquisitions From A to Z. 2nd ed. New York: AMACOM, 2006. Slee, Robert T. “Business Owners Choose a Transfer Value.” Journal of Financial Planning 17, no. 6 (2004): 86-91. Slee, Robert T. Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests. Hoboken, NJ: John Wiley & Sons, 2004.


pages: 302 words: 84,428

Mastering the Market Cycle: Getting the Odds on Your Side by Howard Marks

activist fund / activist shareholder / activist investor, Albert Einstein, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, if you build it, they will come, income inequality, Isaac Newton, job automation, Long Term Capital Management, margin call, money market fund, moral hazard, new economy, profit motive, quantitative easing, race to the bottom, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, secular stagnation, short selling, South Sea Bubble, stocks for the long run, superstar cities, The Chicago School, The Great Moderation, transaction costs, VA Linux, Y2K, yield curve

In the decade of the 1990s, the U.S. economy enjoyed the longest peacetime expansion in its history. In December 1996, when the S&P 500 index of equities stood at 721, Fed Chairman Alan Greenspan asked, “How do we know when irrational exuberance has unduly escalated asset values?” But he was never heard from again on this subject, even as the S&P more than doubled to a high of 1527 in 2000. In 1994, Prof. Jeremy Siegel of the Wharton School published his book Stocks for the Long Run, in which he pointed out that there had never been a long period of time in which stocks had failed to outperform bonds, cash and inflation. Whereas researchers at the University of Chicago had earlier concluded that the normal return on U.S. equities was in the vicinity of 9% per year, in the 1990s the average return on the S&P was nearly 20%. The better stocks performed, the more capital investors allocated to them.


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

The first rule of thumb is that an analyst's recommendation should never be the deciding factor in whether you buy or sell a stock. Sure, you should read analysts' reports. They are a good way to start your own research, but consider them just one more piece of information. Never buy a stock based solely on an analyst's recommendation. Instead, ask yourself: Is the stock right for me because it helps diversify my portfolio, or because it helps me meet an asset allocation goal? Am I expecting to hold the stock for the long term? Do I understand the company, and why I'd like to own it? Do I understand it well enough to know why I might want to sell the stock, beyond a short-term failure to meet analysts' expectations? Answering these questions in the affirmative is enough to justify owning a stock— far more than any analyst's say-so. Ask lots of questions. You should not be influenced by an analyst's stock recommendation unless you understand why the analyst favors it; whether the analyst's firm has any business ties to the company in the form of investment banking fees; and whether the firm or the analyst owns any of the shares being recommended.


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

CHAPTER SEVEN Keep It Simple Make Index Funds the Core, or All, of Your Portfolio There is a crucially important difference about playing the game of investing compared to virtually any other activity. Most of us have no chance of being as good as the average in any pursuit where others practice and hone skills for many, many hours. But we can be as good as the average investor in the stock market with no practice at all. Jeremy Siegel, Professor of Finance, Wharton School, University of Pennsylvania, and author of Stocks for the Long Run n his outstanding book The Four Pillars oflnvesting, William Bernstein writes: "The stockbroker services his clients in the same way that Bonnie and Clyde serviced banks." While most won't publicly admit it, the vast majority of stockbrokers, mutual fund managers, sellers of investment products, and money managers don't earn their keep. In fact, most of them build substantial wealth at their clients' expense.


pages: 305 words: 98,072

How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely by Andrew Craig

Airbnb, Albert Einstein, asset allocation, Berlin Wall, bitcoin, Black Swan, bonus culture, BRICs, business cycle, collaborative consumption, diversification, endowment effect, eurozone crisis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, Long Term Capital Management, low cost airline, mortgage debt, negative equity, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, passive income, pensions crisis, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Silicon Valley, smart cities, stocks for the long run, the new new thing, The Wealth of Nations by Adam Smith, Yogi Berra, Zipcar

Shiller, Robert J. Finance and the Good Society. Princeton: Princeton University Press, 2012. Shipman, Mark. Big Money, Little Effort a Winning Strategy for Profitable Long-Term Investment. London: Kogan Page Publishers, 2008. ———. The Next Big Investment Boom: Learn the Secrets of Investing from a Master and How to Profit from Commodities. London: Kogan Page Publishing, 2008. Siegel, Jeremy J. Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. New York: McGraw-Hill, 2008. Slater, Jim. The Zulu Principle: Making Extraordinary Profits from Ordinary Shares. London: Orion, 1992. Simmons, Matthew R. Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Hoboken: John Wiley & Sons, 2005. Smith, Adam: The Theory of Moral Sentiments.


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

Published in 1998 by Namborn. Protecting Your Wealth in Good Times and Bad, by Richard A. Ferri, CFA. A sensible life-long saving and investing handbook for all investors. Published in 2003 by McGraw-Hill. 319 320 APPENDIX B A Random Walk Down Wall Street, by Burton G. Malkiel. A comprehensive look at today’s market and what is driving it. 9th edition, published in 2007 by W. W. Norton & Company. Stocks for the Long Run, by Jeremy Siegel. A classic book about investing, with market data going back 200 years. 4th edition, published in 2007 by McGraw-Hill. Winning the Loser’s Game, by Charles Ellis. A classic book on how to increase returns and decrease risk through investment policy and indexing. 5th edition, published in 2009 by McGraw-Hill. Wise Investing Made Simple, by Larry Swedoe. Knowing how modern financial markets work helps investors make more informed and better investment decisions.


pages: 306 words: 97,211

Value Investing: From Graham to Buffett and Beyond by Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, Michael van Biema

Andrei Shleifer, barriers to entry, Berlin Wall, business cycle, capital asset pricing model, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, fixed income, index fund, intangible asset, Long Term Capital Management, naked short selling, new economy, place-making, price mechanism, quantitative trading / quantitative finance, Richard Thaler, shareholder value, short selling, Silicon Valley, stocks for the long run, Telecommunications Act of 1996, time value of money, tulip mania, Y2K, zero-sum game

David Dreman, Contrarian Investment Strategies: The Next Generation (New York: Simon & Schuster, 1998), makes use and has references to many of the articles in this field. Chapter Four We owe the analysis of Hudson General to Mario J. Gabelli, whose investment company was a major shareholder of the firm, and who presented this material in Bruce Greenwald's course on value investing at the Graduate School of Business, Columbia University. Chapter Eight Jeremy J. Siegel, Stocks for the Long Run: A Guide to Selecting Markets for Longterm Growth (Burr Ridge, 11: Irwin Professional Publishing, 1994), p. 31. Warren Buffett The Loomis passage is from Carol Loomis, "The Inside Story of Warren Buffett," Fortune, April 11, 1988, p. 28. The Web site for Berkshire Hathaway is www.berkshirehathaway.com, where the letters and much else can be found. There is no shortage of books on Warren Buffett.


pages: 330 words: 99,044

Reimagining Capitalism in a World on Fire by Rebecca Henderson

Airbnb, asset allocation, Berlin Wall, Bernie Sanders, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, collaborative economy, collective bargaining, commoditize, corporate governance, corporate social responsibility, crony capitalism, dark matter, decarbonisation, disruptive innovation, double entry bookkeeping, Elon Musk, Erik Brynjolfsson, Exxon Valdez, Fall of the Berlin Wall, family office, fixed income, George Akerlof, Gini coefficient, global supply chain, greed is good, Hans Rosling, Howard Zinn, Hyman Minsky, income inequality, index fund, Intergovernmental Panel on Climate Change (IPCC), joint-stock company, Kickstarter, Lyft, Mark Zuckerberg, means of production, meta analysis, meta-analysis, microcredit, mittelstand, Mont Pelerin Society, Nelson Mandela, passive investing, Paul Samuelson, Philip Mirowski, profit maximization, race to the bottom, ride hailing / ride sharing, Ronald Reagan, Rosa Parks, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Snapchat, sovereign wealth fund, Steven Pinker, stocks for the long run, Tim Cook: Apple, total factor productivity, Toyota Production System, uber lyft, urban planning, Washington Consensus, working-age population, Zipcar

She argued that since SASB’s airline metrics included both measures of the firm’s relationship with its workforce and of its approach to sustainability, issuing such a report would be a powerful way to help communicate the firm’s long-term, growth-orientated outlook, particularly since JetBlue was significantly ahead of its competitors on both dimensions. In talking about the decision later, she said: Ultimately, what we want to do is… increase the value of our shares, diversify our investor base, (and) reduce volatility in the stock. So we want shareholders to believe in our stock for the long run. Our investors are our owners, and they deserve to have information in the way they want it—particularly as it relates to the major environmental and social mega trends pressuring the industry. Sustainability reporting has shifted from being about storytelling to being about model orientated data sharing. This reporting strategy dramatically increased investor interest. One major investor spent two hours cross examining Sophia on the move.


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

The truth, however, is that markets are simply not predictable and popular storylines such as “stocks always beat bonds” often yield to the more sobering reality. That reality is that bonds can outperform stocks over some periods, and sometimes those periods can be very long (a decade plus). The problem is you simply won't know ahead of time when this can happen, which is why you need to always hold bonds no matter what someone else is advising. Jeremy Siegel, author of Stocks for the Long Run, said in a phone interview for Bloomberg News on October 31, 2011: The bond market posted its first 30-year gain over the stock market in more than a century during the period ended Sept. 30. The last time was in 1861, leading into the Civil War, when the U.S. was moving from farm to factory. In addition to providing security during times of crisis, bonds can also provide strong gains with a stock market that is performing well.


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

This is why private equity fund mavens are billionaires living on latifundia-style estates near Telluride, Colorado, and Jackson Hole, Wyoming. There’s no reason for you to facilitate the looting or be a victim. Hedge funds are a challenging case. They work in theory, not in practice. Hedge funds aim to produce real risk-adjusted returns, known as alpha. This is done through market timing, long-short strategies, and arbitrage. Investors who are long stocks for the long run endure periodic crashes and prolonged bear markets to enjoy spectacular bull markets. The problem is we may not live long enough to recover severe losses, or we may be forced sellers (tuition, anyone?) at market lows. Hedge funds purport to outperform long-only portfolios. Paths to outperformance—market timing and long-short strategies—are easy to describe, yet real talent is difficult to find.


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

These fund managers also analyze the quality of the company’s management, traveling to meet managers and see businesses. Furthermore, they study the accounting numbers, trying to assess their reliability and to estimate future cash flows. Equity long–short managers mostly bet on specific companies, but they can also take views on whole industries. Some equity managers, called value investors, focus on buying undervalued companies and holding these stocks for the long term. Warren Buffett is a good example of a value investor. Implementing this trading strategy often requires being contrarian, since companies only become cheap when other investors abandon them. Hence, cheap stocks are often out of favor or bought during times when others panic. Going against the norm is harder than it sounds, as traders say: It’s easy to be a contrarian, except when it’s profitable.


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

The secret of getting rich slowly (but surely) is the miracle of compound interest. Albert Einstein described compound interest as the “greatest mathematical discovery of all time.” It may sound complicated, but it simply involves earning a return not only on your original investment but also on the accumulated interest that you reinvest. Jeremy Siegel, author of the excellent investing book Stocks for the Long Run, has calculated the returns from a variety of financial assets from 1800 to 2010. His work shows the incredible power of compounding. One dollar invested in stocks in 1802 would have grown to almost $11 million by the end of 2009. This amount far outdistanced the rate of inflation as measured by the consumer price index (CPI). The figure below also shows the much more modest returns that have been achieved by U.S.


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

Although the macroeconomic climate was relatively settled during this time, uncertainty due to the Y2K calendar conversion engendered some portfolio rebalancing and a flight to quality. Once these concerns abated, spreads quickly returned to more normal levels. Another pattern evident in these data is the downward trend in the spread between 3-month LIBOR and 3-month Treasury bills. To see this, we computed summary statistics for each calendar year: mean, standard 15 Jeremy J. Siegel, Stocks for the Long Run (New York, NY: McGraw-Hill, 1998). 39 U.S. Treasury Bills deviation, minimum and maximum. These results are presented in Exhibit 3.8. Two trends are evident: (1) the mean spreads fell over the 1987–1999 period and (2) except for the uptick in volatility in 1998–1999, volatility trends downward as well.16 The explanation is simple. Over this period, LIBOR became the benchmark global short-term interest rate.


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

If you want to achieve your big goals over the long term, you need to do more than just boost your cash flow and stick money in savings. The best way to do this is to invest in the stock market because, over the long-term, stocks offer the best possible return. (When talking about investments, your return is the amount you earn or lose.) How Much Do Stocks Actually Earn? In his book Stocks for the Long Run (McGraw-Hill, 2008), Jeremy Siegel analyzes the historical performance of several types of investments (economists call them asset classes). He tries to answer the question "How much does the stock market actually return?" After crunching lots of numbers, Siegel found that since 1926: Stocks have returned an average of about 10% per year. Over the past 80 years, stocks have produced a real return (meaning an inflation-adjusted return) of 6.8%, which also happens to be their average rate of return for the past 200 years.


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

Shefrin, Hersh, and Meir Statman, 1984. "Explaining Investor Preference for Dividends." Journal of Financial Economics, Vol. 13, No. 2, pp. 253-282. Shiller, Robert J., 1981. "Do Stock Prices Move Too Much?" American Economic Review, Vol. 71, No. 3 (June), pp. 421-436. Shiller, Robert J., 1989. Market Volatility. Cambridge, Massachusetts: Cambridge University Press. Siegel, Jeremy J., 1994. Stocks for the Long Run: A Guide to Selecting Markets for Long-Term Growth. Burr Ridge, Illinois: Irwin Professional Publishing. Siskin, Bernard R., 1989. What Are the Chances? New York: Crown. Skidelsky, Robert, 1986. Jahn Maynard Keynes. Vol. 1: Hopes Betrayed. New York: Viking. Slovic, Paul, Baruch Fischoff, and Sarah Lichtenstein, 1990. "Rating the Risks." In Glickman and Gough, 1990, pp. 61-75. Smith, Clifford W., Jr., 1995.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, business cycle, capital asset pricing model, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, financial innovation, illegal immigration, implied volatility, index fund, Long Term Capital Management, loss aversion, margin call, market clearing, market fundamentalism, market microstructure, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, pre–internet, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

It cannot grow passively by having its stock price go up and thereby be a larger part of the market, so index fund investors will allocate more of their portfolio to it. MPT CAPM is neutral to growth. The expected return on a stock is determined by its correlation with the market, so the stock is an equally good buy at $1, $10, $100, or $1,000. With index investors on the sidelines—holding “stocks for the long run”—stock valuations will be determined by battles between fundamental investors, who sell stocks when the price rises above fundamental economic value, and momentum investors, who buy a stock when it is going up. The problem is that even if the fundamental investors win almost all the battles, fundamental victory means only that the stock goes to its true value. There’s no natural limit to how high momentum investors can push a stock, and no limit above zero to how low momentum investors can push a stock.


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

Journal of Economic Behavior and Organization 12: 47–66. Shiller, Virginia M. 2017. The Attachment Bond: Affectional Ties across the Lifespan. New York: Lexington Books. Shleifer, Andrei, and Robert W. Vishny. 1997. “The Limits of Arbitrage.” Journal of Finance 52(1):35–55. Sidis, Boris. 1898. The Psychology of Suggestion: A Research into the Subconscious Nature of Man and Society. New York: Appleton & Co. Siegel, Jeremy J. 2014 [1994]. Stocks for the Long Run. New York: Irwin. Silber, William. 2014. When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy. Princeton, NJ: Princeton University Press. Silver, David, et al. 2017. “Mastering Chess and Shogi by Self-Play with a General Reinforcement Learning Algorithm.” Cornell University, arXiv:1712.01815 [cs.AI], https://arxiv.org/abs/1712.01815.


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

Irrational Exuberance (Princeton University Press, Princeton, NJ). 376. Shleifer, A. (2000). Inefficient Markets: An Introduction to Behavioral Finance (Oxford University Press, New York). 377. Sieck, W. and Yates, J. F. (1997). Exposition effects on decision making: Choice and confidence in choice, Organizational Behavior & Human Decision Processes 70, 207–219. 378. Siegel, J. J. (1998). Stocks for the Long Run, 2nd ed. (McGraw Hill, New York). 379. Simon, H. (1982). Models of Bounded Rationality, Vols. 1 and 2 (MIT Press, Cambridge, MA). 380. Simon, J. L. (1996). The Ultimate Resource 2? (Princeton University Press, Princeton, NJ). 381. Sircar, K. R. and Papanicolaou, G. (1998). General Black-Scholes models accounting for increased market volatility from hedging strategies, Applied Mathematical Finance 5, 45–82. 382.


pages: 716 words: 192,143

The Enlightened Capitalists by James O'Toole

activist fund / activist shareholder / activist investor, anti-communist, Ayatollah Khomeini, Bernie Madoff, British Empire, business cycle, business process, California gold rush, carbon footprint, City Beautiful movement, collective bargaining, corporate governance, corporate social responsibility, Credit Default Swap, crowdsourcing, cryptocurrency, desegregation, Donald Trump, double entry bookkeeping, end world poverty, equal pay for equal work, Frederick Winslow Taylor, full employment, garden city movement, germ theory of disease, glass ceiling, God and Mammon, greed is good, hiring and firing, income inequality, indoor plumbing, inventory management, invisible hand, James Hargreaves, job satisfaction, joint-stock company, Kickstarter, knowledge worker, Lao Tzu, longitudinal study, Louis Pasteur, Lyft, means of production, Menlo Park, North Sea oil, passive investing, Ponzi scheme, profit maximization, profit motive, Ralph Waldo Emerson, rolodex, Ronald Reagan, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, Socratic dialogue, sovereign wealth fund, spinning jenny, Steve Jobs, Steve Wozniak, stocks for the long run, stocks for the long term, The Fortune at the Bottom of the Pyramid, The Wealth of Nations by Adam Smith, Tim Cook: Apple, traveling salesman, Uber and Lyft, uber lyft, union organizing, Vanguard fund, white flight, women in the workforce, young professional

At the same time upscale department stores such as Nordstrom and Bloomingdale’s were becoming national chains, catering to the designer-jean tastes of affluent consumers. “In sum,” as Bob Haas explained to me some thirty-two years after our first discussion, “we were pinched from above and below: ‘The Jaws of Death,’ as a former Levi’s executive dubbed it.” Moreover, as all those untoward changes were occurring, the character of Wall Street was being transformed. Once home to patient investors who held stock for the long term, now it was the domain of restless speculators demanding high (and quick) financial returns from companies they assumed they “owned.” In effect, Wall Street had come to expect exactly what Levi Strauss was unable to deliver in the early 1980s—high quarterly profits—and that failure caused Levi’s investors to demand drastic changes in the corporation’s strategy, practices, products, and governance.


The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

"Robert Solow", addicted to oil, air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, Right to Buy, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, stocks for the long run, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K, zero-sum game

N e w York: R a n d o m House, 2 0 0 3 . Sala-i-Martin, Xavier. "The World Distribution of Income (Estimated from Individual C o u n t r y Distributions)." NBER Working Papers 8 9 3 3 (2002). Schumpeter, Joseph Alois. Capitalism, Socialism and Democracy. N e w York: Harper & Row, 1975. Sen, Amartya. "Democracy as a Universal Value." Journal of Democracy 10, no. 3 (1999): 3 - 1 7 . Siegel, Jeremy J. Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. N e w York: McGraw-Hill, 2002. Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. 5th ed. London: M e t h u e n & Co., 1904. h t t p : / / w w w .econlib.org/library/Smith/smWN.html (accessed March 24, 2 0 0 7 ) . . Lectures on Jurisprudence. Vol. 5 of Glasgow Edition of the Works and Correspondence of Adam Smith.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

activist fund / activist shareholder / activist investor, air freight, barriers to entry, Basel III, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

Similarly, market bubbles and crises have always captured public attention, fueling the belief that the stock market moves in chaotic ways, detached EXHIBIT 5.2 Distribution of Growth Rates for Growth and Value Stocks Growth stocks do not grow materially faster . . . . . . but do have higher ROICs Value median Growth median 8.7% 10.2% Value median Growth median 15% 35% 14 35 Growth 12 30 10 Value 8 6 % of companies % of companies Growth 25 20 15 4 10 2 5 Value 0 0 –3 1 5 9 13 17 21 3-year average sales growth, % 25 –5 5 15 25 35 45 50+ 3-year average ROIC excluding goodwill, % MARKETS AND FUNDAMENTALS: THE EVIDENCE 69 EXHIBIT 5.3 Stock Performance against Bonds in the Long Run, 1801–2013 $ 100,000,000 Stocks 10,000,000 1,000,000 Stocks (inflation-adjusted) 100,000 Bonds 10,000 Bills 1,000 100 10 CPI 1 0 1801 1816 1831 1846 1861 1876 1891 1906 1921 1936 1951 1966 1981 1996 2011 Source: Jeremy J. Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies (New York: McGrawHill; 2014); Ibbotson Associates; Morningstar EnCorr SBBI Index Data. from economic fundamentals. The 2008 financial crisis, the technology bubble of the 1990s, the Black Monday crash of October 1987, the leveraged-buyout (LBO) craze of the 1980s, and, of course, the Wall Street crash of 1929 appear to confirm such ideas.