index fund

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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, currency risk, diversification, diversified portfolio, financial intermediation, fixed income, index fund, invention of the wheel, Isaac Newton, John Bogle, junk bonds, low interest rates, 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

In order to achieve such a 50/50 government/corporate bond portfolio, investors who require a higher yield than the total bond market index fund (yet still seek a high-quality portfolio) might consider a portfolio consisting of 75 percent in the total bond market index fund and 25 percent in an investment-grade corporate bond index fund. The value of bond index funds is created by the same forces that create value for stock index funds. The reality is that the value of bond index funds is derived from the same forces that create value in stock index funds: broad diversification, rock-bottom costs, disciplined portfolio activity, tax efficiency, and focus on shareholders who place their trust in long-term strategies.

In fact, after all of the selection challenges, timing risks, extra costs, and added taxes, ETF traders can have absolutely no idea what relationship their investment returns will bear to the returns earned in the stock market. These differences between the traditional index fund—the TIF—and the index fund nouveau represented by the ETF are stark (Exhibit 15.1). Exchange-traded funds march to a different drummer than the original index fund. In the words of the old song, I’m left to wonder, “What have they done to my song, ma?” The creation of the “Spider.” EXHIBIT 15.1 Traditional Index Funds versus Exchange-Traded Index Funds ETFs Broad Index Funds Specialized Index Funds TIFs Investing Trading Broadest possible diversification Yes Yes Yes No Longest time horizon Yes Yes No Rarely Lowest possible cost Yes Yes Yes* Yes* Greatest possible tax efficiency Yes Yes No No Highest possible share of market return Yes Yes Unknown Unknown *But only if trading costs are ignored.

Over the past decade, both the original “fundamental” index fund and the first “dividend-weighted” index fund have had the opportunity to prove the value of their theories. What have they proven? Essentially nothing. Exhibit 16.1 presents the comparisons. EXHIBIT 16.1 “Smart Beta” Returns: 10-Year Period Ended December 31, 2016 Fundamental Index Fund Dividend Index Fund S&P 500 Index Fund Annual return 7.6% 6.6% 6.9% Risk (standard veviation) 17.7 15.1 15.3 Sharpe ratio* 0.39 0.38 0.40 Correlation with S&P 500 Index 0.97 0.97 1.00 *A measure of risk-adjusted return. You’ll note that the fundamental index fund earned higher returns while assuming higher risk than the S&P 500 fund.


pages: 345 words: 87,745

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

Alan Greenspan, asset allocation, backtesting, Benchmark Capital, Bernie Madoff, book value, buy and hold, capital asset pricing model, cognitive dissonance, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, Ponzi scheme, prediction markets, proprietary trading, prudent man rule, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, Tax Reform Act of 1986, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

My test compared this index fund portfolio to thousands of randomly selected active funds from the Morningstar list, in the correct weightings. Table 6.7 Model Index Fund Portfolio Used in the Live Study Index Fund Name Percent Allocation Vanguard Total Stock Market Index Fund 45% Vanguard Total International Stock Index Fund* 15% Vanguard Total Bond Market Index Fund 40% * The Vanguard Total International Fund had its first full year under management in 1998. The FTSE All-World ex-US Index Fund (less 0.4 percent fee) is substituted for the years 1995 through 1997. The allocation of the FTSE ex-US could have been replicated using three other Vanguard international index funds that were in existence over the entire time period.

If there was no excess return, then the fund didn’t produce alpha, because the same returns could be engineered in a portfolio through a combination of a total market index fund (beta exposure), small cap index fund (size factor exposure), and value index fund (value factor exposure). If approximately 95 percent of diversified fund performance can be explained using the three-factor model, and active management contributes very little, if any, to return then why pay high fees for active management when you can engineer the same risk exposures using low-cost index funds? How to create a three-factor portfolio using index funds is beyond the scope of this book. There are several books available on this investment strategy including one that I wrote, All About Asset Allocation, 2nd Edition, 2010, from McGraw-Hill.

This was a huge boon for the Vanguard S&P 500 index fund. Not only did interest in index investing start to catch on, the index fund itself outperformed three-quarters of all active funds from 1983 to 1986. This run brought increased publicity to Vanguard. The unexpected asset growth at Vanguard made competitors rethink their opposition to index funds. Wells Fargo was the first to launch a competing fund in 1984. The fund had expenses of almost 1 percent per year and attracted few assets. Two other index funds were formed in 1985, although they were only offered to institutional investors. Eight new index funds were launched by competitors in 1986, which marked the beginning of true competition.


pages: 432 words: 106,612

Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever by Robin Wigglesworth

Albert Einstein, algorithmic trading, asset allocation, Bear Stearns, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Blitzscaling, Brownian motion, buy and hold, California gold rush, capital asset pricing model, Carl Icahn, cloud computing, commoditize, coronavirus, corporate governance, corporate raider, COVID-19, data science, diversification, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, fear index, financial engineering, fixed income, Glass-Steagall Act, Henri Poincaré, index fund, industrial robot, invention of the wheel, Japanese asset price bubble, Jeff Bezos, Johannes Kepler, John Bogle, John von Neumann, Kenneth Arrow, lockdown, Louis Bachelier, machine readable, money market fund, Myron Scholes, New Journalism, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, Performance of Mutual Funds in the Period, Peter Thiel, pre–internet, RAND corporation, random walk, risk-adjusted returns, road to serfdom, Robert Shiller, rolodex, seminal paper, Sharpe ratio, short selling, Silicon Valley, sovereign wealth fund, subprime mortgage crisis, the scientific method, transaction costs, uptick rule, Upton Sinclair, Vanguard fund

This tongue-in-cheek poster produced by The Leuthold Group, an investment manager specializing in active management, adorned the offices of some of the early pioneers. Index funds may have been first invented in the early 1970s but only really started gaining in prominence in the 1990s. The last decade has seen rampant growth, with index funds—whether passive mutual funds or exchange-traded funds—gobbling up more and more of the investment industry’s market share. Index funds come in many flavors, from exchange-traded notes that track the price of oil to passive money market funds. Equity index funds are by far the biggest, but bond index funds have been growing quickly in recent years and are expected to take off further in the coming decade.

The investment manager turned historian Peter Bernstein recounts that at the time one former colleague sputtered that he wouldn’t buy the S&P 500 even for his mother-in-law.30 The Leuthold Group, a Minneapolis-based financial research group, famously distributed a poster where Uncle Sam declared, “Help stamp out index funds. Index funds are un-American!” Copies continue to float around the offices of index fund managers as mementos of the hostility they initially faced. Of course, as the writer Upton Sinclair once observed, it is difficult to get someone to understand something when their salary depends on them not understanding it. “If people start believing this random-walk garbage and switch to index funds, a lot of $80,000-a-year portfolio managers and analysts will be replaced by $16,000-a-year computer clerks.

Rowe Price, 127, 234, 244 Trump, Donald, 246 Tsai, Gerald, 34 Tufts University, 47, 48 Tull, Robert, 195–96, 247 Turner, Grant, 260 Turner, Judith, 58 Twardowski, Jan, xi, 97, 101, 104, 127 at Russell Investments, 142 setting up Vanguard FIIT (“Bogle’s Folly”), 108–9, 110–14 Unilever, 255–56 Union League Club, 97, 99, 100–101 Union Warren Savings Bank, 128 United Airlines, 230 United States Oil Fund (USO), 248 Universities Superannuation Scheme (USS), 274–76 University of Besançon, 23 University of British Columbia, 186 University of California, Berkeley, 42, 58, 137, 138, 161, 187 University of California, Los Angeles (UCLA), 42, 43, 169, 206–7, 234–35 University of Chicago, 52–53, 75 Booth at, 50, 140–41 Booth gift to, 157–58 Fama at, 47–50, 63, 140 Grauer at, 186–87 Lorie and CRSP, 30–33, 35–36, 52–53 Markowitz at, 38–41 Miller at, 48–49, 63, 138, 140, 147 Sauter at, 123 Sinquefield at, 35, 63, 64, 140 University of Dijon, 23 University of Kansas, 139 University of Kentucky, 72 University of Leuven, 47 University of Pennsylvania, 153 value investing, 7, 152, 154 value stocks, 154–56 VanEck Vectors Gold Miners ETF, 242, 242n VanEck Vectors Junior Gold Miners ETF, 262–63 Vanguard billion-dollar milestones of, 119–20, 121 Bogle-Brennan schism, 130–34 DFA and, 146 ETFs, 166–68, 200–201, 256 fee structure, 116–17, 120–21, 123 founding of, 11–12, 104–10, 104n “Giant Three” scenario, 297–99 growth of, 119–20, 121–22 gun stock boycott, 285–87 Malvern headquarters of, 125–26 rise of, 119–35 Vanguard, HMS, 104, 126 Vanguard Adviser, 121 Vanguard Extended Market Index Fund, 124 Vanguard First Index Investment Trust (FIIT), 107–17, 121–22 loads, 115–17 name change of, 121–22 selling, 114–15 setting up, 107–14 Vanguard 500 Index Fund, 15, 122–25, 133–34, 181 Vanguard Index Trust, 122 Vanguard Total Bond Market Index Fund, 261 Vanguard Total Stock Market Index Fund, 123–25 Varley, John, 205 Vasi, Alonso Segura, 257 Velocity Shares Daily Inverse VIX Short Term ETN, 247–48 Vertin, James “Jim,” xi at Wells Fargo, 62, 69–72, 73–74, 81, 187 retirement, 184 Vestager, Margrethe, 296 Vietnam War, 63, 139–40, 161 Visa, 256 volatility, 40, 74, 151, 152–53 volatility index, 247–48 Volcker, Paul, 17–18, 119, 185 Volkswagen, 236 von Neumann, John, 43 Wachter, Paul, 160 Wagner, Susan, 204, 210, 212, 224 Wagner, Wayne, 71, 76 Wallace, David Foster, 265–66 Wall Street Crash of 1929, 27, 88, 89, 92, 225–26 Wall Street Journal, 27, 29, 33, 82, 83, 84, 122, 137, 152, 160, 180, 252 Walmart, 198 Wang, Zexi, 254 Warwick Municipal Bond Fund, 117–18 Washington Post, 4, 7, 8, 17 Wasserstein, Bruce, 210 Weber, Clifford, 176–77, 182 Wellington, Arthur Wellesley, Duke of, 92, 103 Wellington Management Company, 53, 88, 92–104, 115, 127, 130 Wells Fargo, 106, 152–53, 188 Amex and Most, 175 McQuown’s hiring, 57–59 Netzly at, 236–37 origin story of index investing, 69–77, 164–65 WFIA’s relationship with, 185–88 Wells Fargo Investment Advisors (WFIA), 76–77, 79–81, 122, 184–86 Dunn at, 185–86, 193–95 Grauer at, 188–93 “Tactical Asset Allocation” fund, 189n Wells Fargo’s relationship with, 185–88 Wells Fargo Management Sciences, 69–77 McQuown’s departure, 81–82, 184 McQuown’s hiring, 58–59, 61–62 McQuown-Vertin battles, 69–70 Wells Fargo Nikko Investment Advisors (WFNIA), 190–92 Wells Fargo Stagecoach Fund, 74–75, 81, 141, 143 Wheeler, Dan, xii, 138, 161–64 background of, 161 at DFA, 138, 161, 162–64 Where Are the Customers’ Yachts?


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

Alan Greenspan, asset allocation, buy and hold, collateralized debt obligation, commoditize, compensation consultant, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Glass-Steagall Act, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, John Bogle, junk bonds, low interest rates, market bubble, market clearing, military-industrial complex, money market fund, mortgage debt, new economy, Occupy movement, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, Ponzi scheme, post-work, principal–agent problem, profit motive, proprietary trading, prudent man rule, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, seminal paper, shareholder value, short selling, South Sea Bubble, statistical arbitrage, stock buybacks, survivorship bias, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, Vanguard fund, William of Occam, zero-sum game

See also Index funds assets exchange traded funds versus future of growth in number of as portfolio core profile of trading volumes “Trafficking” in management contracts Transactions: cost of taxes on Trends Turner, Adair Turner, Lynn Turnover: actively managed equity funds exchange traded funds index funds mutual funds Stewardship Quotient and stock market Twardowski, Jan M. 12b-1 fees Value, corporate Vanguard: Admiral shares balanced index fund bond funds, defined-maturity cash flow emerging markets stock fund exchange traded funds “Extended Market” portfolio growth and value index funds history index fund family milestones international funds LifeStrategy Portfolios proxy votes REIT index fund small capitalization stock fund Stewardship Quotient structure and strategy tax-managed index funds Vanguard 500 Index Fund Vanguard Institutional Index Fund Vanguard PRIMECAP Fund Vanguard Total Bond Market Index Fund Vanguard Total Stock Market Index funds Vanguard U.S. Growth Fund Vanguard Wellington Fund.

The process moved forward quickly and easily. In the years that followed the creation of our stock index fund, we moved first into the bond index area. Thereafter, we would build an index fund “family” that would greatly expand our mandate. Here are the highlights.10 Vanguard Index Fund Family Milestones (1976 to 1996) 1986: The Bond Index Fund. We took this obvious step to build on our reputation as an index manager. Its story is told in greater depth in Box 6.2. Box 6.2: The Bond Index Fund In 1986, the first decade of Vanguard’s stock index fund came to a close. Its assets would soon top the $1 billion milestone. Its performance success and its growing, if modest, acceptance—led to an obvious idea: If indexing worked so well in the stock market, why wouldn’t it also work in the bond market?

When I stepped down as Vanguard’s chief executive in 1996, the most fertile ground for index funds had already been plowed. During the next few years, we rounded out our index offerings, forming index funds to complete our participation in all nine Morningstar “style box” categories, namely: growth, value, and blended index funds for small-, mid-, and large-cap stocks. We formed more tax-managed index funds, along with a “social index” fund based on an external index of corporations said to honor the principles of “corporate social responsibility.” In 2004, we created index funds for the 10 industry segments of the S&P 500, including financial, health care, energy, and information technology.


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, John Bogle, junk bonds, Long Term Capital Management, low interest rates, Mary Meeker, 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

My hope, though, is that this book will give you every tool required to build portfolios of index funds yourself. Then you can hire a trustworthy accountant to provide advice on tax-sheltered accounts. Seeking an accountant’s advice, you’ll confidently avoid every conflict of interest corrupting the financial service industry—as long as your accountant doesn’t sell financial products on the side. For a review, however, let’s take another look at total stock market index funds and actively managed mutual funds with a side-by-side comparison. Table 3.1 Differences between Actively Managed Funds and Index Funds Actively Managed Mutual Funds Total Stock Market Index Fund 1. A fund manager buys and sells (trades) dozens or hundreds of stocks.

Actively managed fund companies pay annual “trailer fees” to advisers, rewarding them for selling their funds to investors—who end up paying for these. 8. Index funds rarely pay trailer fees to advisers. 9. Most U.S. fund companies charge sales or redemption fees—which go directly to the broker/adviser who sold you the fund. The investor pays for these. 9. Most index funds do not charge sales or redemption fees. 10. Actively managed mutual fund companies are extremely well liked by advisers and brokers. 10. Index funds are not well liked by most advisers and brokers. Global citizens and index funds If you’re British or Australian, you can follow the lead with Vanguard, which has already set up shop in your country.

If you want to invest like Keith, you have two low-cost options: 1. You can buy the low-cost Toronto Dominion Bank Index Funds <www.tdcanadatrust.com/mutualfunds/tdeseriesfunds/index.jsp> (called e-Series Funds), which are—as of 2010—Canada’s cheapest regular index funds. Or, 2. You can open a discount brokerage account and buy Exchange Traded Index Funds. Let’s focus on the bank indexes first: Toronto Dominion Bank currently has the most competitively priced index funds in Canada. But if you try walking into a bank and buying them, one of two things might happen to you: 1. The bank representative might try convincing you to buy actively managed funds instead.


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

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

Low Risk Medium-Low Risk Medium-High Risk High Risk 20/80 40/60 60/40 80120 Average annual return (Geometric) 10.14% 10.89% 11.56% 12.15% Annualized standard deviation 7.51% 8.47% 10.25% 12.51% Worst single calendar year -2.07% -2.02% -7.99% -13.95% Worst two-calendaryear period 7.59% -2.71% -12.51% -21.80% Worst three-calendaryear period 13.32% 0.37% -12.74% -24.69% 180 Appendix B Composition of model portfulillS: 20/ 80 40/60 60/40 2% 10% 8% 80% iShares iShares iShares iShares CON CON CON CON Composite Index Fund (XIC) S&P 500 Index Fund (XSP) MSCI EAFE Index Fund (XIN) Bond Index Fund (XBB) 4% 20% 16% 60% iShares iShares iShares iShares CON CON CON CON Composite Index Fund (X1C) S&P 500 Index Fund (XSP) MSCI EAFE Index Fund (XIN) Bond Index Fund (XBB) 6% iShares iShares iShares iShares CON CON CON CON Composite Index Fund (XIC) S&P 500 Index Fund (XSP) MSCI EAFE Index Fund (XIN) Bond Index Fund (XBB) iShares iShares iShares iShares CON CON CON CON Composite Index Fund (XIC) S&P 500 Index Fund (XSP) MSCI EAFE Index Fund (XIN) Bond Index Fund (XBB) 30% 24% 40% 80/20 8% 40% 32% 20% Raw data used 10 produce performance numbers: iShares CON Composite Index Fund (XIC) =- actual fund retu rns 2002-2005, (TSX 300 Index-o.25% per year) 1977-2001 iShares CON S&P 500 Index Fund (XSP) '" actual fund returns 2002-2005.

Randolph, 162 house funds, 77- 78, 163 Hyperactive Investors about Hyperactive Investors, 19- 20,25,30-33,75 as percentage of all investors, 29 reliance on financial media, 96 See also financial media; psychology of investing Hyperactive Managers about managers, 5 disadvantages of, 9 how to manage, 136-38 myths of, 9 research on, 150 use of fund rating systems, 55-56, 158-59 See also actively managed funds; securities industry Ibbotson, Roger G., 108 Ilkiw, John, 139 income trusts, 134--35, 169 index funds about index funds, 8 benchmark indexes and, 23-24 benefits of, 6, 150 costs and fees, 129, 147 DFA index funds, 112-14, 168 famous investors in, 107-9 four types of, 19 institutional investors in, 89, 105-7, 114, 168 list of Canadian index funds, 112, 167 market returns and, 12, 18 market segment funds, 113-14 regulations on buying U.S. funds, 89 research on, 147, 151, 168 See also ETFs (exchange traded funds) Index Funds, Advisors, 147, 182 Index Funds: The 12-Step Program for Active Investors (Hebner), 148, 150, 151, 182 Index Mutual Funds (Simon), 148 indexes, benchmark, 23-24 See also S&P Composite Index (U.S.); S&P/TSX Composite Index initial public offering (IPOs), prospectus for, 60 insurance companies.

Smart Investing Simply Makes Sense 19 You will hold investments in funds that represent four broad indexes. The four types of index funds you will hold are 1. an index fund representative of the u.s. stock market in its broadest terms; 2. an index fund representative of the Canadian stock market in its broadest terms; 3. an index fund representative of the international stock market (exclusive of the U.S. and Canadian markets) in its broadest terms; and 4. an index fund representative of the Canadian bond market in its broadest terms. I will show you how to determine the exact percentage of your portfolio that you will hold in each of these ETFs in greater detail later.


All About Asset Allocation, Second Edition by Richard Ferri

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, asset-backed security, barriers to entry, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, book value, buy and hold, capital controls, commoditize, commodity trading advisor, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, inverted yield curve, John Bogle, junk bonds, Long Term Capital Management, low interest rates, managed futures, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, stock buybacks, stocks for the long run, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

Figure 15-1 compares the fee savings and five-year annualized return advantage of several Vanguard index funds compared to their representative Morningstar category averages. The average fee for the Vanguard index funds was 0.2 percent, and the average fee for the categories ranged between 1.0 and 1.4 percent. In every category, the no-load index funds saved a considerable amount in fees over the category average, and this led to higher returns for index funds in every category. Index funds have no sales commissions. However, many funds in the categories listed do charge a sales commission. In Figure 15-1 commissions have not been deducted, from the five-year average. Index fund returns would have faired even better had the commissions been included in the analysis.

Accordingly, market-matching index funds and ETFs are a logical investment choice for people who want to make the most of asset allocation analysis. Any deviation from index funds adds an element of risk that was not captured in the asset allocation analysis. Fees Matter in Asset Allocation Planning 313 2. Low expense ratios. In general, stock and bond index funds and ETFs have the lowest investment fees in the industry. The lowest-cost index funds and ETFs charge about 0.1 percent per year, which is well below the industry average of 1.4 percent. One word of caution: Not all index funds have low fees. Some investment companies charge over 1.0 percent to invest in exactly the same indexes as very low-cost funds.

For example, the S&P 500 is composed of predominantly large-company stocks, although there are also several midcap stocks and a few small stocks in the index. There would be some overlap of stocks if a person were to invest in both an S&P 500 Index fund and a small-cap index fund. For all practical considerations, the effect of a small-cap stocks on the return of the S&P 500 Index is negligible. As a result, you can add a small-cap index fund to an S&P 500 Index fund and obtain broader diversification without adding measurable securities overlap to the portfolio. FIGURE 5-2 Number of New Growth and Value Funds, 1997–2000 250 227 200 150 134 133 108 100 50 37 48 36 26 0 1997 1998 New value funds 1999 2000 New growth funds CHAPTER 5 94 The Asset Class Has a Real Expected Return Each asset class to be held in a portfolio for the long term should be expected to earn a return greater than the inflation rate.


pages: 490 words: 117,629

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

asset allocation, asset-backed security, Benchmark Capital, book value, buy and hold, capital controls, classic study, cognitive dissonance, corporate governance, deal flow, diversification, diversified portfolio, equity risk premium, financial engineering, fixed income, index fund, junk bonds, law of one price, Long Term Capital Management, low interest rates, 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, Savings and loan crisis, 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

Trading small-capitalization portfolios involves a significant level of costs. Index funds provide the exception to the mutual-fund rule of ridiculously high portfolio turnover and incredibly burdensome transactions costs. In 2002, index fund portfolio turnover amounted to a modest 7.7 percent, causing commissions to consume a mere 0.007 percent of assets. Ironically, index fund portfolio managers operate in an extremely tough trading environment. The transparency of index fund trades required for full replication and the promptness of execution demanded to match index characteristics combine to increase costs of market impact for index funds. Because market makers see the index portfolio transactions coming, Wall Street stands ready to take more than a fair share of the trade.

Because market makers see the index portfolio transactions coming, Wall Street stands ready to take more than a fair share of the trade. In spite of the adverse market environment for index fund trading, low turnover causes overall index fund trading costs to remain small. The transactions cost advantage enjoyed by index funds joins a long list of reasons to prefer the rock-solid certainty of market-mimicking returns over the will-o’-the-wisp possibility of market-beating results. Trading Costs for Index Funds Turnover matters even in the world of index funds. Well-constructed indices, such as the S&P 500 and the Wilshire 5000, exhibit low turnover, leading to attractive trading cost characteristics and reasonable tax consequences.

Knowing that index managers mechanistically buy new joiners and mindlessly sell old exiters, the arbitrageurs buy the stocks likely to enter and sell the stocks likely to leave. When the July reconstitution occurs, the arbitrage activity causes the index fund manager to pay more for purchases and receive less for sales. Russell 2000 index-fund investors suffer. A more complicated version of the arbitrage occurs at the top end of the Russell 2000 capitalization range. There, reconstitution-induced price movement depends on the relative demand for Russell 1000 and Russell 2000 Index-related portfolios. If demand for Russell 2000 Index funds exceeds demand for Russell 1000 Index funds, stocks graduating from the Russell 2000 to the Russell 1000 face downward price pressure, while stocks falling from the Russell 1000 to the Russell 2000 enjoy upward price pressure.


pages: 194 words: 59,336

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

asset allocation, Bernie Madoff, Black Monday: stock market crash in 1987, buy and hold, compound rate of return, currency risk, diversification, financial independence, full employment, German hyperinflation, index fund, inverted yield curve, John Bogle, lifestyle creep, low interest rates, money market fund, Mr. Money Mustache, nuclear winter, passive income, payday loans, risk tolerance, side hustle, The 4% rule, Vanguard fund, yield curve

This just means that the fund holds several other funds, each with different investment objectives. In the case of Vanguard, the funds held are all low-cost index funds. As you know by now, that’s a very good thing. The TRFs ranging from 2020 to 2060 each hold only four funds: Total Stock Market Index Fund Total Bond Market Index Fund Total International Stock Market Index Fund Total International Bond Market Index Fund To those four funds the TR 2010, 2015 and 2020 funds add: Short-Term Inflation-Protected Securities Index Fund As the years roll by and the retirement date chosen approaches, the funds will automatically adjust the balance held, becoming steadily more conservative and less volatile over time.

So without Vanguard in your plan, the question becomes how to select the best option, which by now you know is a low-cost total stock and/or bond index fund. The good news is that—due to the competitive pressure from Vanguard—nearly every other major mutual fund company now offers low-cost index funds. Just like the variations you can find in Vanguard of VTSAX, you can in all probability find a reasonable alternative in your 401(k). Here’s what you are looking for: A low-cost index fund. For tax-advantaged funds you’ll be holding for decades, I slightly prefer a total stock market index fund but an S&P 500 index fund is just fine. You can also look for a total bond market index fund if your needs or preferences call for it.

To ignore inflation (too unpredictable), taxes (too variable between individuals) and fees (also variable and if you choose the index funds I recommend, minimal). If you want to see what the numbers look like including any of these variables, I encourage you to visit the calculators and run the numbers with your own specifications. Most often in running these scenarios, the period of time I’ve chosen has been January 1975 - January 2015, for these reasons: It is a nice, solid 40-year period and this book advocates investing for the long term. 1975 is the year Jack Bogle launched the world’s first index fund and this book advocates investing in index funds. 1975 happens to be the year I started investing, not that this matters to you.


pages: 482 words: 121,672

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

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, book value, 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, equity risk premium, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, 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 free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Salesforce, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, Teledyne, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

But you can count on the fingers of your hands the number of mutual funds that have beaten index funds by any significant margin. The Index-Fund Solution: A Summary Let’s now summarize the advantages of using index funds as your primary investment vehicle. Index funds have regularly produced rates of return exceeding those of active managers. There are two fundamental reasons for this excess performance: management fees and trading costs. Public index funds and exchange-traded funds are run at fees of of 1 percent or even less. Actively managed public mutual funds charge annual management expenses that average 1 percentage point per year. Moreover, index funds trade only when necessary, whereas active funds typically have a turnover rate close to 100 percent.

Stocks Schwab Total Stock Market Index Fund (SWTSX) or Vanguard Total Stock Market Index Fund (VTSMX) 14% Developed International Markets Schwab International Index Fund (SWISX) or Vanguard International Index Fund (VTMGX) 14% Emerging International Markets Vanguard Emerging Markets Index Fund (VEIEX) or Fidelity Spartan Emerging Markets Index Fund (FFMAX) *A short-term bond fund may be substituted for one of the money-market funds listed. †Although it doesn’t fit under the rubric of an index-fund portfolio, investors might consider putting part of the U.S. bond portfolio in Treasury inflation-protection securities. The dividend growth and corporate bond funds are also an exception since they are not standard index funds.

Thus, investors should not buy a U.S. stock-market index fund and hold no other securities. But this is not an argument against indexing because index funds currently exist that mimic the performance of various international indexes such as the Morgan Stanley Capital International (MSCI) index of European, Australasian, and Far Eastern (EAFE) securities, and the MSCI emerging-markets index. In addition, there are index funds holding real estate investment trusts (REITs). Finally, Total Bond Market index funds are available that track the Barclays Aggregate Bond Market Index. Moreover, all these index funds have also tended to outperform actively managed funds investing in similar securities.


pages: 542 words: 145,022

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest by Andrew W. Lo, Stephen R. Foerster

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, backtesting, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, Charles Babbage, Charles Lindbergh, compound rate of return, corporate governance, COVID-19, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, Edward Glaeser, equity premium, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, fake news, family office, fear index, fiat currency, financial engineering, financial innovation, financial intermediation, fixed income, hiring and firing, Hyman Minsky, implied volatility, index fund, interest rate swap, Internet Archive, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John von Neumann, joint-stock company, junk bonds, Kenneth Arrow, linear programming, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, new economy, New Journalism, Own Your Own Home, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, prediction markets, price stability, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, South Sea Bubble, stochastic process, stocks for the long run, survivorship bias, tail risk, Thales and the olive presses, Thales of Miletus, The Myth of the Rational Market, The Wisdom of Crowds, Thomas Bayes, time value of money, transaction costs, transfer pricing, tulip mania, Vanguard fund, yield curve, zero-coupon bond, zero-sum game

”48 The reaction by competing firms to the introduction of an index fund was harsh. Bogle still remembers one particular excessive reaction. “A Midwestern brokerage firm [Leuthold Group] flooded Wall Street with posters screaming ‘INDEX FUNDS ARE UN-AMERICAN. Help Stamp Out Index Funds!’49 Very little new money was attracted to the fund in the years after inception. It wasn’t until 1982 that the fund was able to break the $100 million in assets mark. No competing fund existed until 1984. Burton Malkiel later praised Bogle’s foresight. “Index funds are so popular now that it’s easy to forget how courageous and tenacious Jack Bogle was in starting them.

Its profits, running about $12 billion a year (in 2007), are largely rebated—98 percent or something—to our fund shareholders in the form of lower expenses. Without that kind of structure, it would be very difficult to bring out an index fund. We went no-load around the time the index fund was introduced. We then focused on being a low-cost provider in the mutual fund industry. When we began operations in May 1975, the first thing on my agenda was to start an index fund, which depended on low cost to work. The chicken-and-the-egg is that Vanguard was the chicken, and the index fund, the egg. But which was the most important?”67 Bogle reflected on the keys to Vanguard’s growth. “You start with the mutual structure.

Thus, his recommended investment horizon: “Holding it forever.”90 His advice to more sophisticated investors: “Ignore the short-term noise of emotions reflected in our financial markets and focus on the productive long-term economics of our corporate businesses.”91 And lower costs increase wealth, as articulated in his CMH. How should one’s asset allocation change over time? Bogle’s rule of thumb was this: “You should start out heavily invested in equities. Hold some bond index funds as well as stock index funds. By the time you get closer to retirement or into your retirement, you should have a significant position in bond index funds as well as stock index funds.”92 According to Bogle, taxes are an important consideration. “Watch out for taxes. If the funds are in your retirement plan, you can ignore taxes, but if they’re in your own account, you want to take into account the tax cost involved.”93 By his estimation, “In terms of tax efficiency alone, active managers lost to the index by about 120 basis points a year.”94 What did Bogle’s own portfolio look like before his passing?


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

asset allocation, behavioural economics, book value, 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 engineering, financial independence, financial innovation, high net worth, index fund, John Bogle, junk bonds, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, 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

The Vanguard LifeStrategy Growth Fund has a fairly aggressive target asset allocation of 80 percent stocks and 20 percent bonds. This fund of funds invests in four Vanguard funds: 1. Total Stock Market Index Fund 2. Total International Stock Index Fund 3. Asset Allocation Fund 4. Total Bond Market Fund The Vanguard LifeStrategy Conservative Growth Fund has a more conservative target asset allocation of 40 percent stocks and 60 percent bonds. This fund of funds invests in five Vanguard funds: 1. Total Stock Market Index Fund 2. Total International Stock Index Fund 3. Asset Allocation Fund 4. Total Bond Market Fund 5. Short-Term Investment-Grade Bond Fund There are two other funds in the Vanguard LifeStrategy series that offer differing asset allocations.

Here is the crux of the strategy: Instead of hiring an expert, or spending a lot of time trying to decide which stocks or actively managed funds are likely to be top performers, just invest in index funds and forget about it! As we discussed in Chapter 4, an index fund attempts to match the return of the segment of the market it seeks to replicate, minus a very small management fee. For example, Vanguard's Index 500 seeks to replicate the return of the S&P 500; the Total Stock Market Index seeks to replicate the return of a broad U.S. stock market index; and Total International Index seeks to replicate the return of a broad cross-section of international stocks. In addition to stock index funds, there are bond index funds that seek to replicate the performance of various bond indexes.

Paul Farrell, columnist for CBS Marketwatch and author of The Lazy Person's Guide to Investing: "So much attention is paid to which funds are at the head of the pack today that most people lose sight of the fact that, over longer time periods, index funds beat the vast majority of their actively managed peers." Richard Ferri, author of Protecting Your Wealth in Good Times and Bad: "When you are finished choosing a bond index fund, a total U.S. stock market index fund, and a broad international index fund, you will have a very simple, yet complete portfolio." Walter R. Good and Roy W. Hermansen, authors of Index Your Way to Investment Success: "Index funds save on management and marketing expenses, reduce transaction costs, defer capital gain, and control risk-and in the process, beat the vast majority of actively managed mutual funds!" Arthur Levitt, former chairman of the Securities Exchange Commission and author of Take on the Street: "The fund industry's dirty little secret: Most actively managed funds never do as well as their benchmark."


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

asset allocation, backtesting, book value, buy and hold, capital asset pricing model, commoditize, computer age, correlation coefficient, currency risk, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, index arbitrage, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, p-value, passive investing, prediction markets, random walk, Richard Thaler, risk free rate, 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, Wayback Machine, Yogi Berra, zero-coupon bond

Using the above principles, the investor has decided on the following policy allocation: 15% U.S. large market 10% U.S. large value 5% U.S. small market 10% U.S. small value 5% European 5% Pacific 5% Emerging markets 5% REITs 20% Municipal bonds 20% Short-term corporate bonds 154 The Intelligent Asset Allocator Using Table 8-2 for the stock funds, he decides to use the following Vanguard funds and place them in the appropriate taxable or taxsheltered account: Taxable Account 15% Total Stock Market Index Fund 5% Tax-Managed Small-Cap Index Fund 5% European Stock Index Fund 5% Pacific Stock Index Fund 20% Limited-Term Tax-Exempt Fund IRA Account 10% Value Index Fund 10% Small-Cap Value Index Fund 5% Emerging Markets Stock Index Fund 5% REIT Index Fund 20% Short-Term Corporate Fund Notice how the investor has segregated the most tax-efficient assets into the taxable account, and the least tax-efficient assets into the IRA.

But over many years, it takes a toll, as the SD of 25-year returns is only 1.6% (see Math Details). For large-cap funds, this means that the index-fund advantage, which has about the same 1.6% value, will result in a ⫹1 SD performance. Meaning that the index fund should beat 84% of actively managed funds. A small or foreign index fund with a 3.2% advantage should perform 2 SDs above the norm, meaning that it should beat 97% of active funds over a 25-year period. And an emerging-markets index fund with a several-percentage-point advantage should best all of its actively managed peers. Market Efficiency 97 Unfortunately, the real world is not nearly this neat, and it is worth looking at the actual data.

Vanguard also runs two other large-cap index funds, one for growth and one for value. Over the five-year period ending December 1998, the Growth Index Fund ranked in the 2nd percentile of the Morningstar large-cap growth category. The Value Index Fund ranked in the 21st percentile of its large-cap value category. Again, both of these are better than we’d calculate from the above formulation, which would predict only about 34th percentile fiveyear performance. Finally, to complete the picture, let’s look at small-cap indexing. The oldest small-cap index fund is the Dimensional Fund Advisors Market Efficiency 99 (DFA) 9-10 Small Company Fund.


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

Alan Greenspan, Andrei Shleifer, asset allocation, automated trading system, backtesting, bank run, banking crisis, Bear Stearns, Bernie Madoff, buy and hold, capital controls, correlation does not imply causation, Credit Default Swap, currency risk, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, high net worth, High speed trading, index fund, inflation targeting, junk bonds, low interest rates, 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

If, however, you only have access to an S&P 500 index fund, this will still work great for purposes of the Permanent Portfolio. Why Use an Index Fund? An index fund is a way of passively tracking a predefined basket of stocks. Index funds usually own stocks in proportion to the size of the company in the overall index. For example, an index fund tracking the U.S. stock market will typically own a larger number of shares of General Electric than a regional publicly traded utility company. The advantage of stock indexing is that an index fund doesn't need to engage in expensive activities associated with actively traded investment funds, such as research, analysts, advisors, and so on.

Owning Stocks To profit during times of prosperity you should own a broad-based stock index fund that captures the returns offered by the stock market without trying to beat the market. A broad-based stock index fund is able to capture the maximum gains available to all investors. There are many stock index funds available today. Some are great, some are mediocre, and some are downright bad. Unfortunately, the term “index fund” has also been used in recent years to describe all kinds of investment products, some of which bear little resemblance to a true index fund. These products are easily avoided if you follow the advice laid out in this chapter.

S&P 500 Index Vanguard S&P 500 Index Mutual Fund (Ticker: VFINX) State Street S&P 500 SPDR Exchange Traded Fund (Ticker: SPY) iShares S&P 500 Exchange Traded Fund (Ticker: IVV) Fidelity Spartan 500 Index Mutual Fund (Ticker: FSMKX) Schwab S&P 500 Index Mutual Fund (Ticker: SWPPX) Total Stock Market Index (TSM) Vanguard Total Stock Market Mutual Fund (Ticker: VTSMX) Vanguard Total Stock Market Exchange Traded Fund (Ticker: VTI) iShares Russell 3000 Index Exchange Traded Fund (Ticker: IWV) Fidelity Spartan Total Stock Market (Ticker: FSTMX) Schwab Total Stock Market (Ticker: SWTSX) This list is far from exhaustive, as many fund companies offer some type of index fund in their investment lineup. If you are at a brokerage or mutual fund company that offers its own index fund then you can use that as long as it meets the criteria outlined in this chapter. Which Type of Index Fund to Use? Given the choice between the two types of index funds described above, a total stock market fund offers wider diversification and tax efficiency when compared to S&P 500 index funds. A typical total stock market fund will hold thousands of stocks compared to the 500 stocks in the S&P 500 index.


pages: 239 words: 60,065

Retire Before Mom and Dad by Rob Berger

Airbnb, Albert Einstein, Apollo 13, asset allocation, Black Monday: stock market crash in 1987, buy and hold, car-free, cuban missile crisis, discovery of DNA, diversification, diversified portfolio, en.wikipedia.org, fixed income, hedonic treadmill, index fund, John Bogle, junk bonds, mortgage debt, Mr. Money Mustache, passive investing, Ralph Waldo Emerson, robo advisor, The 4% rule, the rule of 72, transaction costs, Vanguard fund, William Bengen, Yogi Berra, Zipcar

Furthermore, it’s impossible for us as investors to know ahead of time the one or two fund managers out of thousands who, 30 or 40 years from now, might beat the markets. Index funds are like having your cake and eating it too. They are cheap, simple, and most outperform actively managed funds over the long run. Index mutual funds come in different shapes and sizes, and that’s true for both stock index funds and bond index funds. Let’s look at both. Stock Index Funds We categorize stock index funds in four ways (actively managed funds are also categorized in four way): Size: Some index funds focus on small companies, some on big companies, and some on everything in between.

Bonds (20%) Foreign Developed Country Stocks (20%) Emerging Market Stocks (10%) REITs (10%) Here are the specific funds I used to create my 6-Fund Portfolio: Vanguard 500 Index Fund Admiral Shares (FVIAX) Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX) Vanguard Developed Markets Index Fund Admiral Shares (VTMGX) Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX) Vanguard Real Estate Index Fund Admiral Shares (VGSLX) Vanguard Small Cap Value Index Fund Admiral Shares (VSIAX) This approach does take more work. Remember, as market values change, you need to rebalance your portfolio from time to time.

So which is better, you ask—actively managed mutual funds or index funds? Oh, you’ve done it now. You’ve just stepped into one of the most contentious debates in all of investing. As contentious as the debate may be, I can settle it with two words: index funds. If you gave me a few more words, I’d say the following: Over long periods of time, index funds outperform most actively managed funds on an after-fee and after-tax basis. But that’s just the lawyer in me. My first answer was better: index funds. A review of the performance of mutual funds over decades strongly favors index funds. In a recent Op-ed piece in The Wall Street Journal,30 Burton Malkiel described the respective performance of actively managed funds compared to index funds: In 2016, two-thirds of actively managed mutual funds investing in large U.S. companies underperformed the S&P 500 Index.


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

Alan Greenspan, asset allocation, behavioural economics, book value, 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 engineering, financial independence, financial innovation, fixed income, George Santayana, German hyperinflation, Glass-Steagall Act, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Bogle, John Harrison: Longitude, junk bonds, Long Term Capital Management, loss aversion, low interest rates, market bubble, mental accounting, money market fund, mortgage debt, new economy, pattern recognition, Paul Samuelson, Performance of Mutual Funds in the Period, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Savings and loan crisis, South Sea Bubble, stock buybacks, stocks for the long run, stocks for the long term, survivorship bias, Teledyne, 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

Steel, 147, 160 USA Today, 219, 220 Value averaging, 283–285 Value Line, 90 Value Line Fund, 90 Value stocks (“bad” companies) asset allocation, 120-122, 172, 248–255, 251–253 Graham on, 158 in portfolio building, 109, 120–122, 172 In Search of Excellence (Peters) on, 64 real returns on, 68, 69, 72 rebalancing, 289–290 returns on, 34-38 tax efficiency of, 263–264 Vanguard 500 Index Fund, 97, 98, 102–104, 215, 216 Vanguard GNMA Fund, 215-216 Vanguard Growth Index Fund, 249 Vanguard Limited Term Tax Exempt Fund, 261 Vanguard mutual funds fee structure, 210, 250, foreign indexed funds, 119 founding by Bogle, 213-214 as no-load company, 205 Vanguard Short-Term Corporate Fund, 261 Vanguard Small-Cap Index Fund, 99 Vanguard Tax-Managed Small-Cap Index Fund, 99 Vanguard Total International Fund, 255, 256 Vanguard Total Stock Market Fund, 104, 246 Vanguard Value Index Fund, 249-250 Variable annuity fund, 204 Variety, 145 Venetian prestiti, 10–13 Vertin, James, 96–97 Victoria, Queen of England, 143 Von Böhm-Bawerk, Eugen, 8 Wal-Mart, 34–35, 185 The Wall Street Journal, 85, 96, 98, 167, 211, 219, 222, 225 Wall Street Week (television program), 224 Walz, Daniel T., 231 Wellington Management Company, 213–214 Wells Fargo, first index fund, 96–97, 215, 245 Westinghouse, 133 Wheeler, Dan, 123 Where are the Customers’ Yachts?

But as Vanguard’s reputation, shareholder satisfaction ratings, and, most importantly, assets under management grew, it could no longer be ignored. By 1991, Fidelity threw in the towel and started its own low-cost index funds, as did Charles Schwab. As of this writing, there are now more than 300 index funds to choose from, not counting the newer “exchange-traded” index funds, which we’ll discuss shortly. Of course, not all of the companies offering the new index funds are suffused with Bogle’s sense of mission—fully 20% of index funds carry a sales load of up to 6%, and another 30% carry a 12b-1 annual fee of up to 1% per year for marketing. The most notorious of these is the American Skandia ASAF Bernstein (no relation!)

The smallest, American Greetings, has a market cap of $700 million, or 0.007% of the index—six hundred times smaller than GE. So an index fund which tracks the S&P 500 would have to own 600 times as much GE as American Greetings. What happens if GE plunges in value and American Greetings zooms? Nothing. Since an index fund simply holds each company in proportion to its market cap, the amount of each owned by an S&P 500 index fund adjusts automatically with its market cap. In other words, an index fund does not have to buy or sell stock with changes in value (unlike Wells Fargo’s ill-fated first index fund, which had to hold equal-dollar amounts of all 1,500 stocks on the New York Stock Exchange).


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

asset allocation, asset-backed security, book value, business cycle, buy and hold, currency risk, diversification, diversified portfolio, Donald Trump, employer provided health coverage, estate planning, fixed income, Home mortgage interest deduction, index fund, John Bogle, Kickstarter, low interest rates, 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

An index can represent just about any part of the financial market: U.S. stocks, foreign stocks, global stocks, bonds, the Asian market, and so on. An index fund buys the investments that its corresponding index owns (or, at the very least, a representative sampling) to replicate the performance of the index. An index fund of the S&P 500, for example, is made up of stocks from the 500 largest U.S. corporations. However, an index fund’s return is usually slightly lower than that of its index doppelganger, because the index fund has to pay fund-management expenses. Index funds are an easy and effective way to build a diversified investment portfolio. (Page 166 shows you just how easy it is.)

Instead, choose funds with above-average long-term performance—ones that beat the competition and, more importantly, the market indexes, over 3, 5, or 10 years or more. Troubleshooting Moment Watch for Closet Index Funds When you invest in stock funds, avoid closet index funds. They charge the high fees of actively managed mutual funds, but invest much like a market index. All they do is charge you fees for performance you could get cheaper from a genuine index fund, whether a mutual fund or ETF. Spotting a closet index fund is simple. You compare the fund’s average P/E ratio, sector weightings, and average earnings per share to the values for the fund’s comparable index.

How to Pick Funds Now that you know the basics about funds and how they work, you’re ready to hunt for the funds that meet your needs. Because index funds (mutual fund or ETF) and actively managed mutual funds don’t have the same characteristics, you evaluate them a little differently. Here’s a summary of how to choose different types of funds. Choosing an Index Fund or ETF The big challenge in picking an index fund or ETF is the number of choices. Depending on the index you’re looking at, you may have hundreds of index funds or ETFs to choose from. As with actively managed mutual funds, take a look at the fund’s prospectus, which you can find on the fund sponsor’s website. 92 Chapter 5 However, picking a fund is as easy as 1-2-3: 1.


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I Will Teach You To Be Rich by Sethi, Ramit

Albert Einstein, asset allocation, buy and hold, buy low sell high, diversification, diversified portfolio, do what you love, geopolitical risk, index fund, John Bogle, late fees, low interest rates, money market fund, mortgage debt, mortgage tax deduction, Paradox of Choice, prediction markets, random walk, risk tolerance, Robert Shiller, shareholder value, Silicon Valley, survivorship bias, the rule of 72, Vanguard fund

Just as the stock market may fall 10 percent one year and gain 18 percent the next year, index funds will rise and fall with the indexes they track. The big difference is in fees: Index funds have lower fees than mutual funds because there’s no expensive staff to pay. Vanguard’s S&P 500 index fund, for example, has an expense ratio of 0.18 percent. Remember, there are all kinds of index funds. International index funds are relatively volatile since they follow indexes that were just recently established. General U.S.-based index funds, on the other hand, are more reliable. Since they match the U.S. stock market, if the market goes down, index funds will also go down.

Ironically, this results in lots of taxes and trading fees, which, when combined with the expense ratio, makes it virtually impossible for the average fund investor to beat—or even match—the market over time. Bogle opted to discard the old model of mutual funds and introduce index funds. Today, index funds are an easy, efficient way to make a significant amount of money. Note, however, that index funds simply match the market. If you own all equities in your twenties (like me) and the stock market drops (like it has), your investments will drop (like mine, and everyone else’s, did). Index funds reflect the market, which is going through tough times but, as history has shown, will climb back up. As a bonus for using index funds, you’ll anger your friends in finance because you’ll be throwing up your middle finger to their entire industry—and you’ll keep their fees for yourself.

In short, mutual funds are prevalent because of their convenience, but because actively managed mutual funds are, by definition, expensive, they’re not the best investment any more. Active management can’t compete with passive management, which takes us to index funds, the more attractive cousin of mutual funds. Index Funds: The Attractive Cousin in an Otherwise Unattractive Family In 1975, John Bogle, the founder of Vanguard, introduced the world’s first index fund. These simple funds use computers to buy stocks and match the market (such as the S&P 500 or NASDAQ). Instead of having a mutual fund’s expensive staff of “experts” who try to beat the market, index funds set a lower bar: A computer matches the indexes by automatically matching the makeup of the market.


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The Gone Fishin' Portfolio: Get Wise, Get Wealthy...and Get on With Your Life by Alexander Green

Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, behavioural economics, borderless world, buy and hold, buy low sell high, cognitive dissonance, diversification, diversified portfolio, Elliott wave, endowment effect, Everybody Ought to Be Rich, financial independence, fixed income, framing effect, hedonic treadmill, high net worth, hindsight bias, impulse control, index fund, interest rate swap, Johann Wolfgang von Goethe, John Bogle, junk bonds, Long Term Capital Management, means of production, mental accounting, Michael Milken, money market fund, Paul Samuelson, Ponzi scheme, risk tolerance, risk-adjusted returns, short selling, statistical model, stocks for the long run, sunk-cost fallacy, transaction costs, Vanguard fund, yield curve

So plunk the Vanguard High-Yield Corporate Fund (VWEHX), Vanguard REIT Index Fund (VGSIX), and Vanguard Inflation-Protected Securities Fund (VIPSX) in your retirement accounts. Our remaining funds—Vanguard Total Stock Market Index Fund (VTSMX), Vanguard Precious Metals and Mining Fund (VGPMX), Vanguard Emerging Markets Index Fund (VEIEX), Vanguard European Index Fund (VEURX), and Vanguard Pacific Index Fund (VPACX)—are pretty darn tax efficient. These are fine for your taxable accounts. However, the Vanguard Precious Metals Fund (VGPMX) is not an index fund and may make occasional capital gains distributions. So if there is still cash available in your retirement account, you might own this there, too.

Owning shares of a mutual fund saves you the trouble of researching, constructing, and monitoring a portfolio of individual stocks. THE WISER BET There are essentially two types of mutual funds: index funds and actively managed funds:1. Index funds. With indexing, the fund manager attempts to replicate the return of a particular benchmark, such as the S&P 500 or the Lehman Brothers Aggregate Bond Index. Index fund managers generally do not buy stocks or bonds that are not included in the benchmark. 2. Actively managed funds. Active managers try to outperform the benchmark by selecting the best-performing securities or trying to time the market.

That means you started with the following:• 15% in U.S. large-cap stocks ($15,000 in the Vanguard Total Stock Market Index) • 15% in U.S. small-cap stocks ($15,000 in the Vanguard Small-Cap Index) • 10% in European stocks ($10,000 in the Vanguard European Stock Index Fund) • 10% in Pacific Rim stocks ($10,000 in the Vanguard Pacific Stock Index Fund) • 10% in emerging markets ($10,000 in the Vanguard Emerging Markets Index Fund) • 10% in high-grade bonds ($10,000 in the Vanguard Short-Term Corporate Bond Fund) • 10% in high-yield bonds ($10,000 in the Vanguard High-Yield Corporate Bond Fund) • 10% in inflation-adjusted Treasuries ($10,000 in the Vanguard Inflation-Protected Securities Fund) • 5% in gold shares ($5,000 in the Vanguard Precious Metals and Mining Fund) • 5% in REITs ($5,000 in the Vanguard Real Estate Investment Trust Index Fund) At the end of the year, the total value of your portfolio will have changed, and so will the percentage you hold in each fund.


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, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, book value, 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 engineering, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, 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 free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

But you can count on the fingers of your hands the number of mutual funds that have beaten index funds by any significant margin. The Index-Fund Solution: A Summary Let’s now summarize the advantages of using index funds as your primary investment vehicle. Index funds have regularly produced rates of return exceeding those of active managers. There are two fundamental reasons for this excess performance: management fees and trading costs. Public index funds are run at a fee of less than 1/10 of 1 percent. Actively managed public mutual funds charge annual management expenses that average one percentage point per year. Moreover, index funds trade only when necessary, whereas active funds typically have a turnover rate close to 100 percent.

Thus, investors should not buy a U.S. stock-market index fund and hold no other securities. But this is not an argument against indexing, because index funds currently exist that mimic the performance of various international indexes such as the Morgan Stanley Capital International (MSCI) index of European, Australasian, and Far Eastern (EAFE) securities, and the MSCI emerging-markets index. In addition, there are index funds holding real estate investment trusts (REITs). Finally, Total Bond Market index funds are available that track the Barclays Aggregate Bond Market Index. Moreover, all these index funds have also tended to outperform actively managed funds investing in similar securities.

Those who need a steady income for living expenses could increase their holdings of real estate equities, because they provide somewhat larger current income. A SPECIFIC INDEX-FUND PORTFOLIO FOR AGING BABY BOOMERS Cash (5%)* Fidelity Money Market Fund (FORXX), or Vanguard Prime Money Market Fund (VMMXX) Bonds (27½%)† Vanguard Total Bond Market Index Fund (VBMFX) Real Estate Equities (12½%) Vanguard REIT Index Fund (VGSIX) Stocks (55%) U.S. Stocks (27%) Fidelity Spartan (FSTMX), T. Rowe Price (POMIX), or Vanguard (VTSMX) Total Stock Market Index Fund Developed International Markets (14%) Fidelity Spartan (VSIIX), or Vanguard (VDMIX) International Index Fund Emerging International Markets (14%) Vanguard Emerging Markets Index Fund (VEIEX) Remember also that I am assuming here that you hold most, if not all, of your securities in tax-advantaged retirement plans.


pages: 268 words: 64,786

Cashing Out: Win the Wealth Game by Walking Away by Julien Saunders, Kiersten Saunders

barriers to entry, basic income, Big Tech, Black Monday: stock market crash in 1987, blockchain, COVID-19, cryptocurrency, death from overwork, digital divide, diversification, do what you love, Donald Trump, estate planning, financial independence, follow your passion, future of work, gig economy, glass ceiling, global pandemic, index fund, job automation, job-hopping, karōshi / gwarosa / guolaosi, lifestyle creep, Lyft, microaggression, multilevel marketing, non-fungible token, off-the-grid, passive income, passive investing, performance metric, ride hailing / ride sharing, risk tolerance, Salesforce, side hustle, TaskRabbit, TED Talk, Uber and Lyft, uber lyft, universal basic income, upwardly mobile, Vanguard fund, work culture , young professional

And that’s what makes index funds so much more attractive. Index Funds Index funds are a type of mutual fund except for one key difference: they are passively managed. In other words, there aren’t nearly as many geeks in some back room looking at screens making guesses about which stocks will outperform others. Instead, when you buy an index fund, you’re buying a whole market, category, or sector of funds. For instance, if you purchase an S&P 500 index fund, you are essentially buying a piece of every stock listed on the S&P 500. Similarly, when you purchase a Nasdaq index fund, you’re buying a piece of the entire Nasdaq as a whole.

And the time and money you could be investing in yourself will be spent searching for all the answers to questions you may never actually encounter. Let’s say you’re ready to invest and want more information about index funds. Like most people, you’d probably google “Are index funds a good investment?” On the first page of the search results, you’d see several recent articles. One might be called “Four Reasons Why Index Funds Are the Best Investment for Everyday Investors.” Another, “Why the Index Fund Bubble Will Pop, Leaving Investors Out to Dry.” You might even see conflicting articles on the same website, published days or even hours apart. Now you’re doubting something you were pretty sure about a few minutes ago because there’s clearly more to learn.

Second, these new insights all led me to the same solution—index funds. Investing in index funds had been around for decades but had been cast as a boring, predictable, and lazy approach to investing. Nevertheless, I was intrigued and ready to give it a try. There was only one problem. When I told Martin what I’d learned and that I was interested in investing in index funds, he seemed a little hesitant. This was because, in order for him to do what I was asking him to do, he’d have to sell the stocks and mutual funds I’d already invested in and reallocate the funds into index funds. Well, the company he worked for didn’t offer those funds or anything remotely like them.


pages: 232 words: 70,835

A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan by Ben Carlson

Albert Einstein, asset allocation, backtesting, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, book value, business cycle, buy and hold, buy low sell high, commodity super cycle, corporate governance, delayed gratification, discounted cash flows, diversification, diversified portfolio, do what you love, endowment effect, family office, financial independence, fixed income, Gordon Gekko, high net worth, index fund, John Bogle, junk bonds, loss aversion, market bubble, medical residency, Occam's razor, paper trading, passive investing, Ponzi scheme, price anchoring, Reminiscences of a Stock Operator, Richard Thaler, risk tolerance, Robert Shiller, robo advisor, South Sea Bubble, sovereign wealth fund, stocks for the long run, technology bubble, Ted Nelson, transaction costs, Vanguard fund, Vilfredo Pareto

The lines are becoming increasingly blurred between the two approaches and it's going to matter less and less in the future as the industry evolves and ETFs continue to take market share from the current crop of overpriced and overhyped active mutual funds. To help sort out all of the clutter, here are the five degrees of active and passive investing: Total market index funds. The classic three-fund portfolio from Vanguard (or any low-cost index fund provider) consists of some combination of the Total U.S. Stock Market Index Fund, the Total International Stock Market Index Fund, and the Total U.S. Bond Market Index Fund. These three funds are very broadly diversified and include nearly 18,000 securities across a wide range of sectors, geographies, and companies. If you really want to cover all of your bases, these funds will get you there for the most part.

Next Ferri and Benke simulated 5,000 trials of randomly selected active mutual funds taken from the same categories at the same portfolio weights as their 40/20/40 index fund portfolio. Their results were impressive and somewhat surprising to even the study's authors. When they ran a simulation, the index fund portfolio beat the active fund portfolio almost 83 percent of the time or 4,144 times. That means 856 times or just 17 percent of active portfolios outperformed.12 Picking a single active mutual fund that can beat an index fund is not easy. Picking an entire portfolio of active funds that can beat a portfolio of index funds is even harder. Exhibit 5: Smaller Upside, But Bigger Downside Risk Ferri and Benke also ran studies that included portfolios that were more broadly diversified by including more asset class breakdowns (combinations of REITs, small-cap stocks, mid-cap stocks, emerging markets, TIPs, municipal bonds, and different bond durations).

Only 18 percent, or about 275 funds, of the initial 1,540 funds in the study both survived the full period and outperformed their benchmarks.10 In a separate study, Vanguard founder John Bogle discovered that almost half of all mutual funds created in the 1990s stock market boom ended up failing and following the technology bust there were 1,000 fund failures from 2000 to 2004.11 Exhibit 4: If Picking One Active Fund Is Hard . . . Rick Ferri and Alex Benke performed a study that spanned 16 years by looking at Vanguard's three-fund portfolio of total market index funds in U.S. stocks, foreign stocks, and U.S. bonds. You can see in Table 6.3 that these broadly diversified total market index funds beat the majority of active funds in their respective categories. Table 6.3 Index Fund Outperformance 1997 to 2012 Fund Category Index Win % Median Loss Median Win U.S. Stocks (VTSMX) 77.10% –2.01% 0.97% International Stocks (VGTSX) 62.50% –1.75% 1.34% U.S.


Playing With FIRE (Financial Independence Retire Early): How Far Would You Go for Financial Freedom? by Scott Rieckens, Mr. Money Mustache

Airbnb, An Inconvenient Truth, cryptocurrency, do what you love, effective altruism, financial independence, index fund, job satisfaction, lifestyle creep, low interest rates, McMansion, Mr. Money Mustache, passive income, remote working, sunk-cost fallacy, The 4% rule, Vanguard fund

His simple path to wealth is just this: Spend less than you earn, and invest the balance in index funds. If you’re anything like me, when someone mentions something like “index fund investing,” you nod your head knowingly and let the conversation move on to something you understand, too embarrassed to ask the obvious question: “What’s index fund investing?” As I researched FIRE, at least four people separately recommended index funds to me, including Mad Fientist’s Brandon Ganch during Chautauqua, and each time, I kept quiet, reluctant to admit how little I actually knew. JL fixed that. Here is what I learned: the basics of fire-approved investing An index fund allows you to invest in the stock market without buying individual stocks and without trying to understand, play, or “beat” the stock market.

See also cars Tseng, Winnie, 25–26 underearning, 7–8 undersaving: author’s experience, 13, 16, 53; in average American household, 7; stress caused by, 7–8 United States Forest Service, 157 urban areas: career opportunity in, 76; FIRE in, 69–71 vacations, 51, 121 Vanguard index funds, 19, 113, 148 Vermont, 77 VTI (index fund), 128 VTSAX (index fund), 113, 128 VTSMX (index fund), 128 walking, 20 Washington Post, 156 Wells Fargo, 8 Whidbey Island (WA), 98 Wim Hof method, 173–74 Winfrey, Oprah, 99 work-life balance, 69 Your Money or Your Life (Robin and Dominguez), 64, 97–98, 99 Zillow, 76 about the author Scott Rieckens is an Emmy-nominated film/video producer, serial entrepreneur, and author.

Here is what I learned: the basics of fire-approved investing An index fund allows you to invest in the stock market without buying individual stocks and without trying to understand, play, or “beat” the stock market. An index fund uses computer algorithms to buy up whole baskets of stocks that mimic and represent the entirety of the stock market. Throughout history, on average and over the long term, the stock market overall has gone up approximately 10 percent per year; thus an index fund that reflects the market will most likely experience a similarly positive, predictable result. Stock index funds are low cost, and they are a central component of the FIRE playbook. They are the universally accepted and most popular investment choice in the mainstream FIRE blogosphere.


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, behavioural economics, Black Monday: stock market crash in 1987, Bob Litterman, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, price anchoring, price stability, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, seminal paper, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, tail risk, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

The foundation would be the Active Investor, and Hord assures the committee he would have no trouble finding a suitable Index Investor with a current $200 million investment in BGI’s international index fund. BGI would liquidate that international index fund investment and transfer the proceeds to the active international manager. Hord explains that the Index Investor would still be guaranteed the return on the international index fund, and that guarantee would be collateralized by $200 million transferred to the Asset Trust from the foundation’s fixed-income assets. For safety’s sake, the fixed-income allocation would be converted from BGI’s active management to the BGI fixed-income index fund, but the fixed-income return would continue to accrue to the foundation.

The narrative of how Wells Fargo Investment Advisors became today’s powerhouse of investment management dates back to July 1971, when the group—then known as the Wells Fargo Trust Department— confidently launched the world’s first index fund. This step was just the T 127 bern_c10.qxd 3/23/07 128 9:07 AM Page 128 THE PRACTITIONERS beginning (see Chapter 12 of Capital Ideas, “The Constellation”).* In 1977, the trust department went on to develop the first computerdriven methodology for tactical asset allocation. Two years later it offered a variation on the index fund theme that blended the index fund structure with a risk-controlled active management strategy. Soon after, the trust department was promoting a full-f ledged active strategy based on expected returns derived from the dividend discount model.

Soon after, the trust department was promoting a full-f ledged active strategy based on expected returns derived from the dividend discount model. In 1979, Wells Fargo launched the “Yield-Tilt Fund,” a quasi-index fund favoring stocks with higher yields. In 1981, it started the first international equity index fund and then the first bond index fund in 1983. By that time, Wells Fargo was already managing money for non-U.S. clients, having also marketed a mutual fund called the Stagecoach Fund, designed by none other than Fischer Black and Myron Scholes (see Capital Ideas, p. 250). All these innovations were rooted in the basic underpinnings of financial theory: diversification, optimizing the risk/return trade-off, market efficiency, and the Capital Asset Pricing Model.


pages: 303 words: 84,023

Heads I Win, Tails I Win by Spencer Jakab

Alan Greenspan, Asian financial crisis, asset allocation, backtesting, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, book value, business cycle, buy and hold, collapse of Lehman Brothers, correlation coefficient, crowdsourcing, Daniel Kahneman / Amos Tversky, diversification, dividend-yielding stocks, dogs of the Dow, Elliott wave, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, fear index, fixed income, geopolitical risk, government statistician, index fund, Isaac Newton, John Bogle, John Meriwether, Long Term Capital Management, low interest rates, Market Wizards by Jack D. Schwager, Mexican peso crisis / tequila crisis, money market fund, Myron Scholes, PalmPilot, passive investing, Paul Samuelson, pets.com, price anchoring, proprietary trading, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, Robert Shiller, robo advisor, Savings and loan crisis, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, subprime mortgage crisis, survivorship bias, technology bubble, transaction costs, two and twenty, VA Linux, Vanguard fund, zero-coupon bond, zero-sum game

He puts 60 percent into stocks and 40 percent into bonds, rebalancing that amount at the beginning of every year. Unlike the typical investor in Lake Moneybegone, let’s give our saver the benefit of the doubt and assume he holds his emotions in check and is perfectly robotic. He also invests in the cheapest index funds available. (Yes, I realize index funds weren’t always around.) It turns out that even after a period as long as forty years, it matters when an investor starts saving. What’s more, periods that seem auspicious may not be quite so promising. Others that seem lousy at first turn out to be pretty good. Take the forty-year period that began in 1935.

The Wall Street Journal’s 401(k) plan is run by Fidelity Investments, and in addition to various actively managed funds that I avoid like the plague (I’ll explain why in chapter 8, “Where Are the Customers’ Yachts?”), there are some low-fee index funds they offer that are run by a computer. When a big chunk of my savings was automatically put into the Fidelity Freedom 2035 fund, I assumed that it just held a mix of index funds similar to the Vanguard fund I used as an example. I contribute the most I can but have a policy of only checking my 401(k) rarely. With my investments automated and a target date fund that was supposed to handle rebalancing, that seemed prudent.

Sure enough, I compared my Fidelity 2035 fund to one targeting the same date by Vanguard, which uses index funds only, rebalancing them each year. Vanguard’s expense ratio is 0.18 percent. Over the last ten years, as a result of costs but also investing decisions, $10,000 invested in the Fidelity fund would have grown to $16,876, while it would have grown to $18,145 in the Vanguard fund. That’s a pretty big difference—possibly enough to justify using Fidelity’s lower-cost stock and bond index funds alone and rebalancing them myself manually once a year. Or I could have a service tell me what to do.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

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

Peter Lynch, one-time manager of Fidelity Investment’s Magellan Fund, the world’s largest actively managed fund, and highly respected active manager states of most investors that (Anon, 1990): ‘They’d be better off in an index fund.’ Charles Schwab, the pioneer of online brokerage in the USA, actively supports indexing as the core of an optimal long-term portfolio and states (Schwab, 1999): ‘Most of the mutual fund investments I have are in index funds, approximately 75 per cent.’ David Swensen, CIO of the Yale Endowment and one of the most respected institutional investors, agrees: ‘You should invest only in things that you understand. That should be the starting point and the finishing point. For most investors the practical application of this axiom is to invest in index funds (low-fee investments that aim to mirror the performance of a particular stock market index).

Fees and costs contribute to tracking error Fees always go a long way towards explaining tracking error, as not all index funds are made equal. Some charge very low fees of a few basis points (100ths of 1%) and others as high as 1% for domestic retail products. Better still, find out what the total expense ratio (TER) or Ongoing Charge of the fund is – you can get this from the fund fact sheet or the Key Investor Information Document (KIID) which they are obliged to provide. Never pay an initial fee for an index fund. Some index funds are taking the ‘mickey’ with high upfront fees and high ongoing charges. Vote with your wallet and avoid them.

So, the average investor will generate the market return before fees, transaction costs and taxes. In the real world these costs cannot be avoided so the average active investor must inevitably be below the market by the amount of these costs. If index funds have lower costs than the average active investor, which is most often the case, then they will beat the average active manager by the difference between these costs. Index funds will thus beat the majority of active funds over the long run. That is simple mathematics, not supposition. As Professor William Sharpe (1991), a Nobel Prize winning stock market economist, puts it: ‘The laws of arithmetic have been suspended for the convenience of those who pursue their careers as active managers.’


pages: 231 words: 76,283

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

Affordable Care Act / Obamacare, Airbnb, anti-work, antiwork, asset allocation, barriers to entry, buy and hold, crowdsourcing, diversification, estate planning, financial independence, full employment, General Magic , gig economy, hedonic treadmill, high net worth, independent contractor, index fund, labor-force participation, lifestyle creep, longitudinal study, low interest rates, medical bankruptcy, mortgage debt, Mr. Money Mustache, multilevel marketing, obamacare, passive income, post-work, remote working, rent control, ride hailing / ride sharing, risk tolerance, robo advisor, side hustle, stocks for the long run, tech worker, Vanguard fund, work culture

Some mutual funds known as target date funds manage risk by moving toward more conservative investments as the target date approaches, but these funds have management fees averaging 0.84% according to Morningstar, which is still high enough to erode your gains over the long term. Index Funds Stock and bond index funds are a subcategory of mutual funds and ETFs that mirror key stock or bond indices like the S&P 500, the Dow Jones Industrial Average, the total US stock market, or the total US bond market. With index funds, the singular goal is to match the markets, never to beat them. Therefore, index funds are passively managed, and instead of being constantly tweaked to maximize gains, fund managers simply buy shares of the stocks and bonds included in the index they are seeking to mirror, in proportion to the shares in the index, and then sit back and let the magic of compounding happen.

That passive management means that investors pay minuscule management fees in relation to actively managed funds, often under 0.25% per year. Some of the broad market index funds with the lowest fees are the Schwab US Broad Market Fund, iShares Core S&P Total US Stock Market Fund, Vanguard Total Stock Market Fund, Fidelity Spartan 500 Index Fund, and a range of other funds with Vanguard, Fidelity, USAA, and T. Rowe Price, all of which have total expense ratios under 0.4%. But even those small percentage differences affect how much magic money you generate from your invested assets, so pay attention to fees even with index funds. Index funds have other benefits as well, namely in terms of taxes and health care premium calculation.

And your financial plan for the future may involve trying to optimize your income to hit a specific number exactly, both to minimize the income tax you owe and to maximize your health care benefits (more on this in chapter 5). Because index funds aren’t actively managed—that is, the fund managers aren’t constantly choosing new stocks to include and rebalancing the allocations—there are very few share sales happening behind the scenes that might trigger taxable events that could mess up your careful calculations. Index funds have grown to become a favorite of savvy investors, now comprising 29% of total invested assets in US markets, with Moody’s Investors Service projecting that index funds will surpass half of market holdings by 2024 for all of these reasons.2 It will probably come as no surprise to know that Mark and I now invest primarily in index funds, and we devote zero brain space to trying to pick the right stocks or mutual funds.


pages: 621 words: 123,678

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

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

Adding an international stock index fund to your portfolio might give you greater growth potential over the long term, but I recommend you invest no more than 5 percent of your portfolio in an international stock index fund, which is far below the 30 percent that many investment advisors currently recommend. To keep your investments as efficient and effective as possible you should invest in index funds whenever possible across all of your accounts. You should also set up all of your index fund dividends (the cash issued by the companies who have a dividend in the index fund) to automatically reinvest within the index fund. This means that whenever a company issues a dividend, you will automatically be using the dividend to buy new shares of the index fund to keep your money growing and compounding.

For your stock allocation, opt for a total stock market index fund, which tracks the performance of the entire U.S. stock market, whenever one is available. If you want to be a little more aggressive you can invest most of your money in a total U.S. stock market index fund and then a small percentage in an international stock market fund. My investment accounts have always been invested in a few simple index funds—a total stock market index fund and an international index fund. If you don’t have a total stock market index fund, then the next best selection is an S&P 500 index fund. BUILDING YOUR TOTAL STOCK MARKET FUND IF YOU DON’T HAVE ACCESS TO ONE If you don’t have access to a total stock market fund, then you can invest in funds to mirror the holdings of those types of funds.

Many companies offer an index fund that tracks the U.S. stock market, and many companies actually offer two levels (investor and admiral/premium), where you pay a higher or lower fee based on how much you invest. Some of the most popular index funds with the lowest fees are the Vanguard Total Stock Market Index Fund (VTSAX) and the Vanguard Total Stock Market Index ETF (VTI), both of which hold the top 2,800 stocks in the United States; the Schwab Total Stock Market Index ETF (SWTSX); BlackRock’s iShares Edge MSCI Min Vol USA ETF (USMV); and the Fidelity Total Market Index Fund Premium Class (FSTVX).


pages: 519 words: 118,095

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

Airbnb, Alan Greenspan, asset allocation, bank run, book value, buy and hold, buy low sell high, car-free, Community Supported Agriculture, delayed gratification, diversification, diversified portfolio, do what you love, estate planning, Firefox, fixed income, full employment, hedonic treadmill, Home mortgage interest deduction, index card, index fund, John Bogle, late fees, lifestyle creep, low interest rates, mortgage tax deduction, Own Your Own Home, Paradox of Choice, passive investing, Paul Graham, random walk, retail therapy, Richard Bolles, risk tolerance, Robert Shiller, speech recognition, stocks for the long run, traveling salesman, Vanguard fund, web application, Zipcar

To learn more about the subtle differences between index funds and ETFs, head to http://tinyurl.com/YH-etfs. In Unconventional Success: A Fundamental Approach to Personal Investment (Free Press, 2005), David Swensen writes, "Fully 95% of active investors lose to the passive alternative, dropping 3.8% per annum to the Vanguard 500 Index Fund results." In other words, people who own index funds have typically earned almost 4% more each year than those who own actively managed funds. (This long article offers a good summary of the arguments for using index funds: http://tinyurl.com/dowie-index.) By owning index funds, you can beat the returns of nearly everyone you know.

In The Little Book of Common Sense Investing (Wiley, 2007), John Bogle writes that the average actively managed fund has a total of about 2% in annual costs, whereas a typical passive index fund's costs are only about 0.25%. Although this 1.75% difference in costs between actively and passively managed mutual funds may not seem like much, there's a growing body of research that says it makes a huge difference in long-term investment results. Other advantages of index funds include diversification (see Mutual Funds) and tax efficiency. And because index funds have a low turnover rate—as described on Mutual Funds—they don't generate as much tax liability. Note Exchange-traded funds (or ETFs) are basically index funds that you can buy and sell like stocks (instead of going through a mutual fund company).

What a stock or fund did last year doesn't tell you much about what it'll do during the next decade. Over the short term, index funds are, by definition, average (see Index funds). But a funny thing happens the longer you hold onto them: They begin to float to the top of the stack. That's because the "hot" funds don't stay hot year after year—they cool down. So while index funds are usually in the middle of the pack in any given one-year period, they shine over the long term. During the recent stock market tumble, some folks shouted, "Look! Buy-and-hold investing is dead!" They took the stock market's decline as evidence that passive investing with index funds doesn't work. Well, it doesn't work if you sell after a fall, but if you hold onto your investments, you're fine—you haven't lost anything but time.


pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, clean tech, compound rate of return, credit crunch, currency risk, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, fixed income, high net worth, implied volatility, index fund, intangible asset, invisible hand, John Bogle, Kenneth Rogoff, low interest rates, market bubble, money market fund, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, selection bias, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

As new products come to market there is a risk that the information outlined here grows stale quickly and I would strongly encourage the reader to survey the market for new and better products before making investments. With the large growth of index funds and exchange traded funds (ETF) investing over the past decades, the abundance of different product offerings leave even professional investors confused; it’s no wonder that many investors say ‘forget it’ and revert to doing what they have always done. The two main ways to gain index-type exposure is through ETFs and index funds (this term covers a few different structures). The main difference between the two is that an ETF is traded like any stock while index funds are more akin to mutual funds or unit trusts in their structures.

That said, from my perspective the decision between physical and synthetic ETFs is less important than selecting the right ETF on the basis of tax considerations, liquidity or cost. Index-tracking funds The index funds work like a regular mutual fund or unit trust, even the terminology and exact fund structure vary slightly between jurisdictions (in the UK, for example, they are often called unit trusts or OEICs – open-ended investment companies). In the case of the index funds, the simplest way to think about these is that you give them £1,000 to invest and they then take that £1,000 and buy the underlying securities that make up the index exposure. If you want to redeem or sell your index investment that same index fund will then sell shares in proportion to your index investment and give you back the proceeds from those sales.

Also, don’t ignore the large and increasing number of international corporate bonds. It is expensive to trade bonds Unless you are a big institution you should buy products like ETFs, bond index funds or even cheap managed bond funds that acquire the bonds for you. With the exception of buying government bonds directly from the treasury, you can typically only buy bonds in larger ticket sizes and by buying aggregating products like ETFs or index funds scale and cost advantages are gained that are hard for the individual investor to match. (This is also discussed later in Chapter 14.) Corporate bond returns also depend on credit quality Earlier we discussed how the equity risk premium to the minimal risk bonds is about 4–5% a year.


pages: 825 words: 228,141

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

"World Economic Forum" Davos, 3D printing, active measures, activist fund / activist shareholder / activist investor, addicted to oil, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, backtesting, Bear Stearns, behavioural economics, bitcoin, Black Monday: stock market crash in 1987, buy and hold, Carl Icahn, clean water, cloud computing, corporate governance, corporate raider, correlation does not imply causation, Credit Default Swap, currency risk, Dean Kamen, declining real wages, diversification, diversified portfolio, Donald Trump, estate planning, fear of failure, fiat currency, financial independence, fixed income, forensic accounting, high net worth, index fund, Internet of things, invention of the wheel, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, junk bonds, Kenneth Rogoff, lake wobegon effect, Lao Tzu, London Interbank Offered Rate, low interest rates, Marc Benioff, market bubble, Michael Milken, money market fund, mortgage debt, Neil Armstrong, new economy, obamacare, offshore financial centre, oil shock, optical character recognition, Own Your Own Home, passive investing, profit motive, Ralph Waldo Emerson, random walk, Ray Kurzweil, Richard Thaler, risk free rate, risk tolerance, riskless arbitrage, Robert Shiller, Salesforce, San Francisco homelessness, self-driving car, shareholder value, Silicon Valley, Skype, Snapchat, sovereign wealth fund, stem cell, Steve Jobs, subscription business, survivorship bias, tail risk, TED Talk, telerobotics, The 4% rule, The future is already here, the rule of 72, thinkpad, tontine, transaction costs, Upton Sinclair, Vanguard fund, World Values Survey, X Prize, Yogi Berra, young professional, zero-sum game

By simply removing expensive mutual funds from your life and replacing them with low-cost index funds you will have made a major step in recouping up to 70% of your potential future nest egg! How exciting! What will that mean for you and your family? Vanguard has an entire suite of low-cost index funds (across multiple different types of asset classes) that range between 0.05% and 0.25% per year in total “all-in” costs. Dimensional Funds is another great low-cost index fund provider. If you don’t have access to these low-cost providers in your 401(k), we will show you how to make that happen. And while low-cost index funds are crucial, determining how much of each index fund to buy, and how to manage the entire portfolio over time, are the keys to success.

Asset allocation in accordance with your risk tolerance and your objectives. 2. Diversify through low-cost index funds. 3. Have as much in bond funds as your age. A “crude” benchmark, he says. Jack is in his 80s and has 40% of his total portfolio invested in bonds. But a very young person could be 100% equities. So in my total portfolio, including both my personal and retirement accounts, about 60% of my assets are in stocks, mostly in Vanguard’s stock index funds. The rest is split between Vanguard’s Total Bond Market Index Fund and tax-exempt [municipal bond] funds. My municipal bond holdings are split about two-thirds in Vanguard’s Intermediate-Term Tax-Exempt Fund and about one-third in Vanguard’s Limited-Term Tax-Exempt Fund [limited being somewhere between short and intermediate; a little bit longer for the extra yield].

* * * The goal of the nonprofessional should not be to pick winners—neither he nor his “helpers” can do that—but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal. —WARREN BUFFETT, 2013 letter to shareholders When you look at the results on an after-fee, after-tax basis, over reasonably long periods of time, there’s almost no chance that you end up beating the index fund. —DAVID SWENSEN, author of Unconventional Success and manager of Yale University’s more than $23.9 billion endowment FINANCIAL ENTERTAINMENT When you turn on the financial news today, you can see that it is less “news” and more sensationalism.


pages: 149 words: 43,747

How I Invest My Money: Finance Experts Reveal How They Save, Spend, and Invest by Brian Portnoy, Joshua Brown

asset allocation, behavioural economics, bitcoin, blockchain, blue-collar work, buy and hold, coronavirus, COVID-19, cryptocurrency, diversification, diversified portfolio, estate planning, financial independence, fixed income, high net worth, housing crisis, index fund, John Bogle, low interest rates, mental accounting, passive investing, prediction markets, risk tolerance, Salesforce, Sharpe ratio, time value of money, underbanked, Vanguard fund

Everyone has a story to tell and how we invest, save, and spend is one revealing way of telling that story. A few years back, I had lunch with a wholesaler for one of the largest asset managers in the world and we got to talking about some of his other clients. The firm he worked for is widely known as a large provider of inexpensive index funds. Without naming names, he told me “If you only knew how many hedge fund managers keep all of their personal capital in index funds with us that cost only a few basis points, you’d be amazed.” I countered that I probably would not be surprised at all. Elaborately allocated and expertly traded portfolios are the quickest route to being able to charge enormous fees.

Either way, I’ve shifted my views and now every stock we own is a low-cost index fund. I don’t have anything against actively picking stocks, either on your own or through giving your money to an active fund manager. I think some people can outperform the market averages—it’s just very hard, and harder than most people think. If I had to summarize my views on investing, it’s this: Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.

I know not everyone will agree with that logic, especially my friends whose job it is to beat the market. I respect what they do. But this is what works for us. We invest money from every paycheck into these index funds—a combination of US and international stocks. There’s no set goal—it’s just whatever is left over after we spend. We max out retirement accounts in the same funds, and contribute to our kids’ 529 college savings plans. And that’s about it. Effectively all of our net worth is a house, a checking account, and some Vanguard index funds. It doesn’t need to be more complicated than that for us. I like it simple. One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results.


pages: 44 words: 13,346

Extreme Early Retirement: An Introduction and Guide to Financial Independence (Retirement Books) by Clayton Geoffreys

asset allocation, dividend-yielding stocks, financial independence, index fund, passive income, risk tolerance, The 4% rule

Another thing is to keep your costs at a low level because there is absolutely no reason for you to be investing at a high cost when you can comparatively invest elsewhere at a much lower cost. At this point, one might ask why he or she should try out index fund investing or why is it such a good strategy. Well, there are different reasons as to why you should begin investing, but one of the key designs of an index fund is that it replicates the market trend, and if the market is at an all-time high, what better way to earn returns than with index funds? With index funds, you also know exactly what it is you are investing into, unlike actively-managed funds where the portfolio manager might begin investing into certain stocks and at some point engage in another type of investment, hence, affecting your asset allocation.

Just remember, if you are engaged with actively-managed funds and you decide to invest in other things or sell a few of your investments due to your asset allocation being thrown off course, you will incur taxes and trading fees. On the other hand, index funds provide great consistency and you save more money, allowing room for further investments. Diversification is another reason why you should get started in index investing because the concept is relatively easy to grasp. Think about your stocks, if you own an index fund in that type of investment, then you have already diversified as that index fund replicates the entire stock market. The same thing can be said with your bonds and real estate. Additionally, if you are engaged in these three types of investments (stocks bonds and real estate), you have already created diversity across the markets.

Additionally, if you are engaged in these three types of investments (stocks bonds and real estate), you have already created diversity across the markets. Be sure to keep an eye out for index funds that are too high in cost because they do not give any meaningful return and should be avoided. Instead, keep your focus on low cost index funds as they make it easier to replicate a market rather than trying to shoot past the charts and fail in the long run. One might argue that you cannot really get high returns by simply investing on an index fund, and while that may be true for the most part, you are still getting a significant amount of return nevertheless. Whatever works will continue to work, and if it is not broken, there is no need to fix it; this can serve as a secondary concept for index funds.


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, AOL-Time Warner, asset allocation, Bear Stearns, behavioural economics, bitcoin, Bretton Woods, buy and hold, buy low sell high, Carl Icahn, cognitive bias, cognitive dissonance, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, endowment effect, financial engineering, financial innovation, fixed income, global macro, hindsight bias, index fund, initial coin offering, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, Kickstarter, Long Term Capital Management, loss aversion, low interest rates, Market Wizards by Jack D. Schwager, mega-rich, merger arbitrage, multilevel marketing, Myron Scholes, Paul Samuelson, Pershing Square Capital Management, quantitative easing, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, Robert Shiller, short squeeze, Snapchat, Stephen Hawking, Steve Jobs, Steve Wozniak, stocks for the long run, subprime mortgage crisis, transcontinental railway, two and twenty, value at risk, Vanguard fund, Y Combinator

I guess there is something to Bogle's saying “ideas are a dime a dozen, but implementation is everything.” Success found its way to index funds in the second decade after their creation, when they went from $600 million to $91 billion. In the end, Bogle was vindicated, and then some. From 1976 to 2012, the Vanguard 500 returned 10.4%, compared to the 9.2% return of the average large‐cap blend funds. The 1.2% difference is nearly identical to the one Bogle presented to his board 40 years earlier. That decades‐long track record illustrates the consistent returns that index funds can offer – their primary benefit over other types of investments. Today, index funds represent around 30% of all assets held in mutual funds.

CHAPTER 5 Jack Bogle Find What Works for You Sometimes in life, we make the greatest forward progress by going backward. —Jack Bogle The Vanguard 500 Index fund is the world's largest mutual fund, with $292 billion in assets. That's 292 followed by nine zeros. How do you get to be so gigantic? Start with $11 million and grow 29% per year for the past 40 years. To give you an idea of how much money $292 billion is, if you were to stack it in hundred dollar bills, it would stretch 198 miles, which is just about the round‐trip distance from New York City to Vanguard's headquarters in Valley Forge, Pennsylvania. Index funds have picked up incredible momentum in the past few years. Since the end of 2006, active investors have pulled $1.2 trillion from active mutual funds and plowed $1.4 trillion into index funds.1 Vanguard has been the biggest beneficiary of the tidal wave of change of investor preference.

Since the end of 2006, active investors have pulled $1.2 trillion from active mutual funds and plowed $1.4 trillion into index funds.1 Vanguard has been the biggest beneficiary of the tidal wave of change of investor preference. The only mutually owned mutual fund structure in the world, Vanguard had the largest sales ever by a fund company in 2014, in 2015, and again in 2016.2 But despite the ubiquity of index funds today, it was not always this way. The idea that investors should settle for “average” returns was once heresy and these funds were often referred to as Bogle's folly. The effect that Jack Bogle has had on the mutual fund industry and on all of finance cannot be overstated.


Early Retirement Guide: 40 is the new 65 by Manish Thakur

Airbnb, diversified portfolio, financial independence, hedonic treadmill, index fund, lifestyle creep, Lyft, passive income, passive investing, risk tolerance, Robert Shiller, side hustle, time value of money, uber lyft, Vanguard fund, William Bengen, Zipcar

Studies examined how effective different investing techniques are, ranging from day trading to index funds. In most cases, index funds outperformed a majority of actively managed funds, but there are some benefits to actively managed funds. Ultimately, the best choice for the average investor, who already works a full time job and has other responsibilities, is a passively managed, broadly invested index funds. While looking for the ideal index fund, most people want to go about it with a "set it and forget it" mindset. Total market index funds give us this by buying stocks of 500 to 5000 companies, depending on the fund you choose.

It can be overpowering picking funds with all the technical finance industry jargon, discussions of futures and options, or how foreign markets are performing. Enter the magic of index funds. Index funds buy stocks that represent a whole market or industry, and get rebalanced to keep it representative of the market each year. As the market grows, so does the value of your investments. Instead of having to beat the market, you'll become one with it and benefit from all the hard work of the fund's companies' employees. Index funds also have the benefit of low expenses ratios. An expense ratio is the cut of money that a broker gets for letting you invest money with them, regardless of how well the fund performs.

An expense ratio is the cut of money that a broker gets for letting you invest money with them, regardless of how well the fund performs. A typical actively managed fund expense ratio is around .71%, which doesn't seem like much, but when you have $600,000 in a fund, this equals $4,440 a year! This is compared to index fund ratios of .25% to as low as .06%. Numerous studies found over a period from 1997 to 2014 index funds outperformed actively managed funds 82-90% of the time! What's worse is that these managers charge you for their underperformance through a higher expense ratio! It makes little sense to pay someone for doing a worse job that someone that could do it for pennies on the dollar.


pages: 420 words: 94,064

The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors by Spencer Jakab

4chan, activist fund / activist shareholder / activist investor, barriers to entry, behavioural economics, Bernie Madoff, Bernie Sanders, Big Tech, bitcoin, Black Swan, book value, buy and hold, classic study, cloud computing, coronavirus, COVID-19, crowdsourcing, cryptocurrency, data science, deal flow, democratizing finance, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, Everybody Ought to Be Rich, fake news, family office, financial innovation, gamification, global macro, global pandemic, Google Glasses, Google Hangouts, Gordon Gekko, Hacker News, income inequality, index fund, invisible hand, Jeff Bezos, Jim Simons, John Bogle, lockdown, Long Term Capital Management, loss aversion, Marc Andreessen, margin call, Mark Zuckerberg, market bubble, Masayoshi Son, meme stock, Menlo Park, move fast and break things, Myron Scholes, PalmPilot, passive investing, payment for order flow, Pershing Square Capital Management, pets.com, plutocrats, profit maximization, profit motive, race to the bottom, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robinhood: mobile stock trading app, Saturday Night Live, short selling, short squeeze, Silicon Valley, Silicon Valley billionaire, SoftBank, Steve Jobs, TikTok, Tony Hsieh, trickle-down economics, Vanguard fund, Vision Fund, WeWork, zero-sum game

The difference between going to the racetrack and putting your money in the market is that you can’t possibly profit by betting on every horse—the house has a built-in edge. Buying an index fund that contains all the stock market’s future winners and losers—the entire haystack, as it were—is a proven way to build wealth in the long run. And it costs a lot less too. Of course, index funds make much less money for Wall Street. A $10,000 investment in a typical equity index fund will cost you about $9 a year compared with $63 a year for the typical actively managed stock fund.[14] The fund research firm Morningstar reported that in 2019 the average US mutual fund’s cost had dropped over a decade by 0.42 percentage points of the amount invested annually largely because so many Americans had bought index funds.

Leading up to the pandemic, the industry was enjoying its longest bull market ever and decent profits, but its customers were wising up. Technology, competition, and financial education were threatening their money machine. Even young savers were catching on to cheap index funds that they would buy and rebalance, or to robo-advisers that would do it for them, depriving Wall Street of tens of billions of dollars that it used to earn by getting people to trade individual stocks or to hire mutual fund managers. One anxious analyst wrote a report calling cheap index funds that don’t dangle the promise of beating the market “worse than Marxism.”[1] In fact, it is when individuals believe that they can compete with the so-called smart money that the business has its best years.

Compound interest isn’t something that people grasp intuitively, but people like the late index-fund pioneer Jack Bogle had by then convinced tens of millions of savers that they were giving up a huge chunk of their potential nest eggs due to what seemed like inconsequential costs. Now, though, many stock-trading services like Robinhood were “free.” So were real-time updates delivered straight to your smartphone and investing recommendations on social media that seemed to have worked out well lately. Index funds, on the other hand, were about as exciting as watching grass grow. A lot of the analysis and news feeds that cost professionals a fortune, and had long given them an edge, had now become available to the little guys, allowing them to compete with and even outsmart elite investors.


pages: 572 words: 94,002

Reset: How to Restart Your Life and Get F.U. Money: The Unconventional Early Retirement Plan for Midlife Careerists Who Want to Be Happy by David Sawyer

"World Economic Forum" Davos, Abraham Maslow, Airbnb, Albert Einstein, asset allocation, beat the dealer, bitcoin, Black Monday: stock market crash in 1987, Cal Newport, cloud computing, cognitive dissonance, content marketing, crowdsourcing, cryptocurrency, currency risk, David Attenborough, David Heinemeier Hansson, Desert Island Discs, diversification, diversified portfolio, Edward Thorp, Elon Musk, fake it until you make it, fake news, financial independence, follow your passion, gig economy, Great Leap Forward, hiring and firing, imposter syndrome, index card, index fund, invention of the wheel, John Bogle, knowledge worker, loadsamoney, low skilled workers, Mahatma Gandhi, Mark Zuckerberg, meta-analysis, mortgage debt, Mr. Money Mustache, passive income, passive investing, Paul Samuelson, pension reform, risk tolerance, Robert Shiller, Ronald Reagan, Silicon Valley, Skype, smart meter, Snapchat, stakhanovite, Steve Jobs, sunk-cost fallacy, TED Talk, The 4% rule, Tim Cook: Apple, Vanguard fund, William Bengen, work culture , Y Combinator

Monevator’s slow and steady portfolio Set up in 2011 with £3,000, an extra £900 has been invested every quarter, complete with quarterly blog post and the numbers tracking progress. It’s an all-index-funds, no-transaction-charges portfolio aimed at the UK investor. This passive portfolio uses threshold rebalancing[398]. In April 2018[399], it comprised: Vanguard FTSE UK All Share Index Trust: 5.79%. Vanguard FTSE Developed World Ex-UK Equity Index Fund: 35.45%. Vanguard Global Small-Cap Index Fund: 6.91%. iShares Emerging Markets Equity Index Fund D: 10.03%. iShares Global Property Securities Equity Index Fund D: 6.64%. Vanguard UK Government Bond Index: 29.02%. Vanguard UK Inflation-Linked Gilt Index Fund: 6.16%. RESET View Monevator is the UK FI index investing guru, who I first discovered through a recommendation on the Mr.

Fidelity Index Emerging Markets P Accumulation. Fidelity Index Japan P Accumulation. Fidelity Index Pacific Ex-Japan Fund P Accumulation Shares. Vanguard US Equity Index Fund – Accumulation. FTSE UK All Share Index Unit Trust – Accumulation. FTSE Developed Europe Ex-UK Equity Index Fund – Accumulation. Emerging Markets Stock Index Fund – Accumulation. Japan Stock Index Fund – Accumulation. Pacific Ex-Japan Stock Index Fund – Accumulation. Overall charges Here’s how the overall charges stack up under the suggested RESET portfolio. The calculations[383] assume your stash is under £250k, meaning a wrapper charge from Fidelity of 0.35% and Vanguard of 0.15%.

[359] “A Challenge to Judgment”: “The inspiration for John Bogle’s great invention – MarketWatch.” 5 Mar. 2014, toreset.me/359. [360] $403bn: “VFINX - Vanguard 500 Index Fund Investor Shares | Vanguard.” toreset.me/360. [361] 29% of the entire US market: “Index funds to surpass active fund assets in U.S. by 2024: Moody’s.” 2 Feb. 2017, toreset.me/361. [362] “Something new under the sun”: “The inspiration for John Bogle’s great invention – MarketWatch.” 5 Mar. 2014, toreset.me/362. [363] but it’s a lot more rational than us: “Is the Market Rational? – Kiplinger.” toreset.me/363. [364] “who employ high-fee managers”: “Warren Buffett to heirs: Put my estate in index funds – MarketWatch.” 13 Mar. 2014, toreset.me/364


pages: 89 words: 29,198

The Big Secret for the Small Investor: A New Route to Long-Term Investment Success by Joel Greenblatt

backtesting, book value, discounted cash flows, diversified portfolio, hiring and firing, index fund, risk free rate, Sharpe ratio, time value of money, Vanguard fund

A reasonable expectation for outperformance over market-cap-weighted indexes is approximately 2 percent per year over the very long term. iShares Russell 1000 Value Index Fund (symbol: IWD)—larger stocks iShares Russell 2000 Value Index Fund (symbol: IWN)—smaller stocks iShares Russell Midcap Value Index Fund (symbol: IWS) iShares Russell Small Cap Value Index Fund (symbol: IJS) Vanguard Value ETF (symbol: VTV) Vanguard Mid-Cap Value Index Fund (symbol: VOE) Vanguard Small-Cap Value ETF: (symbol: VBR) INTERNATIONAL VALUE INDEX ETF iShares MSCI EAFE Value Index Fund (symbol: EFV)—based on EAFE International Value Index MUTUAL FUNDS (“VALUE-WEIGHTED”) We have created a free website, valueweightedindex.com, to keep readers updated on what I believe will be a growing area in the investment field.

Well, we already have part of the solution. Clearly, we should start with a strategy that should outperform most others over time. As we’ve already learned, a market-cap-weighted index fund will likely outperform most active managers. Of course, over time, an equally weighted index fund or a fundamentally weighted index fund should do even better. But as we saw in the last chapter, a value-weighted index should do better still—and possibly by a lot! And if we choose the value-weighted index fund, we’ll actually be taking advantage of the systematic mistakes that most of us humans make, rather than suffering from them! Remember, the only reason the value strategy works is that we are systematically setting ourselves up to buy companies that most people don’t want.

Remember, a market-cap-weighted index ends up having a larger weighting in stocks that increase in value and a smaller weighting in companies whose prices decrease. As Mr. Market gets overly excited about certain companies and overpays, their weighting in a market-cap-weighted index rises. Consequently, an index fund that owns these same stocks ends up being more heavily weighted in these overpriced stocks. If Mr. Market is overly pessimistic about particular companies or industries, the opposite happens. The stock prices of these companies fall below fair value, and the index and the accompanying index fund effectively own less of these bargain-priced stocks. In fact, the effect of owning too much of the overpriced stocks and too little of the bargain-priced stocks is actually built into the market-cap-weighting system.


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

asset allocation, backtesting, buy and hold, currency risk, death from overwork, delayed gratification, diversification, diversified portfolio, do what you love, eat what you kill, employer provided health coverage, estate planning, Eugene Fama: efficient market hypothesis, financial independence, fixed income, future of work, independent contractor, index arbitrage, index fund, John Bogle, junk bonds, karōshi / gwarosa / guolaosi, lateral thinking, Mahatma Gandhi, McMansion, merger arbitrage, money market fund, mortgage tax deduction, passive income, rising living standards, risk/return, Silicon Valley, The 4% rule, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, transaction costs, unpaid internship, upwardly mobile, Vanguard fund, work culture , working poor, zero-sum game

Actively managed funds are led by a manager who uses expertise to try to beat the index— that is, the average of the securities in the asset class. Index funds, however, own nearly every security in an index and thereby match the returns of the asset class. Because they do not try to decide what will go up and down but simply buy the securities in the index, index funds run with fewer people and lower expenses. The average mutual fund charges its investors 1.3% per year to manage its assets, whereas many index funds or ETFs run at around 1/10th of that amount, or under 0.2%. ETFs, which tend to be index funds, are bought in a brokerage account and trade during the day on the stock exchanges; mutual funds are bought at the end of the trading day from the mutual fund company.

All this detail is simply to impress on you that an index, while certainly a useful creation, is only an approximation of the actual returns for the asset class and tilt in which you are interested. Whenever the match is close, you are in luck. In those cases, your best choice for the portfolio will almost always be the low-fee, tax-efficient index fund or index ETF. But there’s not always an index fund available that matches your needs. You are then left with little choice but to find a low-fee actively managed fund to do the job. Likewise, a tilt or subindex may not have an index or traditional index fund that properly tracks it—for example, international small stocks or international large value stocks. You may occasionally find actively managed funds that, through some credible difference in trading strategy, develop a consistent deviation from their index or benchmark.

Choose from among these and compare them to other favorite or new funds as you set about implementing the Rational Investing Method for yourself. chapter 3 | Put Your Investing on Autopilot | 185 TiP Not all index funds are created equal. After years of experience in reducing trading costs while still matching the underlying index, Vanguard has learned how to often produce marginally better returns than the index, even after its fees. And Dimensional Fund Advisors (DFA) offers a variety of funds called enhanced index funds that track asset classes and tilts rather than an index per se. These will give you, for instance, funds tracking the International Small or International Large Value asset classes, making them a good fit for investors following the Rational Investing Method.


pages: 369 words: 128,349

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

3Com Palm IPO, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, information security, junk bonds, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, low interest rates, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, short squeeze, survivorship bias, Tax Reform Act of 1986, transaction costs, uptick rule, Vanguard fund

If either of them changes, the temporary index effect will disappear. First, the preannouncements by Standard and Poor’s allow the arbitrageurs to play this game. If the change in the index takes place immediately, the arbitrageurs will not be able to time their trades to the detriment of index fund managers. The second reason is the way owners of index funds evaluate the index fund managers. The performance of an index fund manager is measured by the tracking error, which forces the managers to trade exactly at the time that changes to the index are implemented. If the managers were free to trade the stocks deleted from or added to the index within a reasonable period around the effective date, they will not be forced to play into the hands of the arbitrageurs, and the investors will actually gain from this limited freedom given to the managers.

The consensus is that arbitrageurs have started playing the “S&P game” with the preannouncements, as explained in the section titled “Persistence.” With additions, arbitrageurs or market participants know that the index fund managers must buy the stock at the close of the effective date. Therefore, the arbitrageurs buy the stock be- Changes to the S&P 500 Index fore the effective date in the hope of unloading it to the index fund managers at a higher price on the effective date. For deletions, it is exactly the opposite. A question that arises is why index fund managers don’t buy immediately upon announcement instead of waiting till the effective date. The index fund managers must wait because their objective is not to beat the index but to minimize tracking error.

The different kinds of funds can be categorized into index funds, international funds, regional funds, country funds, emerging market funds, and global funds. International mutual funds have higher expense ratios than domestic mutual funds to cover higher trading costs and higher management fees. The funds also tend to have redemption fees to control frequent trading. Examples of funds offered by major mutual fund companies are given below. • Index funds. These include Fidelity Spartan International Index Fund, Vanguard Developed Markets Stock Index, Vanguard Emerging Markets Stock Index, and Price International Equity Index Fund. • International funds.


Investment: A History by Norton Reamer, Jesse Downing

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

Over the period from 1994 to 1996, some 91 percent of managed funds underperformed their index fund counterparts within US equities—a victory for the vehicle that was once derided as a recipe for mediocrity.58 Today there exist nearly 300 distinct stock and bond index mutual funds in the United States and over 1,000 American passive ETFs, and the world of investment has come a very long way toward not only accepting index funds as a fixture of investing but also fully embracing the power of indexing as one component of a strategy to outperform the market in terms of risk-adjusted return.59 The first index funds were meant for passive investors who simply wanted a small piece of the larger pie of the equity markets. Modern index funds, however, cater not only to passive investors who are looking for a broadly diversified portfolio of securities but also to active investors who want to enhance their portfolio returns by investing in particular asset classes through indexing. For instance, there are index funds that specialize in timberland investment, leveraged index funds that attempt to double or triple the return of a common stock index such as the S&P 500 on a daily basis, and index funds that specialize in commodities. With the widespread proliferation of index funds 286 Investment: A History through all potential asset classes and market segments, and as the industry becomes more and more aggressive in marketing in order to remain competitive, investors must apply ever greater standards of scrutiny to their investments.

The benefit of the latter approach is lower transaction costs, but it comes at the expense of the possibility of additional tracking error.60 The differences between ETFs and index funds are subtle. First, ETFs can be bought and sold throughout the trading day, whereas index funds are purchased or redeemed once per day. Second, index funds are intended to trade at the net asset value of the portfolio’s underlying holdings, whereas ETFs can actually trade at a discount or premium to net asset value. Many ETFs do have mechanisms to prevent very large deviations in price from net asset value, but there is no structural reason that they have to trade at net asset value (as is the case for index funds). Index funds also reinvest dividends immediately whereas ETFs capture cash for distribution at a regular interval (often quarterly).

This fund lasted only 7 years, closing in 1993.57 It was not until the early 1990s that Vanguard started to see any meaningful competition. Vanguard had eleven different index funds by the end of 1992. That same year, thirty-five new index funds were formed by competitors, bringing the total number of index mutual funds in the investment market to just under eighty. The universe of product offerings also expanded. In 1993, Vanguard and some of its competitors offered the first bond index funds. With these, investors could get exposure to a wider array of investments than just equities. The bull market of the 1990s spurred continued growth in the industry, and many of the US equity index funds dramatically outperformed actively managed accounts during this time.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

"World Economic Forum" Davos, AI winter, Alan Greenspan, algorithmic trading, AOL-Time Warner, Apollo 11, asset allocation, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, Bob Litterman, book value, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Charles Babbage, citizen journalism, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, electricity market, Emanuel Derman, en.wikipedia.org, experimental economics, fake news, financial engineering, financial innovation, fixed income, Ford Model T, Gordon Gekko, Hans Moravec, Herman Kahn, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, Ivan Sutherland, Jim Simons, John Bogle, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, machine readable, machine translation, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, military-industrial complex, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, semantic web, Sharpe ratio, short selling, short squeeze, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, stock buybacks, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, tontine, too big to fail, transaction costs, Turing machine, two and twenty, Upton Sinclair, value at risk, value engineering, Vernor Vinge, Wayback Machine, yield curve, Yogi Berra, your tax dollars at work

It is tracking error, a measure of the difference between the calculated index and the actual portfolio. An ideal index fund has a tracking error of zero. Real-world index funds have tracking errors around 0.1 percent. If it gets much larger than that, someone is confused. Index Funds: The Godfather of Quantitative Investing Index funds have an interesting history. Prior to the 1960s, most institutional equity portfolios were managed by bank trust departments, and performance reporting was not the refined art that it has become today. A Gentle Intr oduction to Computerized Investing 111 Bill Fouse, one of the founders of the world’s first indexing group at Wells Fargo in the 1970s, tells stories of when performance reporting by a bank trust department consisted of a table listing all stocks held, the acquisition price of each, the current price, and the size of the position.

Even so, there are economies of scale to be had in managing large index funds. This is reflected by the current business situation in which there are a small number of large index fund providers around the world, such as State Street and Barclays Global Investments. Estimates of total assets managed using this sort of passive approach, in a variety of markets, now exceed $4 trillion. 112 Nerds on Wall Str eet Imagine 500 stocks in this box, one for each company in the S&P 500 index. Figure 5.1 Full Replication Index Fund. All the stocks, all the time. Setting aside considerations of trading costs for now, the idea of an index fund is a very simple one.

Setting aside considerations of trading costs for now, the idea of an index fund is a very simple one. Nevertheless, it is a quantitative concept, and running an index fund requires the use of a computer. The most straightforward way to manage an index fund is simply to hold all of the stocks in the index: every single one of them, each in its index weight. This is illustrated in Figure 5.1, which represents all of the stocks in the S&P 500 put into a portfolio. This is simple and will, in fact, ignoring trading costs, replicate the index exactly. This type of index fund is called a full replication fund. Even with full replication funds, the trading costs and fixed 100-share increments for holdings will cause the portfolio to have a performance somewhat different from that of the index.


pages: 670 words: 194,502

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

3Com Palm IPO, accounting loophole / creative accounting, air freight, Alan Greenspan, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, 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, John Bogle, junk bonds, Long Term Capital Management, low interest rates, market bubble, merger arbitrage, Michael Milken, money market fund, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, stock buybacks, 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

First of all, recognize that an index fund—which owns all the stocks in the market, all the time, without any pretense of being able to select the “best” and avoid the “worst”—will beat most funds over the long run. (If your company doesn’t offer a low-cost index fund in your 401(k), organize your coworkers and petition to have one added.) Its rock-bottom overhead—operating expenses of 0.2% annually, and yearly trading costs of just 0.1%—give the index fund an insurmountable advantage. If stocks generate, say, a 7% annualized return over the next 20 years, a low-cost index fund like Vanguard Total Stock Market will return just under 6.7%.

But the average stock fund, with its 1.5% in operating expenses and roughly 2% in trading costs, will be lucky to gain 3.5% annually. (That would turn $10,000 into just under $20,000—or nearly 50% less than the result from the index fund.) Index funds have only one significant flaw: They are boring. You’ll never be able to go to a barbecue and brag about how you own the top-performing fund in the country. You’ll never be able to boast that you beat the market, because the job of an index fund is to match the market’s return, not to exceed it. Your index-fund manager is not likely to “roll the dice” and gamble that the next great industry will be teleportation, or scratch-’n’-sniff websites, or telepathic weight-loss clinics; the fund will always own every stock, not just one manager’s best guess at the next new thing.

After a year, measure your results against how you would have done if you had put all your money in an S & P 500 index fund. If you didn’t enjoy the experiment or your picks were poor, no harm done—selecting individual stocks is not for you. Get yourself an index fund and stop wasting your time on stock picking. If you enjoyed the experiment and earned sufficiently good returns, gradually assemble a basket of stocks—but limit it to a maximum of 10% of your overall portfolio (keep the rest in an index fund). And remember, you can always stop if it no longer interests you or your returns turn bad. Looking Under the Right Rocks So how should you go about looking for a potentially rewarding stock?


pages: 733 words: 179,391

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

Alan Greenspan, 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, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bob Litterman, Bonfire of the Vanities, bonus culture, break the buck, Brexit referendum, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, carbon tax, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, confounding variable, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, democratizing finance, Diane Coyle, diversification, diversified portfolio, do well by doing good, double helix, easy for humans, difficult for computers, equity risk premium, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, information security, interest rate derivative, invention of the telegraph, Isaac Newton, it's over 9,000, James Watt: steam engine, Jeff Hawkins, Jim Simons, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, language acquisition, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, megaproject, merger arbitrage, meta-analysis, Milgram experiment, mirror neurons, money market fund, moral hazard, Myron Scholes, Neil Armstrong, Nick Leeson, old-boy network, One Laptop per Child (OLPC), out of africa, p-value, PalmPilot, paper trading, passive investing, Paul Lévy, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, proprietary trading, public intellectual, 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 Solow, Sam Peltzman, Savings and loan crisis, seminal paper, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, subprime mortgage crisis, survivorship bias, systematic 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, uptick rule, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

The emergence of the multi-trillion-dollar index fund industry was an evolutionary process driven by competition, innovation, and natural selection. This is the Adaptive Markets Hypothesis at work. NEW SPECIES OF INDEX FUNDS The success of the index mutual fund, beginning with the Vanguard Index Trust, led to an evolutionary explosion of financial innovation. Three different stock market index futures debuted in 1982, based on the New York Stock Exchange (NYSE) Composite, the S&P 500, and the Value Line index, respectively. Indexes for each asset class emerged, and additional index funds to track them: the first bond index fund for retail investors in 1986, the first international share index funds in 1990, and the first exchange-traded fund in 1993.

In a curious twist of fate, a former Princeton undergraduate launched a mutual fund company for this exact purpose a year after Malkiel’s book debuted. You may have heard of this individual, the index fund pioneer John C. Bogle. His little startup, the Vanguard Group, manages over $3 trillion and employs more than fourteen thousand people as of December 31, 2014.5 Vanguard’s main message, and the advice most often dispensed to millions of consumers, is “don’t try this at home.” Don’t try to beat the market. Instead, stick to passive buy-and-hold investments in broadly diversified stock index funds, and hold these investments until you retire. Still, there’s no shortage of examples of investors who did and do beat the market.

If you believe that people are rational and markets are efficient, this will largely determine your views on gun control (unnecessary), consumer protection laws (caveat emptor), welfare programs (too many unintended consequences), derivatives regulation (let a thousand flowers bloom), whether you should invest in passive index funds or hyperactive hedge funds (index funds only), the causes of financial crises (too much government intervention in housing and mortgage markets), and how the government should or shouldn’t respond to them (the primary financial role for government should be producing and verifying information so that it can be incorporated into market prices).


pages: 287 words: 62,824

Just Keep Buying: Proven Ways to Save Money and Build Your Wealth by Nick Maggiulli

Airbnb, asset allocation, Big Tech, bitcoin, buy and hold, COVID-19, crowdsourcing, cryptocurrency, data science, diversification, diversified portfolio, financial independence, Hans Rosling, index fund, it's over 9,000, Jeff Bezos, Jeff Seder, lifestyle creep, mass affluent, mortgage debt, oil shock, payday loans, phenotype, price anchoring, risk-adjusted returns, Robert Shiller, Sam Altman, side hustle, side project, stocks for the long run, The 4% rule, time value of money, transaction costs, very high income, William Bengen, yield curve

How Do You Buy Stocks? You can purchase individual stocks, or an index fund or exchange-traded fund (ETF) that will get you broader stock exposure. For example, an S&P 500 index fund will get you U.S. equity exposure while a Total World Stock Index Fund will get you worldwide equity exposure. I prefer owning index funds and ETFs over individual stocks for a host of reasons (many of which will be discussed in the following chapter), but mainly because index funds are an easy way to get cheap diversification. Even if you decide to only own stocks through index funds, opinions differ on which kinds of stocks you should own.

With free trading on many major investment platforms, the rise of fractional share ownership, and the availability of cheap diversification, Just Keep Buying has an edge like never before. Today you can purchase a single share of an S&P 500 index fund and have every person in every large public corporation in America working to make you richer. And if you buy international index funds, the rest of the world (or most of it) will be working for you as well. For a trivial sum, you can own a small piece of the future economic growth of much of human civilization. Economic growth that will allow you to build wealth for decades.

In addition, REITs can be offered as publicly traded, private, or publicly non-traded. Publicly traded REITs: Trade on a stock exchange like any other public company and are available to all investors. Anyone who owns a broad stock index fund already has some exposure to publicly traded REITs, so buying additional REITs is only necessary if you want to increase your exposure to real estate. Instead of buying individual publicly traded REITs, there are publicly traded REIT index funds – which invest across a basket of REITs – that you can buy instead. Private REITs: Not traded on a stock exchange and only available to accredited investors (people with a net worth >$1 million or annual income >$200,000 for the last three years).


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, Alan Greenspan, asset allocation, backtesting, behavioural economics, Black-Scholes formula, book value, 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, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Money creation, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stock buybacks, stocks for the long run, subprime mortgage crisis, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, uptick rule, Vanguard fund, vertical integration

Indexing became so popular that in the first six months of 1999 nearly 70 percent of the money that was invested went into index funds.13 By 2007, all Vanguard 500 Index funds had attracted over $200 billion in assets, but the largest single equity mutual fund is the American Growth Fund with assets of $185 billion.14 One of the attractions of index funds is their extremely low cost. The total annual cost in the Vanguard 500 Index Fund is only 0.18 percent of market value (and as low as 2 basis points for large institutional investors). Because of proprietary trading techniques and interest income from loaning securities, Vanguard S&P 500 Index funds for individual investors have fallen only 9 basis points behind the index over the last 10 years, and its institutional index funds have actually outperformed the index.15 THE PITFALLS OF CAPITALIZATION-WEIGHTED INDEXING Despite their past success, the popularity of indexing, especially those funds linked to the S&P 500 Index, may cause problems for index 12 Five years before the Vanguard 500 Index Fund, Wells Fargo created an equally weighted index fund called “Samsonite,” but its assets remained relatively small. 13 Heather Bell, “Vanguard 500 Turns 25, Legacy in Passive Investing,” Journal of Index Issues, Fourth Quarter 2001, pp. 8–10. 14 Vanguard’s number includes assets of its 500 Index Fund open to both individuals and institutions. 15 The Vanguard Institutional Index Fund Plus shares, with a minimum investment of $200 million, have outperformed the S&P 500 Index by 7 basis points in the 10 years following the fund’s inception on July 7, 1997. 352 PART 5 Building Wealth through Stocks investors in the future.

Because of proprietary trading techniques and interest income from loaning securities, Vanguard S&P 500 Index funds for individual investors have fallen only 9 basis points behind the index over the last 10 years, and its institutional index funds have actually outperformed the index.15 THE PITFALLS OF CAPITALIZATION-WEIGHTED INDEXING Despite their past success, the popularity of indexing, especially those funds linked to the S&P 500 Index, may cause problems for index 12 Five years before the Vanguard 500 Index Fund, Wells Fargo created an equally weighted index fund called “Samsonite,” but its assets remained relatively small. 13 Heather Bell, “Vanguard 500 Turns 25, Legacy in Passive Investing,” Journal of Index Issues, Fourth Quarter 2001, pp. 8–10. 14 Vanguard’s number includes assets of its 500 Index Fund open to both individuals and institutions. 15 The Vanguard Institutional Index Fund Plus shares, with a minimum investment of $200 million, have outperformed the S&P 500 Index by 7 basis points in the 10 years following the fund’s inception on July 7, 1997. 352 PART 5 Building Wealth through Stocks investors in the future.

Steel Group, 49 Utilities sector: in GICS, 53 global shares in, 175i, 177 Utility, 322 Valuation, 144–145 value versus growth stocks and, 144–145 Value Line Index, 47n, 256 Value stocks, 362–363 growth stocks versus, 144–145 nature of, 157 Value-weighted indexes, 42–45 (See also Center for Research in Security Prices [CRSP] index; Nasdaq Index; Standard & Poor’s [S&P] index) Valuing Wall Street (Smithers and Wright), 117 Vanguard 500 Index Fund, 263n Vanguard Institutional Index Fund Plus, 351n Vanguard S&P 500 Index funds, 351 Van Strum, Kenneth S., 80n Verizon, 177 Vesting, 106 Viceira, Luis M., 35n Vietnam War, 233 bear market and, 85 Virginia Carolina Chemicals, 60i, 63 Vishny, R., 326n VIX Index, 281–282, 282i, 334 Vodafone, 177 Volatility (see Market volatility) 380 Volcker, Paul, 9, 195 Vuolteenaho, Tuomo, 158n Wachovia Bank, 21n Wages, Nixon’s freezing of, 194 Wall Street Journal, 38, 290 Wal-Mart, 155, 176i, 177 Wang, Jiang, 304n War: market movements and, 225, 231–235 (See also specific wars) War on terrorism, 234 Weber, Steven, 218n Wein, Byron, 86 Index Welch, Ivo, 325n Wells Fargo, 351n Werner, Walter, 12n, 21n Western Co., 63 White, Weld & Co., 97 Williams, Frank J., 319q Williams, John Burr, 101 Wilshire 5000 index, 342 Wisdom Tree Investments, 356 Withers, Hartley, 81 Wm.


pages: 461 words: 128,421

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

"Friedman doctrine" OR "shareholder theory", Abraham Wald, activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, AOL-Time Warner, asset allocation, asset-backed security, bank run, beat the dealer, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Carl Icahn, Cass Sunstein, collateralized debt obligation, compensation consultant, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, democratizing finance, Dennis Tito, discovery of the americas, diversification, diversified portfolio, Dr. Strangelove, Edward Glaeser, Edward Thorp, endowment effect, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Glass-Steagall Act, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Bogle, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, market design, Michael Milken, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, power law, prediction markets, proprietary trading, prudent man rule, 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, rolodex, Ronald Reagan, seminal paper, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Skinner box, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, tech worker, 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, Two Sigma, Tyler Cowen, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

Then the magazine that had gotten him into the mutual fund business, Fortune, came through for him with a lengthy article by a recent graduate of the University of Rochester’s Business School, headlined “Index Funds—An Idea Whose Time Is Coming.”39 After that, the money flowed.40 Now it’s possible that the index fund would have been created even in the absence of these writings and of the efficient market hypothesis that helped inspire them. But it’s hard to see how. The work of ivory tower scholars had launched a new school of investing, one that would survive and flourish in the decades to come. It was one of the great practical triumphs in the history of the social sciences. AFTER THE LAUNCH OF THE Vanguard index fund, Paul Samuelson announced in his Newsweek column that he had celebrated the birth of his first grandson by buying the boy a few shares.41 Ben Graham, just before he died in 1976, offered his own endorsement.

Fischer Black Computer scientist who was introduced to finance working alongside Jack Treynor at the consulting firm Arthur D. Little in the 1960s. Coauthor with Myron Scholes of the Black-Scholes option pricing model, later a partner at Goldman Sachs and an early supporter of behavioral finance research. John Bogle After arguing against unmanaged index funds in 1960, the veteran mutual fund executive launched the first retail index fund at Vanguard in 1976. Warren Buffett Student of value-investing legend Benjamin Graham at Columbia Business School who went on to great success as an investor. Outspoken critic of the efficient market hypothesis and the academic approach to finance. Alfred Cowles III Chicago Tribune heir who, while convalescing from tuberculosis in Colorado in the 1920s, decided to research the effectiveness of various stock market forecasters.

This particular oversimplification was undeniably useful, so useful that it took on a life of its own. As it traveled from college campuses in Cambridge, Massachusetts, and Chicago in the 1960s to Wall Street, Washington, and the boardrooms of the nation’s corporations, the rational market hypothesis strengthened and lost nuance. It was a powerful idea, helping to inspire the first index funds, the investment approach called modern portfolio theory, the risk-adjusted performance measures that shape the money management business, the corporate creed of shareholder value, the rise of derivatives, and the hands-off approach to financial regulation that prevailed in the United States from the 1970s on.


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

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, 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, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk 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, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, 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, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, 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, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

Indexing became so popular that in the first six months of 1999 nearly 70 percent of the money that was invested went into index funds.14 By 2013, all Vanguard 500 Index funds had attracted over $275 billion in assets, and Vanguard’s Total Stock Market Funds, which include smaller stocks, attracted $250 billion. One of the attractions of index funds is their extremely low cost. The total annual cost in the Vanguard 500 Index Fund is only 0.15 percent of market value (and as low as 2 basis points for large institutional investors). Because of proprietary trading techniques and interest income from loaning securities, Vanguard S&P 500 Index funds for individual investors have fallen only 9 basis points behind the index over the last 10 years, and its S&P 500 Index fund for institutional investors has actually outperformed the benchmark index.15 THE PITFALLS OF CAPITALIZATION-WEIGHTED INDEXING Despite the past success of index funds, their popularity, especially those funds linked to the S&P 500 Index, may cause problems for index investors in the future.

Because of proprietary trading techniques and interest income from loaning securities, Vanguard S&P 500 Index funds for individual investors have fallen only 9 basis points behind the index over the last 10 years, and its S&P 500 Index fund for institutional investors has actually outperformed the benchmark index.15 THE PITFALLS OF CAPITALIZATION-WEIGHTED INDEXING Despite the past success of index funds, their popularity, especially those funds linked to the S&P 500 Index, may cause problems for index investors in the future. The reason is simple. If a firm’s mere entry into the S&P 500 causes the price of its stock to rise, due to the anticipated buying by index funds, index funds will hold a number of overpriced stocks that will depress future returns.

Bogle, The Little Book of Common Sense Investing, Hoboken, NJ: Wiley, 2007, Chap. 9. 12. Ellis, “The Loser’s Game,” Financial Analysts Journal, p. 19. 13. Five years before the Vanguard 500 Index Fund, Wells Fargo created an equally weighted index fund called “Samsonite,” but its assets remained relatively small. 14. Heather Bell, “Vanguard 500 Turns 25, Legacy in Passive Investing,” Journal of Index Issues, Fourth Quarter 2001, pp. 8-10. 15. The Vanguard Institutional Index Fund Plus shares, with a minimum investment of $200 million, have outperformed the S&P 500 Index by 3 basis points over the 10 years ending June 30, 2013. 16.


pages: 389 words: 81,596

Quit Like a Millionaire: No Gimmicks, Luck, or Trust Fund Required by Kristy Shen, Bryce Leung

Affordable Care Act / Obamacare, Airbnb, Apollo 13, asset allocation, barriers to entry, buy low sell high, call centre, car-free, Columbine, cuban missile crisis, Deng Xiaoping, digital nomad, do what you love, Elon Musk, fear of failure, financial independence, fixed income, follow your passion, Great Leap Forward, hedonic treadmill, income inequality, index fund, John Bogle, junk bonds, longitudinal study, low cost airline, Mark Zuckerberg, mortgage debt, Mr. Money Mustache, obamacare, offshore financial centre, passive income, Ponzi scheme, risk tolerance, risk/return, side hustle, Silicon Valley, single-payer health, Snapchat, Steve Jobs, subprime mortgage crisis, supply-chain management, the rule of 72, working poor, Y2K, Zipcar

The power of indexing is how simple it is. You could probably run an index fund yourself: just throw all the companies in the stock market into a spreadsheet, sort by market cap, and pick the top five hundred. Done. You’ve just created an index fund. And because it’s so simple, there’s no fund manager to pay. In the United States, actively managed mutual funds charge MERs (Management Expense Ratio fees) north of 1 percent annually. In Canada, it’s even worse, with a typical mutual fund charging around 2 percent. But a typical index fund tracking the American stock market (NYSE: VTI) charges only 0.04 percent!

How to Steal from Wall Street If you ever want to see a banker sweat, try this: walk into your bank, ask to see a salesperson, and ask to put your savings into index funds. It’s the funniest thing ever. Armed with the knowledge of why index funds outperform actively managed funds, I did exactly that. I had done my homework. I knew the literature and research cold; I knew the statistics. I had looked up the commission the salesperson would earn on an index fund: precisely $0. So, I was expecting an amusing spectacle. And boy did I get it. That salesperson spun story after story about why I was making a huge mistake, and I slammed down chart after chart onto his desk proving him wrong.

That salesperson spun story after story about why I was making a huge mistake, and I slammed down chart after chart onto his desk proving him wrong. Eventually, he resorted to outright lying. This account, he claimed, couldn’t purchase those types of investments. But after I asked to speak to his supervisor, he relented. I got my account set up, and I invested in my index funds. Here’s the deal: Wall Street hates index funds. Inside those shiny glass skyscrapers is basically a giant collection of stock traders. They have thousands of analysts working long hours, poring over the press releases and financial statements of every publicly traded company. They then feed this information in the form of tip sheets to traders on the floor of the New York Stock Exchange.


pages: 1,164 words: 309,327

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

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

Corresponding total return indexes for these two indexes, however, are widely available. 23.2 INDEX FUNDS An index fund is a portfolio that index managers design to replicate the performance of an index. Tracking error is the difference between the portfolio return and the corresponding dividend-adjusted index return. Index fund managers try to minimize their tracking errors. Most U.S. index funds try to replicate the S&P 500 Index, although other indexes are becoming increasingly popular. Replicating a value-weighted equity index is quite simple. If the value of the index fund is 0.01 percent of the total capitalization of all the index components, the index fund manager simply buys 0.01 percent of the outstanding shares of each index component.

The maximized expected return from using the t-test—expressed relative to the expected index fund return—is the value of the option to decide whether to invest with an active manager when the alternative is to invest in an index fund. It is always positive because you can always choose to invest in an index fund. For sample sizes of ten or fewer years, the value of this option is extremely low. With ten years of data, it is only 8.6 basis points. Not surprisingly, many investors choose to ignore these options. They invest in index funds because they do not believe that they can add significant value to their wealth by choosing managers. 22.4.5 Choosing Among Many Managers In practice, investors rarely decide only between just one active manager and an index fund when choosing whether to invest with an active manager.

Many uninformed investors employ buy and hold strategies to avoid the difficulties of selecting skilled active managers and the costs of investing with unskilled active managers. Buy and hold investors avoid trading losses by not trading. They also avoid high management fees. Since index funds implement buy and hold strategies, they are very attractive to investors who want exposure to index risk without the risk of substantially underperforming the market. The minor frictions associated with index fund management ensure that index funds will slightly underperform their indexes. Although index funds slightly underperform their indexes, they regularly beat three-quarters of all active managers. Once again, note that this regularity is not simply an empirical fact.


pages: 425 words: 122,223

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

Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate raider, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, Glass-Steagall Act, Great Leap Forward, guns versus butter model, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, Michael Milken, money market fund, Myron Scholes, new economy, New Journalism, Paul Samuelson, Performance of Mutual Funds in the Period, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk free rate, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, stochastic process, Thales and the olive presses, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond, zero-sum game

Treynor was so impressed that he predicted that Mellon would be the first institution to go into the business of putting the new ideas into practice. Fouse now felt the wind in his sails. In 1969, he recommended that Mellon launch an index fund that would replicate one of the popular market indexes, like the Standard & Poor’s 500-Stock Composite. An index fund requires no one to select stocks, no security analysts, and no portfolio manager. It is a passively managed rather than an actively managed portfolio. Fouse felt that the index fund would give him an opportunity to put Sharpe’s idea about the super-efficient portfolio on a real-time basis. For his efforts, Fouse recalls, he was “figuratively thrown out of the policy meeting.”b But Fouse was irrepressible.

Those contributions fell short of the $25 million required to buy 1,000 shares of each of the 500 components of the index. So a sampling strategy had to be followed—with unfortunate errors in tracking the index—until the total reached $25 million. From that point forward, the S&P 500 index fund has held the 500 stocks in proportion to their relative market values. In 1976, Samsonite folded its equal-weighted New York Stock Exchange fund into the S&P 500 index fund. That fund has been the model for index funds ever since, even though, as McQuown describes it, “It’s a weird damn thing.” The Composite includes most of the large companies in the United States, so it accounts for a major share of the market.

Not all of it was in stock funds, and not all of what was in stock funds was in the S&P 500. According to another survey, as of late 1990 112 out of the top 200 pension funds were invested in equity index funds and 56 in bond index funds. Indexes that reflect the non-S&P part of the domestic stock market have become increasingly popular. Some $67 billion is in funds that track the major indexes of the domestic bond market, while more than $20 billion is indexed to foreign stock and bond markets. There is an irony in Wells Fargo’s success in marketing and managing index funds, because the company first undertook this activity through default. Even with McQuown’s whirring computers and his army of high-powered academic consultants, Wells Fargo had failed to apply theory to active management with any real success.


pages: 236 words: 77,735

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

affirmative action, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, 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, fear index, fiat currency, financial engineering, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, Glass-Steagall Act, global macro, High speed trading, housing crisis, index fund, joint-stock company, junk bonds, managed futures, Market Wizards by Jack D. Schwager, Michael Milken, military-industrial complex, money market fund, moral hazard, Myron Scholes, National best bid and offer, off-the-grid, passive investing, Ponzi scheme, power law, price discovery process, proprietary trading, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, short squeeze, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

Aren’t index funds supposed to be a good investment? index fund A mutual fund that seeks to track the performance of a market index (e.g., S&P 500). Developed in 1973, index funds provide investors a way to trade broad indexes. Professional investors use index funds to capture the performance of a broad market without the cost of buying hundreds of stocks. Charlatans have been known to create mutual funds that try to beat the index, but are in fact simply “closet index funds.” The most popular index funds are Exchange Traded Funds. See Chapter 8. My Dinner with Burton It was November of 2008 and I was invited to a due diligence conference in Boston.

In 1999, you had just over one million dollars in the index fund. It’s almost 10 years later and you’ve only gained about $200,000, or 13.72 percent. Looking at your statements, you earned 15.61 percent last year! Your head starts to hurt. Has the market gone nowhere since the beginning of the decade? Little did you know that next year, in 2008, the S&P 500 would plunge 36.58 percent. Out of frustration, you sell all of your shares at the end of the year for just more than $750,000. Looking at your statements from 1997 and 1998, you realize that you had about the same amount of money back then. Where did it all go? Aren’t index funds supposed to be a good investment?

But you only would have ended up with $1,311.57! Table 1.2 Performance 1970–2010 Stock portfolio S&P 500a Average monthly total return 1.13% 0.54% Total return 1970-2010 21,628.91% 1,211.57% Value in 1970 $100.00 $100.00 Value in 2010 $21,728.91 $1,311.57 a S&P 500 is treated as an imaginary no-load index fund priced at the index value. But Wait There’s More! It’s 1990 and your kids are older and grown up. They’re all broke except for your son Cornelius, who wants to start investing like you did back in the day. Disneyland is certainly still around. Coca-Cola is still the preferred drink of the Magic Kingdom.


pages: 353 words: 88,376

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

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

Related Terms: • Benchmark • Dow Jones Industrial Average—DJIA • Index Fund • Index Futures • Standard & Poor’s 500 Index—S&P 500 Index Fund What Does Index Fund Mean? A type of mutual fund with a portfolio constructed to match or track the components of a market index such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. Investopedia explains Index Fund Indexing is a passive form of fund management that some argue outperforms most actively managed mutual funds. The most popular index funds track the S&P 500, but a number of other indexes, including the Russell 2000 (small companies), the DJ Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, and the Far East), and the Lehman Aggregate Bond Index (total bond market), are followed widely by investors.

A type of closed-end mutual fund that trades like a stock on an exchange; ETFs usually are constructed to track an index, a commodity, or a basket of assets like an index fund. ETFs fluctuate in price during the trading day as they are bought and sold on an exchange just like a stock. Investopedia explains Exchange-Traded Fund (ETF) Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day the way an open-end mutual fund does. By owning an ETF, an investor gets the diversification of an index fund as well as the ability to sell short, buy on margin, and purchase as little as one share (like a stock). Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund.

Investopedia explains Lehman Aggregate Bond Index The index, which is constructed by Lehman Brothers, is considered by investors to be the best total market bond tracking index. Along with the aggregate index, Lehman has bond indexes tailored to European and Asian investors. This index cannot be purchased, but it is tracked by bond index funds; there are also exchange-traded funds (ETFs) that track the index. The Lehman Aggregate Bond Index trades on an exchange just like a stock. Related Terms: • Bond • Corporate Bond • Index • Index Fund • Mortgage-Backed Securities—MBS Letter of Credit What Does Letter of Credit Mean? A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount.


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

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, AOL-Time Warner, asset allocation, Bear Stearns, Berlin Wall, book value, business cycle, buttonwood tree, buy and hold, Carl Icahn, corporate governance, corporate raider, currency risk, disintermediation, diversification, diversified portfolio, Donald Trump, estate planning, financial engineering, fixed income, index fund, intangible asset, interest rate swap, John Bogle, junk bonds, Larry Ellison, margin call, Mary Meeker, money market fund, Myron Scholes, new economy, payment for order flow, 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, tech worker, technology bubble, transaction costs, Vanguard fund, women in the workforce, zero-coupon bond, éminence grise

For years, experts have debated whether index funds are superior to managed funds. Index-fund proponents argue that actively managed funds waste money by paying higher salaries for top-flight analysts and stock pickers to put together a winning portfolio. They also incur higher transaction costs because they engage in frequent trading. But after all that, most managed funds still can't beat the passive index funds. On the other hand, managed-fund backers say that index funds don't always perform better, such as in the twelve months following the March 2000 technology bust. And managed-fund aficionados say index funds are, well, boring.

When their broker recommends a fund, they don't know enough to ask: Are you suggesting this fund because your research shows it's the best investment for me, or because your firm is paid $1 million to push it? If your head is spinning from all of this, take the easiest and safest route and pick a low-cost index fund. Many Vanguard, Fidelity, and TIAA-CREF funds fit the criteria I outlined above. Vanguard, for example, has twenty-one no-load index funds to choose from. Start off with the boring but predictable returns of a broad-based index fund— one that tracks the S&P 500 or, to get exposure to the entire market, the Wilshire 5000— over the more alluring, but volatile, managed funds. Index funds generate less capital gains taxes and also charge lower fees and expenses. They make the most sense when you want to be invested in large-cap stocks, since it's harder for portfolio managers to beat those indices.

Fire Your Broker If you have less than $50,000 to invest, you don't need a broker. The strategy that makes the most sense is investing in low-cost mutual funds, especially index funds that match the performance of a stock index. You could start off with a fund that follows the Wilshire 5000, which includes virtually all U.S. stocks, or the Standard & Poor's 500, which mimics the shares of 500 large U.S. companies. As you become more comfortable investing in mutual funds, and as your assets grow, you can move into index funds that track small, medium, and large companies. Or you can buy funds that track fast-growing companies or undervalued ones.


pages: 426 words: 115,150

Your Money or Your Life: 9 Steps to Transforming Your Relationship With Money and Achieving Financial Independence: Revised and Updated for the 21st Century by Vicki Robin, Joe Dominguez, Monique Tilford

asset allocation, book value, Buckminster Fuller, buy low sell high, classic study, credit crunch, disintermediation, diversification, diversified portfolio, fiat currency, financial independence, fixed income, fudge factor, full employment, Gordon Gekko, high net worth, index card, index fund, intentional community, job satisfaction, junk bonds, Menlo Park, money market fund, Parkinson's law, passive income, passive investing, profit motive, Ralph Waldo Emerson, retail therapy, Richard Bolles, risk tolerance, Ronald Reagan, Silicon Valley, software patent, strikebreaker, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, Vanguard fund, zero-coupon bond

Mutual fund managers are constrained by regulations imposed by the Security and Exchange Commission (SEC), a federal agency. Index Funds Index Funds are mutual funds designed to mimic the performance of stock market indices such as the Dow Industrials, the NASDAQ Composite and the S&P 500. As an FI investor you have learned when enough is enough, particularly in terms of your money. In using index funds to invest your capital you are not attempting to beat the market. Instead you are looking for enough of a return to meet your short-term as well as long-term goals while taking as little risk as possible. That is why index funds, with their low fees and ability for diversification, can work well for the FI investment program.

At its core, index fund investing means you are using an approach and strategy that seeks to track the investment returns of a specified stock or bond market benchmark or index. One of the most popular index funds today is the S&P 500 Index Fund, which attempts to replicate the investment results of this specific target index. There is no attempt to use traditional “active” money management or to make “bets” on individual stocks. Indexing is a passive investment approach emphasizing broad diversification and low portfolio trading activity. Low cost is a key advantage of index funds, leaving a larger share of the pie for investors, which is why this choice aligns well for your FI investment plan.

When you have a choice about where to invest your money, though, choose firms that offer no-load funds, carry no sales fees (loads) and don’t charge 12b-1 fees to cover marketing expenses. Actively Managed Funds or Index Funds? If you can’t figure out which to choose—an actively managed mutual fund or an index fund—no worries. The sharpest minds in the industry seem to favor index funds for people like us. A few examples: Legendary investor Warren Buffett: “Most investors are better off putting their money in low-cost index funds. A very low-cost index is going to beat a majority of the professionally managed money.” Best-selling author Larry Swedroe from his book, What Wall Street Doesn’t Want You to Know: “Regardless of the asset class [see below], use only index or passive asset class funds.


pages: 526 words: 144,019

A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History by Diana B. Henriques

Alan Greenspan, asset allocation, bank run, banking crisis, Bear Stearns, behavioural economics, Bernie Madoff, Black Monday: stock market crash in 1987, break the buck, buttonwood tree, buy and hold, buy low sell high, call centre, Carl Icahn, centralized clearinghouse, computerized trading, Cornelius Vanderbilt, corporate governance, corporate raider, Credit Default Swap, cuban missile crisis, Dennis Tito, Edward Thorp, Elliott wave, financial deregulation, financial engineering, financial innovation, Flash crash, friendly fire, Glass-Steagall Act, index arbitrage, index fund, intangible asset, interest rate swap, It's morning again in America, junk bonds, laissez-faire capitalism, locking in a profit, Long Term Capital Management, margin call, Michael Milken, money market fund, Myron Scholes, plutocrats, Ponzi scheme, pre–internet, price stability, proprietary trading, quantitative trading / quantitative finance, random walk, Ronald Reagan, Savings and loan crisis, short selling, Silicon Valley, stock buybacks, The Chicago School, The Myth of the Rational Market, the payments system, tulip mania, uptick rule, Vanguard fund, web of trust

The LOR concept assumed there would always be a large population of wealthy, unflappable bargain hunters who would persist in buying low and selling high, investors who would step into a falling market to buy all the shares the portfolio insurers would be selling. Those opportunistic bargain hunters certainly would not come from the rapidly growing community of index funds, who bought only those shares that helped their portfolio track some index such as the S&P 500. Firmly believing markets were rational and efficient, index fund investors weren’t going to be looking for bargains when LOR’s clients needed to sell. Indeed, as stock prices fell, the index funds might well be selling, too, to cover redemptions from nervous retail investors. Indeed, if the “Chicago School” was right—if markets were rational and efficient, and current prices reflected all the information known to all rational investors—how could such bargain hunters survive?

By 1981, that shift had already begun. Institutional investors were putting more and more money into the hands of “index fund” managers. Based on academic theories about how rational markets worked, these giant portfolios, an ocean of money tens of billions of dollars deep, replicated, on a smaller scale, the entire blue-chip market represented by broad market measures of value, such as the Standard & Poor’s 500 index. Even some individual investors were starting to seek out mutual funds using this approach. These index funds, although still a relatively small factor in the overall market for common stocks, tended to buy and sell the same stocks at the same time.

Either way, you retained a stake in the index—which made the strategy immensely attractive to index funds. This was not a game for small fry. To nab those arbitrage profits, you needed three things: computers that could constantly monitor prices in both markets and alert you when they parted ways; a trading desk that could instantly deliver the necessary orders and get them executed for pennies a share; and enough money to buy a lot of stocks and futures contracts at one time. Doing trades like that, day in and day out, was called index arbitrage, and it was a low-risk way for sophisticated money managers to pick up a few extra pennies of profit for an index fund that would otherwise merely match the market.


Stock Market Wizards: Interviews With America's Top Stock Traders by Jack D. Schwager

Asian financial crisis, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Black-Scholes formula, book value, commodity trading advisor, computer vision, East Village, Edward Thorp, financial engineering, financial independence, fixed income, implied volatility, index fund, Jeff Bezos, John Meriwether, John von Neumann, junk bonds, locking in a profit, Long Term Capital Management, managed futures, margin call, Market Wizards by Jack D. Schwager, money market fund, Myron Scholes, paper trading, passive investing, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk-adjusted returns, short selling, short squeeze, Silicon Valley, statistical arbitrage, Teledyne, the scientific method, transaction costs, Y2K

In addition, because of their low turnover of stock holdings, index funds also offer the benefits of lower management fees and more favorable tax treatment. Frankly, there is nothing wrong with this argument. Indexation, as it was intended, is a reasonable investment strategy. As index funds outperformed the majority of other funds at lower costs, however, they attracted a steadily expanding portion of investment flows. This shift, in turn, created more buying for the stocks in the index at the expense of much of the rest of the market, which helped the index funds outperform the vast majority of individual stocks, and so on.

The bottom line is that in the present perverse incentive structure of benchmark-guided portfolios, there is more risk for fund managers in not owning certain grossly overvalued mega-capitalization stocks than in abstaining from them. Including enhanced index funds, such as Fidelity Magellan, the S&P 500 index funds now account for over two-thirds of new equity investments. What happens when the enhanced index funds want to MICHAEL LAUER lighten or liquidate their current positions, which are overwhelmingly concentrated in severely overpriced stocks? Who are they going to sell to? This is an amazingly small community. Only about 25 mutual fund institutions control almost one-third of total equity assets in this country, and every one of those guys knows what the others are doing.

For example, if major funds are large holders of a given stock and then begin to reduce their position, then the stock is likely to be under relative pressure for months. What about Lauer's warnings that the S&P 500 index funds and what he terms the "enhanced" or "closet" index funds are filled with overvalued stocks? Clearly, this is advice that has a limited shelf life. If by the time you read this book, the same general condition still prevails (lopsidedly high price/earnings ratios for the highest capitalization stocks), then for better or worse, you will still have the opportunity to act on Lauer's advice. However, what if, by the time you read this book, a decline in the index and "closet" index funds relative to the broader stock market is history?—in other words, Lauer was right, but it is too late as far as you are concerned.


pages: 304 words: 80,965

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

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

These funds attempt to track the returns and risks of an asset class (as represented by a benchmark such as the S&P 500 or FTSE 100) and make no effort to outperform it. The great advantage of index funds is that they generally charge very low fees.57 Nearly a quarter of all mutual fund assets in the United States are now in index funds, as are about 17 percent in Europe.58 Even in the United Kingdom, a redoubt of active management, the market share of “trackers” recently reached a market record 8.7 percent in 2012, up from 7.4 percent in 2011.59 Many professionals create a “core and satellite” structure, using index funds as the core allocation to any asset class (say, bonds and stocks) and active managers for specialty allocations.

As of this writing, for example, the largest company, Apple Computer, comprises about 3 percent of the S&P 500 index, while the tenth largest, AT&T, comprises about 1.5 percent. The companies that rank 499th and 500th in the index account for only a few hundredths of a percent. To track accurately, an index fund comprises its portfolio by owning stocks in the same percentages as the index. Index funds are constituted that way because modern portfolio theory says that the market overall is the result of thousands or millions of Warren Buffetts making active, considered decisions. The result, according to the theory, is a market that efficiently prices risk and reward.

The great advantage of index funds is that they generally charge very low fees.57 Nearly a quarter of all mutual fund assets in the United States are now in index funds, as are about 17 percent in Europe.58 Even in the United Kingdom, a redoubt of active management, the market share of “trackers” recently reached a market record 8.7 percent in 2012, up from 7.4 percent in 2011.59 Many professionals create a “core and satellite” structure, using index funds as the core allocation to any asset class (say, bonds and stocks) and active managers for specialty allocations. USING COLLECTIVE ACTION The popularity of index funds has its own consequences. When large numbers of investors are locked into a list of stocks, portfolio companies receive less robust signals of confidence or discontent through the marketplace. Index funds can’t buy shares to reward good management or dump them when a CEO has gone awry. But there are other ways of encouraging good corporate performance. Awareness is growing that citizen investors benefit when asset managers address ownership issues in ways other than trading shares, even if doing so does not gain the asset manager any ground over a competitor.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", 3Com Palm IPO, Alan Greenspan, Albert Einstein, asset allocation, Bear Stearns, beat the dealer, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, book value, Brownian motion, buy and hold, buy low sell high, caloric restriction, caloric restriction, 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 engineering, financial innovation, Garrett Hardin, George Santayana, German hyperinflation, Glass-Steagall Act, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Bogle, John Meriwether, John Nash: game theory, junk bonds, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, Mason jar, merger arbitrage, Michael Milken, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, PalmPilot, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, power law, 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, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stock buybacks, stocks for the long run, survivorship bias, tail risk, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Tragedy of the Commons, uptick rule, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

What if, somehow, you could save $6 a day and buy shares in the Vanguard S&P 500 Index Fund at the end of each month? If that investment grows in a tax-deferred retirement plan at the long-term average for large stocks of about 10 percent, then after forty-seven years you can retire at age sixty-five with $2.4 million. But where do you find an extra $6 a day? The pack-and-a-half-a-day smoker who kicks his drug habit saves $6 each day. If the construction worker who drinks two $5 six-packs of beer or Coke each day switches to tap water he can save $10 a day, $6 of which he puts in an index fund and $4 of which he spends on healthy food to replace the junk calories from the beer or Coke.

A calculation shows that in 1.2 million years we would be a solid sphere of flesh with a radius almost as large as that of our galaxy, expanding at the speed of light! How fast do ordinary investments grow? The best simple long-term choice has been a broad common-stock index fund. At the average past growth rate of about 10 percent a year, such an investment has doubled in about 7.3 years. Historically, inflation offset about 3 percent of this, stretching to a little over a decade the average time required to double real buying power. Taxable investors in an index fund, which generates dividends and some realized capital gains, pay government another percent or so annually, delaying the doubling time to about twelve years.

This means if the oil giant Exxon has a market value, computed as share price times number of shares outstanding, of $400 billion and the total market value of all stocks is $10 trillion, then the index fund puts 4 percent of its net worth in Exxon, and so on for all the other stocks. A mutual fund like this that replicates the composition and investment results of a specified pool of securities is called an index fund, and investors who buy such funds are known as indexers. Call any investment that mimics the whole market of listed US securities “passive” and notice that since each of these passive investments acts just like the market, so does a pool of all of them.


pages: 515 words: 132,295

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

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, Alan Greenspan, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, Bear Stearns, behavioural economics, Big Tech, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, data science, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, electricity market, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial intermediation, Ford Model T, Frederick Winslow Taylor, George Akerlof, gig economy, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Greenspan put, guns versus butter model, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Bogle, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, low interest rates, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, proprietary trading, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Ronald Reagan, Satyajit Das, Savings and loan crisis, scientific management, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, TED Talk, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, Tragedy of the Commons, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, vertical integration, zero-sum game

But active fund management was much more profitable, and the industry worked hard to convince average Joe investors that they needed to pay for professional guidance through this wild world of investing. “You wouldn’t settle for an ‘average’ brain surgeon,” said one index fund critic. “So why would you settle for an ‘average’ mutual fund?”15 Another fund management firm papered Wall Street with posters showing an angry Uncle Sam putting a rubber stamp across index funds. “Index funds are un-American!” the ad screamed. “Help stamp out index funds.” Even the prudent Bostonians got into the game. My husband’s father, Robert Minturn Sedgwick, happened to be one of those stewards who worked in the Boston asset management industry before and after World War II.

It’s likely that CSC will use behavioral nudges to get as many eligible people as possible to participate, for instance by making enrollment automatic unless a worker opts out, rather than requiring a sign-up to opt in.45 Participants in CSC would sock away at least 3 percent of their income, most likely in a conservative index fund like an S&P 500 fund, where the pooled money is invested in all 500 stocks in that index. Index funds are considered a simple way to ensure that investors see the same return as the overall stock market—and they’re cheaper, too, since index funds don’t employ stock-picking wizards and charge the related fees. Advocates say that the government role will be to help recruit more people to save, and that costs of such plans will be kept low through efficiencies of scale derived from all those participants, much as happens at some big public employee plans.

In April 2011, journalist Frederick Kaufman wrote an article for Foreign Policy magazine titled “How Goldman Sachs Created the Food Crisis,” which put the blame squarely on Wall Street.10 Kaufman outlined many of the headline statistics about just how financialized food and all sorts of other commodities had become. Since 2000 there has been a fiftyfold increase in dollars invested into commodities-linked index funds. It was a shift that was due to several things: the creation of a commodity index fund by Goldman Sachs in 1991, which allowed raw materials to become securities that could be bought and sold by investors; the deregulation of commodities markets in 2000, which poured gasoline on that process; the financial crisis of 2008, which scared everyone out of stocks and drove investors into “safety” bets like raw materials; and the beginning of the Federal Reserve’s quantitative easing program the following year, a $4.5 trillion money dump that was meant to help Main Street but ended up giving Wall Street a lot of easy money to burn.


Concentrated Investing by Allen C. Benello

activist fund / activist shareholder / activist investor, asset allocation, barriers to entry, beat the dealer, Benoit Mandelbrot, Bob Noyce, Boeing 747, book value, business cycle, buy and hold, carried interest, Claude Shannon: information theory, corporate governance, corporate raider, delta neutral, discounted cash flows, diversification, diversified portfolio, Dutch auction, Edward Thorp, family office, fixed income, Henry Singleton, high net worth, index fund, John Bogle, John von Neumann, junk bonds, Louis Bachelier, margin call, merger arbitrage, Paul Samuelson, performance metric, prudent man rule, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, survivorship bias, technology bubble, Teledyne, transaction costs, zero-sum game

It was this “form of self‐deception” as Buffett described it, that nearly destroyed GEICO in the early 1970s.158 Simpson believes that, when considering active management, the base case for an investor must be a passive index fund, for example an S&P 500 index fund, a total market index fund, or a worldwide market index fund. That base case index fund allows an investor to obtain a market return very cheaply, so unless an active manager can add value over and above that index, the investor is better off in the index fund. For active managers as a whole, investing is a zero sum game, less fees and transaction costs, so most active managers won’t do as well as the market because they are the market.

He doesn’t believe, for example, that the ease of buying and selling exchange traded funds (ETFs) will help most investors because most investors will trade them, and tend to buy when they are high and sell when they are low. He agrees with John Bogle, who prefers index funds to ETFs, not because they’re cheaper—the fees on index funds might be a few basis points more—but because investors are more likely to buy them and put them away. They’re not likely to trade them. The ETF’s big advantage— that they can be traded throughout the entire day—will turn out to be a negative for most investors, including professional investors, because it will make them more likely to trade the ETF for a few percentage points, which won’t work over a long period of time.

As Glenn Greenberg said, Peter Lynch (manager of the Fidelity Magellan Fund during its most successful period, earning truly amazing average annual returns during his tenure) was anything but a concentrated investor, owning a large number of securities in the fund. Furthermore, concentrated investing should only be undertaken by people who are prepared to do intensive research and analysis on their investments. People outside of the investment profession usually don’t have the time to do this, and are far better off with an index fund or finding a competent investment manager— preferably one who employs a focused approach. xi Preface The second caveat is more important, and applies to investment professionals and non-professionals alike (perhaps even more to professionals). It is summed up in an insightful and humbling quote from legendary martial artist Bruce Lee, which is as follows: A goal is not always meant to be reached, it often serves simply as something to aim at.


pages: 120 words: 39,637

The Little Book That Still Beats the Market by Joel Greenblatt

backtesting, book value, General Magic , index fund, intangible asset, random walk, survivorship bias, transaction costs

But their sales fees and expenses were way too high. Then came no-load funds, which were better. They eliminated the sales fee, but were still burdened with management fees and with the tax and transactional burden that comes from active management. Then came “index funds,” which cut fees, taxes, and transaction costs to the bone. Very, very good. What Joel would have you consider, in effect, is an index-fund-plus, where the “plus” comes from including in your basket of stocks only good businesses selling at low valuations. And he has an easy way for you to find them. Not everyone can beat the averages, of course—by definition. But my guess is that patient people who follow Joel’s advice will beat them over time.

No doubt attracted by the large fees, thousands of new hedge funds have been created over the past few years. Most will have no chance of justifying their fees. There just aren’t that many great managers, and your chances of finding one are quite slim. So that’s why many people just choose to invest in an index fund.27 An index fund is a mutual fund that just tries to equal the overall market’s return, less a very small fee. These funds pick a market index (perhaps the S&P 500 index of 500 large stocks or the Russell 2000 index, an index that consists of 2,000 somewhat smaller stocks) and buy all of the stocks in that particular index.

Market at just the wrong time (for instance, when you need money to cover expenses and a depressed Mr. Market is offering low prices for your shares). 27 Or an exchange-traded fund (ETF), an index fund that trades similar to the way a stock trades. 28 Also, if you are not investing using a tax-free retirement account and taxes are a concern for you, this strategy will minimize the amount of taxes you must pay because index funds typically do not sell their stock holdings unless a particular security is dropped from the index. This is usually less than 10 percent of the securities in the index in any one year. 29 Either a traditional investment retirement account or a Roth IRA. 30 Thereafter making no further contributions of any kind. 31 From investing the maximum allowable $4,000 per year in an IRA over two years and then the increased maximum of $5,000 per year for the following four years equaling $28,000 over the six years. 32 It’s fascinating to note that if you had decided to contribute $5,000 per year for the remaining 24 years of this 30-year period, rather than stopping contributions after just six years as we did in this example, your IRA account would have grown to approximately $16.5 million after 30 years versus the $13.4 million from just those six contributions.


pages: 179 words: 59,704

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

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

Many employers offer the ability to contribute to your 401(k) directly from your paycheck, so you never even see the money or have the chance to consider spending it. It’s a great way to force/motivate yourself to save. Investments in the form of low-fee index funds. This is where the bulk of my cash hangs out. Index funds are, in my opinion, the best way to invest because the fees are low, you can manage them yourself, and they often outperform actively managed funds. Index funds are also ideal because they’re a heavily diversified way to invest, since you’re invested across the entire market. But the real win with index funds is their absence of high fees, which are what you’ll encounter with a portfolio manager and what will cripple your net worth in the long run.

This is an oversimplification of investing, and there are other variables such a rebalancing and asset allocation, as well as decreasing your exposure to risk as you near traditional retirement age, but this is the basic gist. If you want to grow your wealth, you need to avail yourself of the stock market. Investing in low-fee index funds is as straightforward as any other facet of online banking, and you can set up an account online by yourself in minutes. You will need to select a brokerage that offers low-fee index funds, and then you will need to set up an account and transfer over some money to get started. In order to remove human error and the very human temptation to time the market, I simply invest money every month.

We canceled our plans to go out to dinner that night and instead ate frozen pizza while poring over the spreadsheets Nate had assembled with projections ranging from how much money we could save each month to what we could charge in rent for our Cambridge home to purchase prices for rural properties to standard stock market returns for our portfolio of low-fee index funds. Midway through dinner, I told Nate it was a go. After four hours of hearing him talk with more passion than I’d heard from him in the last seven years, I knew there was no way we could zip this dream back up. It was out like an air mattress, expanding by the minute, never to be stuffed neatly into its factory-issued carrying case ever again.


pages: 199 words: 48,162

Capital Allocators: How the World’s Elite Money Managers Lead and Invest by Ted Seides

Albert Einstein, asset allocation, behavioural economics, business cycle, coronavirus, COVID-19, crowdsourcing, data science, deliberate practice, diversification, Everything should be made as simple as possible, fake news, family office, fixed income, high net worth, hindsight bias, impact investing, implied volatility, impulse control, index fund, Kaizen: continuous improvement, Lean Startup, loss aversion, Paradox of Choice, passive investing, Ralph Waldo Emerson, risk tolerance, Sharpe ratio, sovereign wealth fund, tail risk, The Wisdom of Crowds, Toyota Production System, zero-sum game

A CIO must consider which markets to own, which indexes to employ, and in what proportions. Charley Ellis himself discussed these challenges in our two podcast conversations. While staunchly supporting index fund management, Charley noted that active management is preferable in emerging markets and probably in Europe too. Selecting active managers is also required to participate in private equity and venture capital. Charley is passionate about the index fund movement, but he is equally passionate about the unusual success of Capital Group, Yale University, and Vanguard – that is, the little-known team at Vanguard that selects active managers, not the indexing juggernaut itself.

Only 10% of Yale’s policy portfolio is allocated to U.S. stocks, bonds and cash, and only approximately 14% more is invested in international equities. The remaining 76% of Yale’s portfolio is invested in assets that have no readily accessible index fund to earn low-cost, easy-to-access returns. Yale is playing a completely different game than that easily available to individuals, and so are the other CIOs around the world who have appeared on Capital Allocators. The staunch proponents of index fund management might want to consider why some of the smartest people in the business have independently chosen to pursue strategies that cannot be indexed. Perhaps the wisdom of this crowd is entirely wrong and investment success is easy, but I doubt it.

In 2010, Larry Kochard and Cathleen Rittereiser profiled Ted in the book Top Hedge Fund Investors, and in 2016 Ted authored So You Want to Start a Hedge Fund: Lessons for Managers and Allocators to share lessons from his experience. On a slow day in 2007, Ted had the bright idea to challenge a statement made by Warren Buffett about the superiority of index funds over hedge funds. With aspirations to demonstrate the value of hedge funds to institutional portfolios, he initiated a charitable wager with Warren that pitted the 10-year performance of the S&P 500 against a selection of five hedge fund of funds from 2008–2017. Protégé Partners lost the bet, and Ted still wonders about the probability distribution of outcomes and the quality of his decision process.


pages: 244 words: 79,044

Money Mavericks: Confessions of a Hedge Fund Manager by Lars Kroijer

activist fund / activist shareholder / activist investor, Bear Stearns, Bernie Madoff, book value, capital asset pricing model, corporate raider, diversification, diversified portfolio, equity risk premium, family office, fixed income, forensic accounting, Gordon Gekko, hiring and firing, implied volatility, index fund, intangible asset, Jeff Bezos, Just-in-time delivery, Long Term Capital Management, Mary Meeker, merger arbitrage, NetJets, new economy, Ponzi scheme, post-work, proprietary trading, risk free rate, risk-adjusted returns, risk/return, shareholder value, Silicon Valley, six sigma, statistical arbitrage, Vanguard fund, zero-coupon bond

When I asked a former professor of mine at HBS, he said that for whatever reason the world does not seem to value this kind of investing very highly. Increasing amounts of money are invested in index funds like Vanguard, but taking that a step further and picking broad arrays of indices has, for whatever reason, not been something a lot of people do or are willing to pay a lot for. This is probably because anyone who can convince people to let them manage their money would prefer to claim higher fees for doing so, and would not want clients to allocate money to an index-fund product that might charge a mere 0.2 per cent per year or less. There is more money to be made from active management or convincing people to invest in more fancy products like hedge funds or private equity.

‘I haven’t really been following the stock market closely. I figure that stock markets are pretty efficient and if you are going to have any chance at all to beat them you need to commit to it full time with access to the best information. If you don’t, it might be better to put your money in an index fund. Or hedge fund, obviously,’ I added, quickly remembering where I was. This was the equivalent of a car mechanic saying he is not really interested in cars or a vet saying that animals are an unnecessary annoyance. Perry’s response was measured. ‘There’s probably some truth in that, but most people who work here have a long history of investing in the stock market and a genuine interest in it.’

Heaven forbid that Mr Straw would have to pay tax on his gains. Instead of enriching the many layers of financial advisers and principals, Mr Straw should simply have put his money in Treasury bonds, and slept easily at night (particularly as his retirement date was fast approaching) or a stock-market index fund if he wanted market exposure. But wouldn’t Mr Straw be quite upset with the company canteen folks if they forced him to pay this kind of price premium for a slightly more exotic-sounding and tasting fruit as part of his standard company lunch? The example described needs one further explanation.


pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

Alan Greenspan, AOL-Time Warner, Benoit Mandelbrot, Black-Scholes formula, book value, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, confounding variable, 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, equity risk premium, 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, it's over 9,000, John Bogle, John Nash: game theory, Larry Ellison, 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, Plato's cave, Ponzi scheme, power law, price anchoring, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, Richard Thaler, risk free rate, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, two and twenty, ultimatum game, UUNET, Vanguard fund, Yogi Berra

Chapter 8 - Connectedness and Chaotic Price Movements Insider Trading and Subterranean Information Processing Trading Strategies, Whim, and Ant Behavior Chaos and Unpredictability Extreme Price Movements, Power Laws, and the Web Economic Disparities and Media Disproportions Chapter 9 - From Paradox to Complexity The Paradoxical Efficient Market Hypothesis The Prisoner’s Dilemma and the Market Pushing the Complexity Horizon Game Theory and Supernatural Investor/Psychologists Absurd Emails and the WorldCom Denouement Bibliography Index Copyright Page Also by John Allen Paulos Mathematics and Humor (1980) I Think Therefore I Laugh (1985) Innumeracy: Mathematical Illiteracy and its Consequences (1988) Beyond Numeracy: Ruminations of a Numbers Man (1991) A Mathematician Reads the Newspaper (1995) Once Upon a Number: The Hidden Mathematical Logic of Stories (1998) To my father, who never played the market and knew little about probability, yet understood one of the prime lessons of both. “Uncertainty,” he would say, “is the only certainty there is, and knowing how to live with insecurity is the only security.” 1 Anticipating Others’ Anticipations It was early 2000, the market was booming, and my investments in various index funds were doing well but not generating much excitement. Why investments should generate excitement is another issue, but it seemed that many people were genuinely enjoying the active management of their portfolios. So when I received a small and totally unexpected chunk of money, I placed it into what Richard Thaler, a behavioral economist I’ll return to later, calls a separate mental account.

Thus, taking Keynes literally and not having much confidence in my judgment of popular taste, I refrained from investing in individual stocks. In addition, I believed that stock movements were entirely random and that trying to outsmart dice was a fool’s errand. The bulk of my money therefore went into broad-gauge stock index funds. AWC, however, I deviated from this generally wise course. Fathoming the market, to the extent possible, and predicting it, if at all possible, suddenly became live issues. Instead of snidely dismissing the business talk shows’ vapid talk, sports-caster-ish attitudes, and empty prognostication, I began to search for what of substance might underlie all the commentary about the market and slowly changed my mind about some matters.

Predictability and Trends I often hear people swear that they make money using the rules of technical analysis. Do they really? The answer, of course, is that they do. People make money using all sorts of strategies, including some involving tea leaves and sun-spots. The real question is: Do they make more money than they would investing in a blind index fund that mimics the performance of the market as a whole? Do they achieve excess returns? Most financial theorists doubt this, but there is some tantalizing evidence for the effectiveness of momentum strategies or short-term trend-following. Economists Narasimhan Jegadeesh and Sheridan Titman, for example, have written several papers arguing that momentum strategies result in moderate excess returns and that, having done so over the years, their success is not the result of data mining.


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, Alan Greenspan, Andrei Shleifer, asset allocation, Bretton Woods, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, equity risk premium, financial engineering, fixed income, frictionless, global macro, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, junk bonds, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low cost airline, low interest rates, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, Phillips curve, price mechanism, purchasing power parity, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolling blackouts, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, statistical arbitrage, stocks for the long run, survivorship bias, systematic bias, Tax Reform Act of 1986, the market place, transaction costs, Y2K, yield curve, zero-sum game

Call it cyclical asset allocation (CAA). Such a strategy emphasizes different asset classes as well as activeversus-passive management, as cycles dictate. When markets do not provide much in terms of selection opportunities for securities, the index fund is a cost-efficient tool with which to access broad market moves. But, market efficiency has cycles, too. Correspondingly, reallocating index funds is another source of value that can be added through the asset-allocation process. There is a time for everything. There is a time for active management and a time for passive management; a time for value stocks and a time for growth stocks; a time for large-caps and a time for small-caps.

(We could further disaggregate the longer-term fixed-income instruments into a global allocation, but for this exercise, we stay domestic.) Figure 6.3 illustrates the SAA produced by my interpretation of the various asset classes’ market weights. Either exchange-traded funds (ETFs), or passively managed low-cost index funds, could fill most buckets in question. ETFs and the low cost-managed index funds are diversified baskets of securities designed to track the performance of well-known indices, proprietary indices or basket of securities. The major differences between the two is that the ETF are traded as individual stocks on major exchanges while the passive funds are subject to the traditional mutual funds-pricing mechanism (that is, at the close of market).

A forward-looking view one can tie together such important variables is critical to the asset-allocation process. But, the process needs to differentiate itself in two additional ways: The first way has to do with the versatility of the framework. The second way has to do with actively using passive vehicles (also known as index funds). xix When I talk about the framework’s versatility, I mean the assetallocation model can be changed to find opportunity. For example, I do not view the nontraditional sector as the hedge fund’s exclusive domain. To me, it is a place for any investment decision that does not correlate with traditional capital-market indices but does have value.


pages: 463 words: 105,197

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

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

This means that there is little point in stock-picking in the first place, certainly for amateur investors.14 “Behavioral finance” holds that ordinary investors often act irrationally.15 All this theory exhorted investors to simply diversify while paying as little as possible to dishonest money managers who claim to be able to “beat the market.” The cheapest way to do this is via low-cost mutual funds (especially index funds) that track broad market indices. A mutual fund is a portfolio of stocks that may have an industry focus (e.g., energy) or a strategy (e.g., growth). An index fund (which is a type of mutual fund) holds a portfolio of stocks designed to exactly mimic the index of interest (e.g., S&P 500). Beginning in the 1970s, a huge demand developed for such funds, in part because of the shift of pension savings into the stock market spurred by various government reforms and in part because governments, persuaded by financial theory, encouraged investors to park their savings in such low-cost, diversified funds.

The overall effect was that institutional investors, which controlled these funds, became the largest owners, and thus the largest controllers (at least in principle), of the major corporations. Who are the institutional investors, anyway? They include companies that manage mutual funds and index funds, asset managers, and other firms that buy and hold equities on behalf of their customers. The largest names are those we mentioned above: Vanguard, BlackRock, State Street, and Fidelity. Index fund operations are relatively mechanical, so their costs are low; today they comprise probably less than a quarter of the offerings of institutional investors.16 Figure 4.2 displays the growth of the fraction of the US public stock market controlled by institutional investors.

Diversification means that they own stock in a wide range of companies rather than in any one company or group of similar companies. Passivity means that they do not frequently buy and sell stocks, but instead mostly hold onto them. They also often manage the assets that are technically owned by workers and other ordinary people. Vanguard has been rightly praised for pioneering low-cost index funds, which enable workers to diversify their retirement savings and avoid the hazards of stock-picking. These features give the impression that these institutions play no active role in guiding the economy. Yet economic research suggests that diversified institutional investors have harmed a wide range of industries, raising prices for consumers, reducing investment and innovation, and potentially lowering wages.


pages: 483 words: 141,836

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

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, 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, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

However, I think the biggest perceived problem in the IGT world would have been a lack of basic fairness. There are problems in index funds, but people like that any individual can get the average return of the market, without much expense or effort. All the slick people trying to do better, do worse as a group. If some make money, others lose it, and neither the winners nor the losers hurt the index fund investor (but both pay more fees, expenses, and taxes than the index fund investor). This fairness helps generate the social support for the financial system. In the IGT world, people would have hated Wall Street for the reasons they used to—that it was a bunch of sharpies playing with other people’s money and doing no social good—rather than the current reasons—that it wrecked the economy and used huge bailout funds to pay obscene bonuses.

Belief in MPT CAPM helped make the markets more efficient cross-sectionally; that is, returns on different asset classes over the same time periods aligned pretty well with their respective risk levels. But, at least arguably, MPT CAPM contributed toward prices diverging from fundamental value. Index fund investors don’t ask what something is worth; they want to hold it in proportion to its price. Among other things, it guarantees that they are overinvested in anything overpriced, and underinvested in anything underpriced. It may be impossible to tell overpriced assets from underpriced ones, but that doesn’t matter; it’s a mathematical certainty the index fund investor has the worst of both worlds. (Of course, as Ken French and John Bogle independently pointed out to me, half the nonindex investors must be even more overweighted in the overpriced assets, and all the nonindex investors pay higher costs.)

Everyone would say she just wants to get a lot of assets in from foolish people so she can live off the fee income. It would take many years, but people would begin to notice that the index fund produced pretty decent returns. After fees it was better than more than half the hedge funds. And it was liquid, transparent, and tax efficient. Pressure would begin to mount to expand access. Hedge fund versions of the index product would be introduced to avoid anti-index fund rules. Eventually, when the pendulum stopped, we might end up in pretty much the same place as the real world, in which Harry didn’t meet Kelly. CHAPTER 6 Exponentials, Vampires, Zombies, and Tulips This is one of those chapters that might not seem to belong in a book on risk.


pages: 202 words: 62,901

The People's Republic of Walmart: How the World's Biggest Corporations Are Laying the Foundation for Socialism by Leigh Phillips, Michal Rozworski

Alan Greenspan, Anthropocene, Berlin Wall, Bernie Sanders, biodiversity loss, call centre, capitalist realism, carbon footprint, carbon tax, central bank independence, Colonization of Mars, combinatorial explosion, company town, complexity theory, computer age, corporate raider, crewed spaceflight, data science, decarbonisation, digital rights, discovery of penicillin, Elon Musk, financial engineering, fulfillment center, G4S, Garrett Hardin, Georg Cantor, germ theory of disease, Gordon Gekko, Great Leap Forward, greed is good, hiring and firing, independent contractor, index fund, Intergovernmental Panel on Climate Change (IPCC), Internet of things, inventory management, invisible hand, Jeff Bezos, Jeremy Corbyn, Joseph Schumpeter, Kanban, Kiva Systems, linear programming, liquidity trap, mass immigration, Mont Pelerin Society, Neal Stephenson, new economy, Norbert Wiener, oil shock, passive investing, Paul Samuelson, post scarcity, profit maximization, profit motive, purchasing power parity, recommendation engine, Ronald Coase, Ronald Reagan, sharing economy, Silicon Valley, Skype, sovereign wealth fund, strikebreaker, supply-chain management, surveillance capitalism, technoutopianism, TED Talk, The Nature of the Firm, The Wealth of Nations by Adam Smith, theory of mind, Tragedy of the Commons, transaction costs, Turing machine, union organizing, warehouse automation, warehouse robotics, We are all Keynesians now

And so, as capitalism heaves from boom to bust, its managers switch from plans for prosperity to plans for surviving a crisis, all of them contested and imperfectly implemented. Communism by Index Fund? Contemporary capitalism is ever more tightly integrated through the financial system. What do we mean by integration? Well, for instance, the chance that any two firms in the broad S&P 1500 index of the US stock market have a common owner that holds at least 5 percent of shares in both is today a stunning 90 percent. Just twenty years ago, the chance of finding this kind of common ownership was around 20 percent. And index funds (which invest money passively), pension funds, sovereign wealth funds, and other gargantuan pools of capital all bind economic actors still closer together via their enormous pools of money.

Big institutional investors and passive investment funds, on the other hand, move entire sectors toward concentration that looks much more like monopoly—with handy profits, as firms have less reason to undercut one another. The result is a very capitalist sort of planning. This unseemly situation led Bloomberg business columnist Matt Levine to ask, in the title of a remarkable 2016 article, “Are Index Funds Communist?” Levine imagines a slow transition from today’s index funds, which use simple investing strategies, through a future where investing algorithms become better and better, until “in the long run, financial markets will tend toward perfect knowledge, a sort of central planning—by the Best Capital Allocating Robot.” For him, capitalism may end up creating its own gravediggers—except they will be algorithms, not workers.

Other titles in this series available from Verso Books: Utopia or Bust by Benjamin Kunkel Playing the Whore by Melissa Gira Grant Strike for America by Micah Uetricht The New Prophets of Capital by Nicole Aschoff Four Futures by Peter Frase Class War by Megan Erickson Building the Commune by George Ciccariello-Maher Capital City by Samuel Stein The People’s Republic of Walmart How the World’s Biggest Corporations Are Laying the Foundation for Socialism LEIGH PHILLIPS AND MICHAL ROZWORSKI First published by Verso 2019 © Leigh Phillips and Michal Rozworski 2019 All rights reserved The moral rights of the authors have been asserted 1 3 5 7 9 10 8 6 4 2 Verso UK: 6 Meard Street, London W1F 0EG US: 20 Jay Street, Suite 1010, Brooklyn, NY 11201 versobooks.com Verso is the imprint of New Left Books ISBN-13: 978-1-78663-516-7 ISBN-13: 978-1-78663-517-4 (UK EBK) ISBN-13: 978-1-78663-518-1 (US EBK) British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress Typeset in Monotype Fournier Printed in the US by Maple Press CONTENTS Acknowledgements 1.Introduction 2.Could Walmart Be a Secret Socialist Plot? 3.Islands of Tyranny 4.Mapping the Amazon 5.Index Funds as Sleeper Agents of Planning 6.Nationalization Is Not Enough 7.Did They Even Plan the Soviet Union? 8.Hardly Automated Space Communism 9.Allende’s Socialist Internet 10.Planning the Good Anthropocene 11.Conclusion: Planning Works ACKNOWLEDGEMENTS The idea for this book was born of a beer or three at a scruffy Gastown pub early on in our friendship.


pages: 222 words: 70,559

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

Alan Greenspan, book value, Buckminster Fuller, buy and hold, currency risk, diversified portfolio, electricity market, fixed income, government statistician, guns versus butter model, hydrogen economy, income per capita, index fund, low interest rates, mortgage debt, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit motive, reserve currency, rising living standards, Ronald Reagan, shareholder value, Silicon Valley, Vanguard fund, vertical integration, Yom Kippur War, zero-coupon bond

In the discussion a few paragraphs above, where we contrasted a buy-and-hold strategy with an oil indicator strategy and saw our return double, the results were based on buying and selling “the market.” And this was not in any way a mere theoretical exercise: it is entirely possible to buy and sell “the market” by investing in index funds that include all the stocks in particular market indices. In our comparisons, we assumed you were buying and selling the Vanguard 500 Index Fund, which is a no-load fund that can be purchased through the Vanguard Group. But while index funds are a convenient way to showcase our oil indicator’s performance, they won’t be good investments in the years ahead, and when oil flashes a positive signal, we don’t suggest that you buy “the market.”

A few airlines will survive, and there may be some new entrants and some consolidations, but we think the industry is doomed to struggle fiercely to very little avail. One final category of things to avoid should be obvious given our projections of rough sledding ahead for the general run of stocks. In the 1990s some of the most popular investments were the index funds, such as the enormously successful Vanguard 500 Index Fund. It was the perfect choice for scads of investors, who no doubt felt they had discovered the Holy Grail—a one-shot investment in a highly diversified group of safe big-cap stocks that seemed capable of returning annual gains of 20 percent or more year after year. But the fund began to turn sour in 2000 and will continue to produce unsatisfactory returns for a while to come.

Stocks once again embarked upon a bull run—and this one was to be a bull run for the ages. Between 1991 and 2000, with oil prices remaining well under control, stocks staged one of the greatest rallies any financial market has ever seen. If you had invested in the S&P 500, say, by buying the Vanguard 500 Index Fund, in January 1991, you would have gained on average 20 percent a year for the next nine years. To put it differently, a $10,000 investment would have turned into more than $50,000. And because those nine years were ones of low inflation, your gains were mostly real gains in terms of their actual purchasing power.


pages: 209 words: 53,236

The Scandal of Money by George Gilder

Affordable Care Act / Obamacare, Alan Greenspan, bank run, behavioural economics, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, Claude Shannon: information theory, Clayton Christensen, cloud computing, corporate governance, cryptocurrency, currency manipulation / currency intervention, currency risk, Daniel Kahneman / Amos Tversky, decentralized internet, Deng Xiaoping, disintermediation, Donald Trump, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, glass ceiling, guns versus butter model, Home mortgage interest deduction, impact investing, index fund, indoor plumbing, industrial robot, inflation targeting, informal economy, Innovator's Dilemma, Internet of things, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jeff Bezos, John Bogle, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, Law of Accelerating Returns, low interest rates, Marc Andreessen, Mark Spitznagel, Mark Zuckerberg, Menlo Park, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Nixon triggered the end of the Bretton Woods system, obamacare, OSI model, Paul Samuelson, Peter Thiel, Ponzi scheme, price stability, Productivity paradox, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, reality distortion field, reserve currency, road to serfdom, Robert Gordon, Robert Metcalfe, Ronald Reagan, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, secular stagnation, seigniorage, Silicon Valley, Skinner box, smart grid, Solyndra, South China Sea, special drawing rights, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, time value of money, too big to fail, transaction costs, trickle-down economics, Turing machine, winner-take-all economy, yield curve, zero-sum game

With little access to the venture capital or private equity game, the public at large is counseled to invest its money in “index funds.” These yield no more knowledge and learning than the state lotteries do. Purchasing a sampling of all the stocks in the market without any research on specific companies, indexers give the public some exposure to the gains of the inside-trading conglomerateurs. But they provide less than no benefit to the learning processes that create growth and wealth. Index funds are parasites on the research done by actual investors. Index funds are even worse than they look because they base allocation not on the expected yield of the investment but on market capitalization.

But as the economist Charles Gave of Gavekal puts it, “In a true capitalist system, the rule is the higher the price the lower the demand. With indexation, the higher the price, the higher the demand. This is insane.”3 Yet as pioneered by the laureled John Bogle at Vanguard and encouraged by the SEC’s insider-trading phobias, these parasitical and distortionary index funds directly extinguish knowledge and learning in the economy.4 Vanguard now passively “manages” some $2.9 trillion of assets while contributing nothing to the investment process. Rather than investing in the market, they parasitically infest and congest it. Rather than creating wealth and jobs, they destroy them.

In recent years, Silicon Valley has suffered from the HYPERTROPHY OF FINANCE, become bloated with MONOPOLY MONEY, and been bent by controls from the Wall Street–Washington axis. Like Wall Street, Silicon Valley has bypassed Main Street, which has remained trapped in its pedestrian time-based compensation and mindless index fund investments. Sand Hill Road: The arboreal abode of California venture capitalists and their “unicorns,” stretching from the Camino Real near Stanford to Route 280 and into the clouds and wealth of Woodside and SILICON VALLEY. Expansionary fiscal and monetary policy: The attempt by central banks to stimulate economic activity by selling government securities to pay for a governmental deficit.


pages: 209 words: 53,175

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

airport security, Amazon Web Services, Bernie Madoff, book value, business cycle, computer age, Cornelius Vanderbilt, coronavirus, discounted cash flows, diversification, diversified portfolio, do what you love, Donald Trump, financial engineering, financial independence, Hans Rosling, Hyman Minsky, income inequality, index fund, invisible hand, Isaac Newton, It's morning again in America, Jeff Bezos, Jim Simons, John Bogle, Joseph Schumpeter, knowledge worker, labor-force participation, Long Term Capital Management, low interest rates, 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, Ronald Reagan, side hustle, Stephen Hawking, Steven Levy, stocks for the long run, tech worker, the scientific method, traffic fines, Vanguard fund, WeWork, working-age population

Either way, I’ve shifted my views and now every stock we own is a low-cost index fund. I don’t have anything against actively picking stocks, either on your own or through giving your money to an active fund manager. I think some people can outperform the market averages—it’s just very hard, and harder than most people think. If I had to summarize my views on investing, it’s this: Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success. That doesn’t mean index investing will always work.

I know not everyone will agree with that logic, especially my friends whose job it is to beat the market. I respect what they do. But this is what works for us. We invest money from every paycheck into these index funds—a combination of U.S. and international stocks. There’s no set goal—it’s just whatever is leftover after we spend. We max out retirement accounts in the same funds, and contribute to our kids’ 529 college savings plans. And that’s about it. Effectively all of our net worth is a house, a checking account, and some Vanguard index funds. It doesn’t need to be more complicated than that for us. I like it simple. One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results.

The share of Americans over age 25 with a bachelor’s degree has gone from less than 1 in 20 in 1940 to 1 in 4 by 2015.⁷ The average college tuition over that time rose more than fourfold adjusted for inflation.⁸ Something so big and so important hitting society so fast explains why, for example, so many people have made poor decisions with student loans over the last 20 years. There is not decades of accumulated experience to even attempt to learn from. We’re winging it. Same for index funds, which are less than 50 years old. And hedge funds, which didn’t take off until the last 25 years. Even widespread use of consumer debt—mortgages, credit cards, and car loans—did not take off until after World War II, when the GI Bill made it easier for millions of Americans to borrow. Dogs were domesticated 10,000 years ago and still retain some behaviors of their wild ancestors.


pages: 117 words: 31,221

Fred Schwed's Where Are the Customers' Yachts?: A Modern-Day Interpretation of an Investment Classic by Leo Gough

Albert Einstein, banking crisis, Bernie Madoff, book value, corporate governance, discounted cash flows, disinformation, diversification, fixed income, index fund, John Bogle, junk bonds, Long Term Capital Management, Michael Milken, Northern Rock, passive investing, Ralph Waldo Emerson, random walk, short selling, South Sea Bubble, The Nature of the Firm, the rule of 72, The Wealth of Nations by Adam Smith, transaction costs, young professional

HERE’S AN IDEA FOR YOU… Although the idea of index investing makes a lot of sense, there are some potential problems. Some indices might be driven up to artificially high prices, followed by a crash, so you need to keep your eye on what is happening in the index fund market. And if the Western economies are going to go downhill in the course of a ‘hegemonic shift’ towards Asia, as some people like to predict, then the big US and UK indices may not perform very well in the future. Lastly, there are already some daft index funds that try to do a bit of active management at the same time – that’s not the point, so avoid them. 28 DON’T INVEST ON A HIGH ‘The habit of buying popular shares works for bad results … It must tend to get the buyer in nearer the top than the middle.’

People who live much longer than expected make a profit, but it’s probably better to keep control of your wealth and manage it on your own – the upside potential is better. 27 INDEX INVESTING ‘Admittedly, it is preposterous to suggest that stock speculation is like coin flipping. I know that there is more skill in stock speculation. What I have never been able to determine is – how much more?’ DEFINING IDEA… Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. ~ WARREN BUFFETT, 1996 In chapter 13 the idea of index investing was mentioned. In the US this approach has become very widely used, with hundreds of billions of dollars going into special funds, known as tracker funds, which mimic one of the major indices, such as the NYSE or the S&P 500.

Young adulthood: people in their twenties naturally have a big appetite for life but usually are earning less than they will later on. Many people at this stage tend to spend too easily. There is a danger of getting into debt. On the other hand, any sound long term investment is likely to grow substantially. Try contributing a small sum each month to an index fund. Building a family: if you are starting a family, your expenditure is likely to have increased dramatically. Purchasing a home is an important form of long term saving. You also need to start planning for retirement. Middle age: by this time many people have got some equity in their homes and are at the top of their career and earning power.


pages: 229 words: 75,606

Two and Twenty: How the Masters of Private Equity Always Win by Sachin Khajuria

"World Economic Forum" Davos, affirmative action, bank run, barriers to entry, Big Tech, blockchain, business cycle, buy and hold, carried interest, COVID-19, credit crunch, data science, decarbonisation, disintermediation, diversification, East Village, financial engineering, gig economy, glass ceiling, high net worth, hiring and firing, impact investing, index fund, junk bonds, Kickstarter, low interest rates, mass affluent, moral hazard, passive investing, race to the bottom, random walk, risk/return, rolodex, Rubik’s Cube, Silicon Valley, sovereign wealth fund, two and twenty, Vanguard fund, zero-sum game

High-yield bond (also “high-yield debt”): A bond issued by a company or business that has a comparatively high potential risk of a negative event, such as a failure to pay the interest due or pay back the money borrowed. To compensate investors for this risk, the bonds will have a higher interest rate. Index fund: An investment fund that consists of a portfolio of simpler assets, like stocks, constructed to match or track a financial market index, like the S&P 500. The fund will follow the index regardless of changes in market conditions. Fees charged by index funds are much lower than for private capital funds because index funds passively follow an index. The idea is that in the long term, a broad and well-known index may outperform a small basket of stocks or a private capital fund.

It’s actually a great time for the Firm to capture the opportunity, even though the investment is in listed stock and debt rather than acquiring a business outright. This is a target the Firm knows. It’s a scenario that the partners feel can’t go wrong—at the right price—and that the investment professionals can model with reasonable confidence. Mutual funds, index funds, and ETFs are running out the door, sending the prices of these securities into free fall. Passive money is trying to escape. Meanwhile, the active managers in the room want to back up the truck and buy in bulk at a big discount. Why are the prices of these securities so distressed? The world is in chaos.

Consider, for example, a retirement system for public sector employees that consistently needs annual investment returns of around seven percent. To receive these returns, the pension program is compelled to look beyond passive money investors that track the stock market or invest in government bonds as attractive and safe places to house the money. Mutual funds, index funds, and ETFs might cut it for one year or over a run of years, but such instruments often encounter volatile periods during which the returns are negative or insufficient. That’s not good enough to build a retirement around. Pension money needs high, stable returns through the ups and downs of the market and business cycles.


pages: 337 words: 96,666

Practical Doomsday: A User's Guide to the End of the World by Michal Zalewski

accounting loophole / creative accounting, AI winter, anti-communist, artificial general intelligence, bank run, big-box store, bitcoin, blockchain, book value, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carrington event, clean water, coronavirus, corporate governance, COVID-19, cryptocurrency, David Graeber, decentralized internet, deep learning, distributed ledger, diversification, diversified portfolio, Dogecoin, dumpster diving, failed state, fiat currency, financial independence, financial innovation, fixed income, Fractional reserve banking, Francis Fukuyama: the end of history, Haber-Bosch Process, housing crisis, index fund, indoor plumbing, information security, inventory management, Iridium satellite, Joan Didion, John Bogle, large denomination, lifestyle creep, mass immigration, McDonald's hot coffee lawsuit, McMansion, medical bankruptcy, Modern Monetary Theory, money: store of value / unit of account / medium of exchange, moral panic, non-fungible token, nuclear winter, off-the-grid, Oklahoma City bombing, opioid epidemic / opioid crisis, paperclip maximiser, passive investing, peak oil, planetary scale, ransomware, restrictive zoning, ride hailing / ride sharing, risk tolerance, Ronald Reagan, Satoshi Nakamoto, Savings and loan crisis, self-driving car, shareholder value, Silicon Valley, supervolcano, systems thinking, tech worker, Ted Kaczynski, TED Talk, Tunguska event, underbanked, urban sprawl, Wall-E, zero-sum game, zoonotic diseases

He argued that the smartest thing for an investor to do is put their money in an investment fund containing such a blend of equities, managed by his firm for a very low fee. People listened—and today, nearly half of all money in the stock market flows through index funds.19 The sheer scale of this phenomenon is raising eyebrows. Some argue that when so much money moves in and out of equities with no consideration for the health of individual businesses, it has the potential of creating “zombie companies” and precipitating the next market crash.20 This theory is controversial, however. Its critics retort that markets are efficient, and that all the prevalence of index funds does is create opportunities for other players to bet against the overvalued components of an index and then drive them into the ground.

If you invest in stable, fairly valued enterprises, it doesn’t matter if some cybersecurity startup is trading at 100 times its revenue. It is, however, true that in a frothy market, finding good investments requires more effort; throwing darts at the board won’t do. This brings us, in a roundabout way, to the topic of index funds. These passively managed investment vehicles are the brainchild of John C. Bogle, the founder of The Vanguard Group. Bogle observed that most brokerage customers—and most professional fund managers, for that matter—didn’t seem to be able to beat the returns of an index (the Dow Jones, S&P 500, or a similar capitalization-weighed sum of the prices of many stocks).

Its critics retort that markets are efficient, and that all the prevalence of index funds does is create opportunities for other players to bet against the overvalued components of an index and then drive them into the ground. Meanwhile, my concern with index funds is much simpler. I worry that they bring back the inscrutable question of whether “the market” is valued too high or too low. It’s nearly impossible to reason about the correct price for the composite of hundreds of companies, including a large collection of international financial conglomerates. I find it much easier to wrap my head around the financials of a dozen hand-picked businesses—say, a freight railroad, a cemetery operator, a paper mill, and a concrete plant. I’m reminded of the parable of Mr. Market in Graham’s book: he describes a gentleman who knocks on your door every day and always offers to trade the same item—but on every visit, he quotes a different price.


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

asset allocation, banking crisis, Berlin Wall, Black Monday: stock market crash in 1987, book value, Bretton Woods, British Empire, buy and hold, capital asset pricing model, capital controls, central bank independence, classic study, colonial rule, corporate governance, correlation coefficient, cuban missile crisis, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, European colonialism, fixed income, floating exchange rates, German hyperinflation, index fund, information asymmetry, joint-stock company, junk bonds, negative equity, new economy, oil shock, passive investing, purchasing power parity, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, stocks for the long run, survivorship bias, Tax Reform Act of 1986, technology bubble, transaction costs, yield curve

When investors are concerned that they do not have the skill to beat the market, there is an obvious response— buy index funds. The incremental risk of running an active strategy adds relatively little to equity portfolio volatility, however. So institutions that wish to play the investment game to win need not follow our focus on index investment, and may apply our findings to actively managed portfolios as well. Treynor and Black (1973) approach investment management as a task in which a high-risk overlay (the “active portfolio”) is blended with a low cost, highly diversified index fund (the “passive portfolio”). The active portfolio comprises a decision to hold more-than-index weightings in securities that are perceived to be undervalued, plus a decision to hold lessthan-index weightings (or even have a short position) in securities that are perceived to be overvalued.

For equity investors to have beaten bond investors, it would often have been necessary to have an investment horizon of forty years or more. We discuss some of the investment implications of our findings. We emphasize how we should alter our judgments in the light of a reduced estimate for the future equity risk premium. There are strong inferences that can be drawn about the role for active management, the case for index funds, levels of management fees, tax management, asset allocation, international diversification, and strategies for exploiting anomalies and regularities. Chapter 14 summarizes the implications of our research for investors and investment institutions. In chapter 15 we extend this discussion to the cost of capital and the impact of an attenuated equity premium on real investment decisions.

This has raised a regulatory concern, since UK mutual funds are not permitted to hold more than 10 percent in a single stock. At start-2001, at least one company, Vodafone, had a weighting of 11 percent in the FTSE 100 Index of the largest 100 UK stocks, while its weighting exceeded 9 percent even in the FTSE All-Share Index. This raised an intriguing issue, namely, that an index fund in one of the world’s largest equity markets could be prohibited by the regulators from holding the index portfolio. Figure 2-4 shows how the United Kingdom compares with other countries. This chart shows the weighting at start-2001 of the largest, and the three largest, stocks, in each of the sixteen countries covered by our database, plus Finland.


pages: 267 words: 71,941

How to Predict the Unpredictable by William Poundstone

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

A line on the company’s website once ran, “Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark.” Another rule of thumb is never invest in anything you don’t understand. Though the sentiment is laudable, it’s unrealistic in today’s complex financial universe. Some people don’t truly “understand” money market accounts or index funds. Should they keep their money in a mattress? In any case, someone investing with a miracle-working manager should not expect a complete explanation of how he makes the money. That’s the secret sauce. Madoff’s investors believed he had achieved annual returns of something like 10 percent a year with low volatility, and had done so over an otherwise volatile decade.

When a company is in a declining industry or has financial problems, its PE may be low, and this also could be reasonable. You can compute PE ratios for an entire market index like the FTSE 100 (of the hundred most valuable companies on the London Stock Exchange) or the S&P 500 (the S&P 500 index covers the broad American stock market, and there are scores of index funds tracking it). The FTSE 100 dates back to 1984. Its median PE has been about 19. It has varied wildly, though. It has topped 30; other times it’s been in the single digits. The American indices show similar variation. This doesn’t make sense. The FTSE 100 is all of Britain’s big companies averaged together.

Warren Buffett said that the first rule of making money is to not lose money. A realistic goal is to use PEs to exit the stock market during most of the biggest plunges. These generally happen when PEs are high. I’ll focus on the S&P 500 as it has the longest track records. Here’s the simplest PE-based system of all. You invest in a low-cost S&P 500 index fund, buying low and selling high (in PE terms). When the ten-year PE hits a specified high value (the sell trigger), you sell and put the proceeds in a low-cost fixed-income fund (offering the return of ten-year US Treasury bonds, let’s say). You stay in the bond fund until the PE hits a particular low value, the buy trigger.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

3Com Palm IPO, asset allocation, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Brownian motion, buy and hold, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, Jim Simons, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, subprime mortgage crisis, survivorship bias, tail risk, transaction costs, two-sided market, value at risk, yield curve

Long-Only Funds (Mutual Funds) If a fund is highly correlated to the market (or a sector)—as is true for virtually all long-only funds—its performance will be far more a reflective of the market than the fund’s investment process and skill. For example, a so-called closet index fund—a fund that is managed so that its performance does not deviate much from the selected index—would by design be highly correlated to the market. For a closet index fund, high returns would simply mean that the market had witnessed similar high returns and would provide no additional information about the fund’s relative merits. Although closet index funds may represent an extreme case, most long-only mutual funds are still highly correlated to whichever index most closely resembles the types of stocks in their portfolios (an index representing similar capitalization companies, sector, and country or region) and could be described as quasi-closet index funds.

The general conclusion appears to be that the advice of the financial experts may sometimes trigger an immediate price move as the public responds to their recommendations (a price move that is impossible to capture), but no longer-term net benefit. My advice to equity investors is either buy an index fund (but not after a period of extreme gains—see Chapter 3) or, if you have sufficient interest and motivation, devote the time and energy to develop your own investment or trading methodology. Neither of these approaches involves listening to the recommendations of the experts. Michael Marcus, a phenomenally successful trader, offered some sage advice on the matter: “You have to follow your own light. . . .

Although markets are often efficiently priced (or approximately so), there are many exceptions, and it is the exceptions that provide skilled market participants the opportunity for outperformance. Markets are indeed difficult to beat, and recognition of this fact means that for many investors, the best choice might well be traditional academic advice: Invest in index funds so that you can at least match the market. But there is a big difference between hard to beat and impossible to beat. Investors with an interest in markets who are willing to put in the hard work to develop an investment or trading methodology and who have the discipline to follow a plan should not be dissuaded from that endeavor by the efficient market hypothesis.


pages: 417 words: 97,577

The Myth of Capitalism: Monopolies and the Death of Competition by Jonathan Tepper

"Friedman doctrine" OR "shareholder theory", Affordable Care Act / Obamacare, air freight, Airbnb, airline deregulation, Alan Greenspan, bank run, barriers to entry, Berlin Wall, Bernie Sanders, Big Tech, big-box store, Bob Noyce, Boston Dynamics, business cycle, Capital in the Twenty-First Century by Thomas Piketty, citizen journalism, Clayton Christensen, collapse of Lehman Brothers, collective bargaining, compensation consultant, computer age, Cornelius Vanderbilt, corporate raider, creative destruction, Credit Default Swap, crony capitalism, diversification, don't be evil, Donald Trump, Double Irish / Dutch Sandwich, Dunbar number, Edward Snowden, Elon Musk, en.wikipedia.org, eurozone crisis, Fairchild Semiconductor, Fall of the Berlin Wall, family office, financial innovation, full employment, gentrification, German hyperinflation, gig economy, Gini coefficient, Goldman Sachs: Vampire Squid, Google bus, Google Chrome, Gordon Gekko, Herbert Marcuse, income inequality, independent contractor, index fund, Innovator's Dilemma, intangible asset, invisible hand, Jeff Bezos, Jeremy Corbyn, Jevons paradox, John Nash: game theory, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Rogoff, late capitalism, London Interbank Offered Rate, low skilled workers, Mark Zuckerberg, Martin Wolf, Maslow's hierarchy, means of production, merger arbitrage, Metcalfe's law, multi-sided market, mutually assured destruction, Nash equilibrium, Network effects, new economy, Northern Rock, offshore financial centre, opioid epidemic / opioid crisis, passive investing, patent troll, Peter Thiel, plutocrats, prediction markets, prisoner's dilemma, proprietary trading, race to the bottom, rent-seeking, road to serfdom, Robert Bork, Ronald Reagan, Sam Peltzman, secular stagnation, shareholder value, Sheryl Sandberg, Silicon Valley, Silicon Valley billionaire, Skype, Snapchat, Social Responsibility of Business Is to Increase Its Profits, SoftBank, Steve Jobs, stock buybacks, tech billionaire, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, undersea cable, Vanguard fund, vertical integration, very high income, wikimedia commons, William Shockley: the traitorous eight, you are the product, zero-sum game

For the last decade, passive investing has outperformed active management, and it has involved a lot less effort or skill. The index does all the work. The highest paid investment managers in the world lost out to a simple index in which anyone could invest. Jack Bogle is the godfather of index funds. He created the world's first retail index fund at Vanguard in 1974. Buffett has called him a hero for helping the average investor. Jack humbly responded, “I'm not a hero, I'm an ordinary guy … who gave a damn about the people investing and wanted to make sure they got a fair shake.” Bogle never could have anticipated the incredible inflows into this asset class.

Ibid. 14. https://www.forbes.com/sites/laurengensler/2017/02/25/warren-buffett-annual-letter-2016-passive-active-investing/#1bae82286bbd. 15. https://www.theatlas.com/charts/S1lPjxkM-. 16. https://www.nytimes.com/2017/04/14/business/mutfund/vanguard-mutual-index-funds-growth.html. 17. https://www.theatlantic.com/magazine/archive/2017/09/are-index-funds-evil/534183/?utm_source=twb. 18. National Bureau of Economic Research, “Explaining Low Investment Spending,” http://www.nber.org/digest/feb17/w22897.html. 19. https://www.theatlantic.com/business/archive/2017/06/how-companies-decide-ceo-pay/530127/. 20. https://www.mercurynews.com/2018/05/07/butler-who-do-stock-buy-backs-leave-behind/. 21. https://www.bloomberg.com/gadfly/articles/2018-03-05/five-charts-that-show-where-those-corporate-tax-savings-are-going. 22. https://www.brookings.edu/wp-content/uploads/2016/06/lazonick.pdf. 23.

This is known as active investing – and in recent years it has come under fire for being ineffective and expensive. Warren Buffett claims that investors have “wasted” upwards of $100 billion paying useless wealth managers high management fees.14 He is a proponent of what's known as passive investing, or investing in index funds. These funds do not try to beat the market, but mimic a performance of a particular index like the S&P, Russell 500, and so forth. They do not have to be managed, so they are much less expensive than active funds, and they help investors lessen risk through diversification. Passive investing has brought great benefits for average, middle-class investors.


pages: 348 words: 83,490

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

Alan Greenspan, Albert Einstein, Andrei Shleifer, Atul Gawande, availability heuristic, beat the dealer, behavioural economics, 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, equity risk 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, John Bogle, 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, Performance of Mutual Funds in the Period, Pierre-Simon Laplace, power law, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Richard Florida, Richard Thaler, Robert Shiller, shareholder value, statistical model, Steven Pinker, stocks for the long run, Stuart Kauffman, survivorship bias, systems thinking, The Wisdom of Crowds, transaction costs, traveling salesman, value at risk, wealth creators, women in the workforce, zero-sum game

The objective is to create a game plan that exploits the competition’s weaknesses and neutralizes its strengths. Teams generally consider intelligent scouting vital to their long-term success. So what’s the competition for a money manager? Investors with particular objectives can typically invest either with active managers or with index funds. For example, an investor seeking exposure to large-capitalization stocks can place money with a large-cap active manager or with an index fund that mirrors the S&P 500. Accordingly, we can consider an appropriate index’s return to be a measure of an investor’s opportunity cost—the cost of capital—and that beating the benchmark over time should be an active manager’s measure of success.

Our scouting report of the S&P 500 might also note that the committee does no macroeconomic forecasting, invests long-term with low portfolio turnover, and is unconstrained by sector or industry limitations, position weightings, investment-style parameters, or performance pressures. Also critical is that index funds closely track the S&P 500 at a very low cost. Evaluating the Winners Some actively managed funds clearly do beat the benchmark, even over longer time periods. To see if we could come to some stylized conclusions about how these successful investors did it, we created a screen of the general equity funds that beat the S&P 500 over the decade that ended with 2006 where the fund had one manager and assets in excess of $1 billion (see exhibit 2.1).2 Four attributes generally set this group apart from the majority of active equity mutual fund managers:• Portfolio turnover.

To see if we could come to some stylized conclusions about how these successful investors did it, we created a screen of the general equity funds that beat the S&P 500 over the decade that ended with 2006 where the fund had one manager and assets in excess of $1 billion (see exhibit 2.1).2 Four attributes generally set this group apart from the majority of active equity mutual fund managers:• Portfolio turnover. As a whole, this group of investors had about 35 percent turnover in 2006, which stands in stark contrast to turnover for all equity funds of 89 percent. The S&P 500 index fund turnover was 7 percent. Stated differently, the successful group had an average holding period of approximately three years, versus roughly one year for the average fund.3 • Portfolio concentration. The long-term outperformers tend to have higher portfolio concentration than the index. For example, these portfolios have, on average 35 percent of assets in their top ten holdings, versus 20 percent for the S&P 500


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

affirmative action, Alan Greenspan, Albert Einstein, Andrei Shleifer, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Boeing 747, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, Cass Sunstein, central bank independence, classic study, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency risk, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, Great Leap Forward, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, junk bonds, Kenneth Rogoff, libertarian paternalism, low interest rates, low skilled workers, Malacca Straits, managed futures, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, school vouchers, seminal paper, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, tech worker, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

Indeed, investors now have access to their own monkey with a towel: index funds. Index funds are mutual funds that do not purport to pick winners. Instead, they buy and hold a predetermined basket of stocks, such as the S&P 500, the index that comprises America’s largest five hundred companies. Since the S&P 500 is a broad market average, we would expect half of America’s actively managed mutual funds to perform better, and half to perform worse. But that is before expenses. Fund managers charge fees for all the tire-kicking they do; they also incur costs as they trade aggressively. Index funds, like towel-throwing monkeys, are far cheaper to manage.

In other words, 55 percent of the mutual funds that claim to have some special stock-picking ability did worse over two decades than a simple index fund, our modern equivalent of a monkey throwing a towel at the stock pages. If you had invested $10,000 in the average actively managed equity fund in 1973, when Malkiel’s heretical book A Random Walk Down Wall Street first came out, it would be worth $355,091 today (many editions later). If you had invested the same amount of money in an S&P 500 index fund, it would now be worth $364,066. Data notwithstanding, the efficient markets theory is obviously not the most popular idea on Wall Street.

A BusinessWeek review of the book noted, “Surprisingly, perhaps, Lo and MacKinlay actually agree with Malkiel’s advice to the average investor. If you don’t have any special expertise or the time and money to find expert help, they say, go ahead and purchase index funds.”8 Warren Buffett, arguably the best stock picker of all time, says the same thing.9 Even Richard Thaler, the guy beating the market with his behavioral growth fund, told the Wall Street Journal that he puts most of his retirement savings in index funds.10 Indexing is to investing what regular exercise and a low-fat diet are to losing weight: a very good starting point. The burden of proof should fall on anyone who claims to have a better way.


pages: 232 words: 71,965

Dead Companies Walking by Scott Fearon

Alan Greenspan, bank run, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, book value, business cycle, Carl Icahn, corporate raider, cost per available seat-mile, creative destruction, crony capitalism, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, Golden Gate Park, hiring and firing, housing crisis, index fund, it's over 9,000, Jeff Bezos, John Bogle, Joseph Schumpeter, Larry Ellison, late fees, legacy carrier, McMansion, moral hazard, multilevel marketing, new economy, pets.com, Ponzi scheme, Ronald Reagan, short selling, short squeeze, Silicon Valley, Snapchat, South of Market, San Francisco, Steve Jobs, survivorship bias, Upton Sinclair, Vanguard fund, young professional

It also creates an even more destructive mind-set—once they themselves rise to positions of power, they see themselves as infallible and worthy of worship. Add it all up and there’s only one conclusion you can reach: these are the last people you want safeguarding your money. And it’s not just me saying this. The numbers back me up. The great author and investor John Bogle—who invented the passive index fund back in the 1970s—examined the average returns of equity mutual funds from 1983 to 2003. A dollar invested in those kinds of funds in the early 1980s netted just $7.10 in profits twenty years later. Over the same period, a dollar invested in the S&P 500 index, which Bogle’s Vanguard 500 Fund tracks, would have brought in over $11.50.§ Think about those numbers for a second.

Compare that to your average mutual fund, where you’ve got highly paid professional investors buying and selling individual stocks all day, every day. (And when I say highly paid, I mean it. Bogle has calculated the total fees and commissions reaped by the financial industry at more than $500 billion a year.) For all that extra effort, and all that extra expense, all of those well-compensated experts earned considerably less than an index fund whose managers did next to nothing. Not all money managers are doomed to eternal underperformance, just most of them. A handful beat the market consistently, even after all taxes and fees. Warren Buffet comes to mind. Peter Lynch, too. Not to brag or put myself in those guys’ class, but I think my twenty-three-year record as a hedge fund manager is also proof that the indexes are beatable.

I don’t know how else to put this, so I’ll just be blunt: If you are an individual investor, you should not under any circumstances trust your money to a Wall Street brokerage or investment management company. The vast majority of people in my business have the wrong temperaments for investing. So unless you are uniquely positioned to find that rare manager who can outperform the market over the long term, do what John Bogle has been urging people to do for decades: put your money in an index fund and leave it there. You’ll make more, and you’ll pay less in fees to do it. The attributes I listed earlier—joinerism, power worship, hypercompetitiveness, intellectual torpor—lead to some very common investment mistakes like averaging down and trusting the word of so-called experts. Worst of all, though, those qualities also cause far too many money managers to confuse success with the size of their assets.


pages: 147 words: 39,910

The Great Mental Models: General Thinking Concepts by Shane Parrish

Albert Einstein, anti-fragile, Atul Gawande, Barry Marshall: ulcers, bitcoin, Black Swan, colonial rule, correlation coefficient, correlation does not imply causation, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, delayed gratification, feminist movement, Garrett Hardin, if you see hoof prints, think horses—not zebras, index fund, Isaac Newton, Jane Jacobs, John Bogle, Linda problem, mandelbrot fractal, Pepsi Challenge, Philippa Foot, Pierre-Simon Laplace, Ponzi scheme, Richard Feynman, statistical model, stem cell, The Death and Life of Great American Cities, the map is not the territory, the scientific method, Thomas Bayes, Torches of Freedom, Tragedy of the Commons, trolley problem

Instead of thinking through the achievement of a positive outcome, we could ask ourselves how we might achieve a terrible outcome, and let that guide our decision-making. Index funds are a great example of stock market inversion promoted and brought to bear by Vanguard’s John Bogle.9 Instead of asking how to beat the market, as so many before him, Bogle recognized the difficulty of the task. Everyone is trying to beat the market. No one is doing it with any consistency, and in the process real people are losing actual money. So he inverted the approach. The question then became, how can we help investors minimize losses to fees and poor money manager selection? The results were one of the greatest ideas—index funds—and one of the greatest powerhouse firms in the history of finance.

This is particularly acute in the financial realm. Until recently, nearly all financial products we might be pushed into had commissions attached to them—in other words, our advisor made more money by giving us one set of advice than another, regardless of its wisdom. Fortunately, the rise of things like index funds of the stock and bond markets has mostly alleviated the issue. In cases like financial advisory, we’re not on solid ground until we know, in some detail, the compensation arrangement our advisor is under. The same goes for buying furniture, buying a house, or buying a washing machine at a retail store.

The results were one of the greatest ideas—index funds—and one of the greatest powerhouse firms in the history of finance. The index fund operates on the idea that accruing wealth has a lot to do with minimizing loss. Think about your personal finances. Often we focus on positive goals, such as “I want to be rich,” and use this to guide our approach. We make investing and career choices based on our desire to accumulate wealth. We chase after magical solutions, like attempting to outsmart the stock market. These inevitably get us nowhere, and we have usually taken some terrible risks in the process which actually leave us worse off. Instead, we can try inverting the goal.


pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

Al Roth, Albert Einstein, asset allocation, availability heuristic, behavioural economics, call centre, carbon tax, Cass Sunstein, choice architecture, continuous integration, currency risk, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, do well by doing good, endowment effect, equity premium, feminist movement, financial engineering, fixed income, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, low interest rates, machine readable, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta-analysis, Milgram experiment, money market fund, pension reform, presumed consent, price discrimination, profit maximization, rent-seeking, Richard Thaler, Right to Buy, risk tolerance, Robert Shiller, Saturday Night Live, school choice, school vouchers, systems thinking, Tragedy of the Commons, transaction costs, Vanguard fund, Zipcar

The asset allocation is 65 percent foreign (that is, non-Swedish) stocks, 17 percent Swedish stocks, 10 percent fixed-income securities (bonds), 4 percent hedge funds, and 4 percent private equity. Across all asset classes, 60 percent of the funds are managed passively, meaning that the portfolio managers are simply buying an index of stocks and not trying to beat the market. One good thing about index funds is that they are cheap. The fees they charge investors are much lower than those charged by funds that try to beat the market. These low fees for the index funds helped keep the costs in the default fund very low, 0.17 percent. (This means that for every $100 invested, the investor is charged 17 cents per year.) Overall, most experts would consider this fund to be very well designed.

Louis Germany, organ donations in Gilovich, Tom Give More Tomorrow Goldstein, Dan Goolsbee, Austan Gore, Al Gould, Stephen Jay government: distrust of, libertarian paternalism of, neutrality in, paternalism of, and RECAP, and retirement plans, and slippery slope, starting points provided by, transparency in government bonds greenhouse gas emissions Greenhouse Gas Inventory (GGI), proposed Green Lights, EPA program, Gross, David, group norms, gut feelings Hackman, Gene Halloween night experiment H&R Block, and FAFSA software Harvard School of Public Health Hazard Communication Standard (HCS) health care, birth control pills, choosing, costs of, defensive medicine, Destiny Health Plan, deterrent effect of tort liability in, drug compliance, framing in, freedom of contract in, incentive conflicts in, ineffective lawsuits in, libertarian paternalists on, medical malpractice liability, negligence defined in, “no-fault” system in some countries, organ donations, prescription drug plan, right to sue for negligence, social influences in, treatment options “heuristics and biases” approach Hoffman, Dustin home-building industry home equity loans Home Ownership and Equity Protection Act homo economicus (economic man) “hot-cold empathy gap,” hot-hand theory hot states Houston Natural Gas Howell, William Hoxby, Carolyn Humans: Automatic Systems used by, conformity of, difficult choices for, influenced by a nudge, loss aversion of, and money, social pressures on, use of term Hurricane Katrina Illinois First Person Consent registry imitation incentives, conflicts of, in free markets, in investments, and salience income tax: Automatic Tax Return, compliance in, refunds from index funds inertia: and default option, and loss aversion, and organ donations, power of, and status quo bias, “yeah, whatever,” information, spread of Informed Decisions inheritance INSEAD School of Business, France insurance: costs of, fraught choices in, health Internal Revenue Service (IRS) intuitive thinking, test of investment goods investments, asset allocation in, in company stock, default options, and ERISA, error expected in, feedback in, incentives in, index funds, “lifestyle” funds, mappings in, and market timing, mental accounting in, mutual funds, past performance of, portfolio management, portfolio theory, rates of return, risk in, rules of thumb for, stocks and bonds, structuring complex choices, “target maturity funds,” iPhone and iPod IRAs Johnson, Eric Johnson, Samuel Jones, Rev.

That does not seem bad until you realize that just to keep up with inflation you had to earn 3.0 percent per year. If you had invested your money in longer-term bonds, your dollar would have become $71, a 5.5 percent rate of return, which is quite a bit better. But if you had invested in mutual funds that held shares in the largest American companies (such as an S&P 500 index fund), your dollar would have grown into $2,658, a 10.4 percent rate of return, and if you had invested in a broad portfolio of the stocks of smaller companies, you could have earned even more. In economics jargon, in which stocks are referred to as equities, the difference in the returns between Treasury bills and equities is called the “equity premium.”


pages: 321

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

algorithmic trading, asset allocation, automated trading system, backpropagation, backtesting, barriers to entry, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, constrained optimization, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, data science, deep learning, discounted cash flows, discrete time, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, financial intermediation, Flash crash, Geoffrey Hinton, implied volatility, index arbitrage, index fund, intangible asset, iterative process, Long Term Capital Management, loss aversion, low interest rates, machine readable, market design, market microstructure, merger arbitrage, natural language processing, passive investing, pattern recognition, performance metric, Performance of Mutual Funds in the Period, popular capitalism, prediction markets, price discovery process, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, selection bias, sentiment analysis, shareholder value, Sharpe ratio, short selling, Silicon Valley, speech recognition, statistical arbitrage, statistical model, stochastic process, survivorship bias, systematic bias, systematic trading, text mining, transaction costs, Vanguard fund, yield curve

For instance, SPY’s expense ratio is 0.09%, and those of some others, such as Schwab US Broad Market ETF (SCHB), are as low as 0.03%. One reason for such low expense ratios is that many ETFs are index funds that are not actively managed – hence they are relatively simple to run. Also, ETFs do not need to maintain a cash reserve for redemptions. ETFs and Alpha Research233 •• Tax efficiency: Taxable capital gains are created when a mutual fund or ETF sells securities that have appreciated in value. However, as most ETFs are passive index funds with very low turnover of the portfolio securities (most trading happens only for index rebalancing), they are highly tax efficient.

Most alphas benefit from broad caps on volatility, value at risk, expected tail loss, and position concentrations. When the risk goes up, the book size should scale down so that the alpha does not risk all of its long-term PnL on only a few high-risk days. Alphas with broad beta or risk-on/risk-off behavior can also use other relevant proxies, such as the CBOE Volatility Index, fund flows into risk-on/risk-off assets, or spikes in the correlation eigenvalues, as signals to scale their risk appetite to fit current market conditions. No single risk measure captures the full complexity of the risk profile, so it is useful to combine several relevant measures and use the most conservative one.

In contrast to the Russell 2000, large-cap and total-market-tracking products typically do not suffer as much of a rebalancing drag on their portfolios. The S&P 500, for example, tends not to see as much reversion in added stocks, perhaps owing to their higher liquidity or late purchases by closet trackers, who cannot predict S&P additions as easily. Meanwhile, the CRSP US. Total Market Index, which is tracked by Vanguard Group’s largest index funds, encompasses the entire US market, from large caps to microcaps, and accordingly does not trigger any trading Finding an Index Alpha227 requirements when cap-size migrations occur. (However, funds benchmarked to the individual capitalization ranges would still need to trade and thus potentially would impact market prices for some illiquid stocks.)


Hedgehogging by Barton Biggs

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, Big Tech, book value, Bretton Woods, British Empire, business cycle, buy and hold, diversification, diversified portfolio, eat what you kill, Elliott wave, family office, financial engineering, financial independence, fixed income, full employment, global macro, hiring and firing, index fund, Isaac Newton, job satisfaction, junk bonds, low interest rates, margin call, market bubble, Mary Meeker, Mikhail Gorbachev, new economy, oil shale / tar sands, PalmPilot, paradox of thrift, Paul Samuelson, Ponzi scheme, proprietary trading, random walk, Reminiscences of a Stock Operator, risk free rate, Ronald Reagan, secular stagnation, Sharpe ratio, short selling, Silicon Valley, transaction costs, upwardly mobile, value at risk, Vanguard fund, We are all Keynesians now, zero-sum game, éminence grise

The Leuthold large-cap growth index of 90 companies is selling at 20.5 times earnings and the Leuthold value index is at 11.9 times, which is a growth to value price earnings ratio of 1.68 versus the historical median of 2.5. For IRAs the Vanguard index funds make sense to me. Sure, you can capture alpha, extra return, if you identify a winner mutual fund, but you are bucking a number of headwinds in terms of higher costs, performance cycles, manager turnover, and so on. When the time comes and small value is cheap again, Vanguard has a Small-Cap Value Index Fund.The stock selection is based on the MSCI Index, which, in making its selection, uses eight value and growth factors including price/book value, dividend yield, earnings yield, sales growth, and longterm-earnings growth.

As I mentioned earlier, history shows that the lifespan of growth stocks is short, and the fall from grace when it comes can wipe out years of gains.As for mutual funds, their managers come and go, and the fees are high. If you can find someone like Bill Miller at Legg Mason, it’s a gift from heaven.As I noted before, an attractive alternative is owning an index fund, and they come in all shapes and sizes with minuscule fees. At least you are going to capture the index return. The two biggest index fund firms by far are Vanguard and Fidelity. Growth investing, because of its bias toward a buy-and-hold strategy, is inherently more tax efficient. However, for tax-exempt investors, the hard evidence is that the actual portfolios of value managers beat those of growth managers.The New York research firm, Bernstein, publishes an index of growth versus value that is based on the actual portfolio style analysis of six consulting firms as shown in Table 17.1.

Rational individuals wouldn’t dream of competing against professional athletes for money or against professional card players.Why would they in the financial markets? However, the individuals do need to make their own long-term asset allocations decisions. This can be done if they have at least a general concept of secular and cyclical cycles and some sense of contrarian investing. Index funds should be the means of implementation. THE DIFFERENCE BETWEEN SECULAR AND CYCLICAL BEAR MARKETS Let’s start with the definitions of secular and cyclical bear markets.To me, a secular bear market is a decline in the major stock averages of at least 40 percent—and considerably more in secondary stocks—where the decline lasts at least three to five years.


pages: 389 words: 109,207

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

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Albert Einstein, anti-communist, asset allocation, Bear Stearns, beat the dealer, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bletchley Park, Brownian motion, buy and hold, buy low sell high, capital asset pricing model, Claude Shannon: information theory, computer age, correlation coefficient, diversified portfolio, Edward Thorp, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, Henry Singleton, high net worth, index fund, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, John Meriwether, John von Neumann, junk bonds, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Michael Milken, Myron Scholes, New Journalism, Norbert Wiener, offshore financial centre, Paul Samuelson, publish or perish, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ronald Reagan, Rubik’s Cube, short selling, speech recognition, statistical arbitrage, Teledyne, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, value at risk, zero-coupon bond, zero-sum game

The passive investor puts all his money into a market portfolio of every stock in existence (roughly, an “index fund”). An active investor is anyone who suffers from the delusion that he can beat the market. The active investor puts his money into anything except a market portfolio. By Sharpe’s terminology, an active investor need not trade “actively.” A retired teacher who has two shares of AT&T in the bottom of her dresser drawer counts as an active investor. She is operating on the assumption that AT&T is a better stock to own than a total market index fund. Active investors include anyone who tries to pick “good” stocks and shun “bad” ones, or who hires someone else to do that by putting money in an actively managed mutual fund or investment partnership.

The small investor has long been inundated by mutual fund and brokerage ads implying that you’d be a sap to settle for “average” returns. It is an American credo that you can pick a “good” mutual fund from Morningstar ratings. “Good” presumably means that it will earn more cents on the dollar than an index fund. It is a more astonishing credo that the small investor can pick market-beating stocks him- or herself just by doing a little research on the Internet and watching pundits on CNBC. This raises an important point, the connection between market information and return. “In an efficient market,” Eugene Fama wrote, “competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effect of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future.”

It would be alarming to visit a great stock exchange and find the floor littered with worthless stock certificates. Try visiting a racetrack. Most wager tickets become worthless within minutes. It is folly to bet everything on a favorite (horse or stock). The only way to survive is through diversification. Someone who bets on every horse—or buys an index fund—will at least enjoy average returns, minus transaction costs. “Average” isn’t so hot at the racetrack, given those steep track takes. “Average” is pretty decent for stocks, something like 6 percent above the inflation rate. For a buy-and-hold investor, commissions and taxes are small. Shannon was more interested in above average returns.


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, buy and hold, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, currency risk, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, equity risk premium, Exxon Valdez, foreign exchange controls, forensic accounting, Glass-Steagall Act, global reserve currency, high net worth, index fund, inflation targeting, information security, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, proprietary trading, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, risk free rate, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

Two of the biggest declared commodities investors are Sainsbury’s, and Hermes, owned by the BT Pension Scheme. Most commodities investors put their money in index funds, of which the largest is the Goldman Sachs Commodity Index (GSCI), which Standard & Poor’s acquired in February 2007. The GSCI, which is heavily weighted towards energy, rose in value from US $4–5 billion in 2001 to US $60 billion in early 2007. Index funds can only take a long position, which means they cannot profit from a declining market by taking short positions, and they are not geared. Backwardation and contango Index funds will roll contracts at periods that the market can often predict. If the market is in backwardation, the forward price (agreement to buy or sell at an agreed future point) is lower than spot (agreement to buy and sell immediately and settle for cash).

If the market is in backwardation, the forward price (agreement to buy or sell at an agreed future point) is lower than spot (agreement to buy and sell immediately and settle for cash). Index funds will gain because they sell high and buy low. If the market is in contango, the forward price is higher than spot, and index funds will lose money because they sell low and buy high. In early 2007, some commodities had switched into contango, which made it arguably a bad time to start investing in commodities. Some index funds are looking at rolling futures contracts differently to reduce the contango effect. Retail investment in commodities is negligible.

The industry showed an initial mixed reaction to the proposals that, as the second edition of this book went to press, were under consultation. There were concerns about the distinction between the two types of adviser and whether the ‘independent’ label would truly mean there was no bias. Some felt that the idea of primary products had been tried before and did not work, and could lead to mis-selling because some products like index funds were simple to explain but not low risk. Meanwhile, a review is underway to research and prepare a national approach to ‘generic’ financial advice, led by Otto Thoreson, chief executive at insurer Aegon UK. A generic adviser should take a holistic view of the consumer’s finances and recommend that the customer move to the stage of buying products only when it suited his or her circumstances.


pages: 375 words: 105,067

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

Alan Greenspan, American ideology, asset allocation, Bear Stearns, behavioural economics, 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 engineering, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, John Bogle, Kevin Roose, London Whale, longitudinal study, low interest rates, Mark Zuckerberg, Mary Meeker, money market fund, mortgage debt, multilevel marketing, oil shock, payday loans, pension reform, Ponzi scheme, post-work, prosperity theology / prosperity gospel / gospel of success, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, Stanford marshmallow experiment, stocks for the long run, The 4% rule, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise

“I was ignorant,” wrote an anonymous Fortune writer about his or her time recommending investments for an Internet publication in a 1999 piece titled “Confessions of a Former Mutual Funds Reporter.” “My only personal experience had been bumbling into a load fund until a colleague steered me to an S&P 500 index fund. I worried I’d misdirect readers, but I was assured that in personal finance journalism it doesn’t matter if the advice turns out to be right, as long as it’s logical.” There are any number of things you can take from my story and others like it. The first is about money and what it means to us.

Over the years Quinn made numerous enemies, ranging from brokers to heads of mutual fund companies, for relentlessly putting the financial interests of the consumer ahead of the financial interests of the financial services industry. Quinn sees herself as both a part of the consumer movement and the personal finance and investment communities. She names as her contemporaries such financial pioneers as Bruce Bent, the creator of the now ubiquitous money market fund, and John Bogle, the force behind Vanguard’s low-cost index funds. Yet a look at Quinn’s work demonstrates both the promise and the perils of the financial advice arena. A quick run through the many, many profiles of her penned over the years shows howlers mixed in with the prescient comments, sometimes in the same piece, proving how hard it is to get this forecasting thing right.

Fee-only financial planners and registered investment advisers (RIAs) are willing to help out too—provided, that is, they can count your savings toward their assets under management and collect the fees. Surveying the situation, no one less than John Bogle, the founder of the Vanguard Group and the man who pioneered the low-cost index fund, has come forward to say the mutual fund and retirement industries collect so much money in fees that the entire system is a “train wreck.” But a train wreck for your future retirement is a gravy train for those collecting the fees. As a result, the political influence of the industry can’t be oversold.


pages: 229 words: 64,697

The Barefoot Investor: The Only Money Guide You'll Ever Need by Scott Pape

Albert Einstein, Asian financial crisis, diversified portfolio, Donald Trump, estate planning, financial independence, index fund, Jeff Bezos, Mark Zuckerberg, McMansion, Own Your Own Home, Paradox of Choice, retail therapy, Robert Shiller, Snapchat

Respected US financial research firm Dalbar has been tracking investors' real returns for decades. And here's the shocker: their research shows that the average investor earned 3.7 per cent annually over the past 30 years, during a period in which a basic index fund returned 11.1 per cent annually. In other words, the average investor underperformed the market by approximately 7.4 per cent each year for three decades. Here's another way to explain it: Let's say you invested $100 000 in a no-brainer index fund (that automatically buys all the companies that make up a sharemarket index, and tracks the market), and then headed off to the Thai island of Ko Pha Ngan and did nothing but drink buckets of whisky on the beach for the next 30 years.

You: Pauline, the biggest risk is not owning shares. I need my shares to keep ahead of inflation when I get older. If I live another 50 years, a loaf of bread will cost $10! Pauline: But what if you invest in the wrong company? You: Warren Buffett, the world's greatest investor, is leaving his wife her entire inheritance in a simple index fund that automatically buys the 500 largest companies in America. We're talking about companies like Apple, Google, Facebook, McDonald's, Amazon and Nike. My super does the same thing, but it's also got the 200 biggest Aussie companies — like the banks, Telstra and BHP. Pauline: Well, I just don't understand shares.

The SMSF Lite that I use I have my SMSF Lite with Hostplus (because I'm already invested in their ultra-cheap Index Balanced Fund for my super). They call it ‘ChoicePlus', and it allows you to invest in any of Australia's biggest 300 companies on the stock exchange, together with a range of term deposits and ETFs (‘exchange traded funds' — basically index funds). To be invested in ChoicePlus, you need a minimum of $10 000 to kick things off, and at least $2000 must be kept in one of Hostplus's other investment options. It costs $180 a year, versus thousands for a traditional SMSF from an accountant. By combining ChoicePlus with the Indexed Balanced Fund, I get the best of both worlds: the cheapest super fund in the country together with the opportunity to pick and choose my own shares!


pages: 316 words: 94,886

Decisive: How to Make Better Choices in Life and Work by Chip Heath, Dan Heath

behavioural economics, billion-dollar mistake, call centre, Captain Sullenberger Hudson, Cass Sunstein, classic study, Daniel Kahneman / Amos Tversky, en.wikipedia.org, endowment effect, Great Leap Forward, hindsight bias, index fund, it is difficult to get a man to understand something, when his salary depends on his not understanding it, job satisfaction, Kevin Kelly, loss aversion, Max Levchin, medical residency, mental accounting, meta-analysis, Mikhail Gorbachev, PalmPilot, Paradox of Choice, pattern recognition, Peter Thiel, pets.com, Richard Thaler, Ronald Reagan, shareholder value, Silicon Valley, unpaid internship, Upton Sinclair, US Airways Flight 1549, young professional

Investing in individual stocks is a losing proposition for most people. For one thing, you’re competing against full-time professionals like Penstock who are waking up at 3:00 a.m. to work on their analyses—and even so, 96% of them manage to underperform a simple index fund. (See the endnotes if you want our full soapbox rant on why your retirement dollars are better off in index funds than in individual stocks or mutual funds.) We offer the example because we do want to recommend Penstock’s approach to life decisions. His humility about his predictive abilities is critical to making a good decision. What if we, like Penstock, could make wise choices without knowing exactly what the future holds?

If he’d maintained the investment, it would have meant betting that the stock would hit its upper bookend, which was not a bet he was comfortable with. 2 Invest in index funds. For our full-fledged soapbox treatment of this topic, see our article “The Horror of Mutual Funds” in our collection The Myth of the Garage, which is available for free at http://​www.​heath​brothers.​com/​the-​myth-​of-​the-​garage/. For a clear and understandable account of the research on the advantages of index funds, see the book by the millionaire teacher Andrew Hallam, from the short-term emotion chapter, who figured out how to buy a car without falling victim to sleazy car sales tactics.

Andrew Hallam (2011), Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (New York: Wiley). On investments, see his brilliant chapter on rule 3, which quotes four Nobel Prize winners in economics recommending the index-funds strategy, then unpacks the hidden costs and expenses in the typical mutual fund. He quotes one study from the Journal of Portfolio Management that found that over a 15-year period 96% of actively managed mutual funds underperformed an index fund. And individual investors frequently do worse, particularly when they trade more because of overconfidence. See Brad M. Barber and Terrance Odean (2001), “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” Quarterly Journal of Economics 116: 261–92. 3 Jack Soll and Joshua Klayman.


pages: 379 words: 114,807

The Land Grabbers: The New Fight Over Who Owns the Earth by Fred Pearce

activist lawyer, Asian financial crisis, banking crisis, big-box store, Black Monday: stock market crash in 1987, blood diamond, British Empire, Buy land – they’re not making it any more, Cape to Cairo, carbon credits, carbon footprint, clean water, company town, corporate raider, credit crunch, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy security, farmers can use mobile phones to check market prices, Garrett Hardin, Global Witness, index fund, Jeff Bezos, Kickstarter, Kondratiev cycle, land reform, land tenure, Mahatma Gandhi, market fundamentalism, megacity, megaproject, Mohammed Bouazizi, Nelson Mandela, Nikolai Kondratiev, offshore financial centre, out of africa, quantitative easing, race to the bottom, Ronald Reagan, smart cities, structural adjustment programs, too big to fail, Tragedy of the Commons, undersea cable, urban planning, urban sprawl, vertical integration, WikiLeaks

Traditional futures are themselves a form of derivative, of course. But the new forms began in 1991, when Goldman Sachs packaged up commodities futures of all sorts (from coffee and corn to oil and copper) into the Goldman Sachs Commodity Index. It then sold stakes in index funds. By buying them, investors were betting on the future price of a basket of commodities. The first index funds bumped along for years without attracting too much attention. Then in 2005, three things happened that suddenly made them extremely attractive to investors. First, real food prices started to push up after a long period of decline. Second, it started to look like investing in some of the other derivatives markets beloved by speculators, like subprime mortgages, might not be so clever.

But a bad situation was again made worse by rampant speculation. After federal reserve chairman Ben Bernanke pumped another $600 billion of “quantitative easing” into the U.S. economy in November 2010, Barclays Capital said speculators were pushing record amounts into index funds, in the hope of tapping more profits as prices rose. Investment in commodity index funds in the United States alone was reported at above $400 billion. The bubble inflated. Back in the real world, by mid-2011, wheat was up 98 percent from the previous May, beef 32 percent, sugar 48 percent, cocoa 80 percent, cooking oils 53 percent, and rice 33 percent.

Soon, the price of food futures began to depend less on the balance between supply and demand for the crops themselves, and more on what was happening elsewhere in the financial system. And that—if you cared about feeding the world rather than turning a profit—began to look dangerous. Between 2005 and 2008, speculators piled into commodities index funds. The funds swiftly came to dominate key U.S. markets in corn, wheat, and soy. A report from Morgan Stanley estimated that the number of contracts in corn futures increased fivefold between 2003 and 2008. The distinguished Indian economist Jayati Ghosh said later: “From about late 2006, a lot of financial firms realized that there was really no more profit to be made in the US housing market.”


pages: 284 words: 79,265

The Half-Life of Facts: Why Everything We Know Has an Expiration Date by Samuel Arbesman

Albert Einstein, Alfred Russel Wallace, Amazon Mechanical Turk, Andrew Wiles, Apollo 11, bioinformatics, British Empire, Cesare Marchetti: Marchetti’s constant, Charles Babbage, Chelsea Manning, Clayton Christensen, cognitive bias, cognitive dissonance, conceptual framework, data science, David Brooks, demographic transition, double entry bookkeeping, double helix, Galaxy Zoo, Gregor Mendel, guest worker program, Gödel, Escher, Bach, Ignaz Semmelweis: hand washing, index fund, invention of movable type, Isaac Newton, John Harrison: Longitude, Kevin Kelly, language acquisition, Large Hadron Collider, life extension, Marc Andreessen, meta-analysis, Milgram experiment, National Debt Clock, Nicholas Carr, P = NP, p-value, Paul Erdős, Pluto: dwarf planet, power law, publication bias, randomized controlled trial, Richard Feynman, Rodney Brooks, scientific worldview, SimCity, social contagion, social graph, social web, systematic bias, text mining, the long tail, the scientific method, the strength of weak ties, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Tyler Cowen, Tyler Cowen: Great Stagnation

Unless we want to make it our jobs to figure out how to invest, just use index funds and don’t bother focusing too carefully on individual stocks. Perhaps the same advice can be used for knowledge. Unless it’s one’s job to keep abreast of a certain field of knowledge, simply use the informational equivalent of index funds. But what are informational index funds? They are publications and Web sites that aggregate changing knowledge all in a single place. These include magazines, blogs, and the “What’s News” column in the Wall Street Journal, among other sources. While informational index funds can help, reading omnivorously is still important, and we have already been given some help with this.

., 174 Godwin’s law, 105 Goldbach’s Conjecture, 112–13 Goodman, Steven, 107–8 Gould, Stephen Jay, 82 grammar: descriptive, 188–89 prescriptive, 188–89, 194 Granovetter, Mark, 76–78 Graves’ disease, 111 Great Vowel Shift, 191–93 Green, George, 105–6 growth: exponential, 10–14, 44–45, 46–47, 54–55, 57, 59, 130, 204 hyperbolic, 59 linear, 10, 11 Gumbel, Bryant, 41 Gutenberg, Johannes, 71–73, 78, 95 Hamblin, Terry, 83 Harrison, John, 102 Hawthorne effect, 55–56 helium, 104 Helmann, John, 162 Henrich, Joseph, 58 hepatitis, 28–30 hidden knowledge, 96–120 h-index, 17 Hirsch, Jorge, 17 History of the Modern Fact, A (Poovey), 200 Holmes, Sherlock, 206 homeoteleuton, 89 Hooke, Robert, 21, 94 Hull, David, 187–88 human anatomy, 23 human computation, 20 hydrogen, 151 hyperbolic growth rate, 59 idiolect, 190 impact factors, 16–17 inattentional blindness (change blindness), 177–79 India, 140–41 informational index funds, 197 information transformation, 43–44, 46 InnoCentive, 96–98, 101, 102 innovation, 204 population size and, 135–37, 202 prizes for, 102–3 simultaneous, 104–5 integrated circuits, 42, 43, 55, 203 Intel Corporation, 42 interdisciplinary research, 68–69 International Bureau of Weights and Measures, 47 Internet, 2, 40–41, 53, 198, 208, 211 Ioannidis, John, 156–61, 162 iPhone, 123 iron: magnetic properties of, 49–50 in spinach, 83–84 Ising, Ernst, 124, 125–26, 138 isotopes, 151 Jackson, John Hughlings, 30 Johnson, Steven, 119 Journal of Physical and Chemical Reference Data, 33–35 journals, 9, 12, 16–17, 32 Kahneman, Daniel, 177 Kay, Alan, 173 Kelly, Kevin, 38, 46 Kelly, Stuart, 115 Kelvin, Lord, 142–43 Kennaway, Kristian, 86 Keynes, John Maynard, 172 kidney stones, 52 kilogram, 147–48 Kiribati, 203 Kissinger, Henry, 190 Kleinberg, Jon, 92–93 knowledge and facts, 5, 54 cumulative, 56–57 erroneous, 78–95, 211–14 half-lives of, 1–8, 202 hidden, 96–120 phase transitions in, 121–39, 185 spread of, 66–95 Koh, Heebyung, 43, 45–46, 56 Kremer, Michael, 58–61 Kuhn, Thomas, 163, 186 Lambton, William, 140 land bridges, 57, 59–60 language, 188–94 French Canadians and, 193–94 grammar and, 188–89, 194 Great Vowel Shift and, 191–93 idiolect and, 190 situation-based dialect and, 190 verbs in, 189 voice onset time and, 190 Large Hadron Collider, 159 Laughlin, Gregory, 129–31 “Laws Underlying the Physics of Everyday Life Really Are Completely Understood, The” (Carroll), 36–37 Lazarus taxa, 27–28 Le Fanu, James, 23 LEGO, 184–85, 194 Lehman, Harvey, 13–14, 15 Leibniz, Gottfried, 67 Lenat, Doug, 112 Levan, Albert, 1–2 Liben-Nowell, David, 92–93 libraries, 31–32 life span, 53–54 Lincoln, Abraham, 70 linear growth, 10, 11 Linnaeus, Carl, 22, 204 Lippincott, Sara, 86 Lipson, Hod, 113 Little Science, Big Science (Price), 13 logistic curves, 44–46, 50, 116, 130, 203–4 longitude, 102 Long Now Foundation, 195 long tails: of discovery, 38 of expertise, 96, 102 of life, 38 of popularity, 103 Lou Gehrig’s disease (ALS), 98, 100–101 machine intelligence, 207 Magee, Chris, 43, 45–46, 56, 207–8 magicians, 178–79 magnetic properties of iron, 49–50 Maldives, 203 Malthus, Thomas, 59 mammal species, 22, 23, 128 extinct, 28 manuscripts, 87–91, 114–16 Marchetti, Cesare, 64 Marsh, Othniel, 80–81, 169 mathematics, 19, 51, 112–14, 124–25, 132–35 Matthew effect, 103 Mauboussin, Michael, 84 Mayor, Michel, 122 McGovern, George, 66 McIntosh, J.


pages: 305 words: 98,072

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

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

However, there is a wealth of research that says that, on average over the long run, passive funds outperform active (after accounting for costs). Which brings us to the second type of fund: passive funds are where a fund management company copies the performance of an index (see below). These funds are sometimes referred to as tracker or index funds (because they “track” an index). A good example would be a tracker on the FTSE 100. If you were to buy into such a fund it would aim to replicate as closely as possible the performance of the FTSE 100 Index. If you were to invest in a FTSE tracker, your money would essentially be divided between the 100 shares in the FTSE index.

If you were to invest in a FTSE tracker, your money would essentially be divided between the 100 shares in the FTSE index. This is a crucial advantage of being in a fund, as you yourself would not be able to own all 100 stocks in the FTSE index unless you had a great deal of money and a great deal of time to devote to investment. These days even the super rich will tend to use a tracker or index fund to own the FTSE 100 stocks, as they would see too much of their potential return eaten up in fees if they actually bought all of the stocks in the FTSE 100 Index individually. Paying for 100 separate transactions in order to end up owning all of the companies in the index is clearly not ideal when you can pay once to own a tracker fund and have basically the same exposure.

The reason this is important for our purposes is that as a private investor you are able to “buy” these indices through a passive fund. There has been an explosion in the choice available for the private investor in recent years. If you have a strong view on the UK economy then you can buy a FTSE 100 index fund. Equally, if you think biotechnology companies are likely to have a good time, you can own them via a biotech index. If you feel that Singapore has a bright future, you can “own” Singapore. Within reason, you can own almost anything that occurs to you. If you read an article explaining why something has a bright future (graphene, thorium, tungsten, water, coal mining in Bangladesh, Brazilian oil, property in Montenegro, diamonds – the list is very, very long) you will be able to buy something that gives you financial exposure to that theme.


pages: 364 words: 101,286

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

Alan Greenspan, Albert Einstein, asset allocation, Augustin-Louis Cauchy, behavioural economics, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black-Scholes formula, British Empire, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, carbon-based life, discounted cash flows, diversification, double helix, Edward Lorenz: Chaos theory, electricity market, Elliott wave, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, financial engineering, full employment, Georg Cantor, Henri Poincaré, implied volatility, index fund, informal economy, invisible hand, John Meriwether, John von Neumann, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market microstructure, Myron Scholes, new economy, paper trading, passive investing, Paul Lévy, Paul Samuelson, plutocrats, power law, price mechanism, quantitative trading / quantitative finance, Ralph Nelson Elliott, RAND corporation, random walk, risk free rate, risk tolerance, Robert Shiller, short selling, statistical arbitrage, statistical model, Steve Ballmer, stochastic volatility, transfer pricing, value at risk, Vilfredo Pareto, volatility smile

As in many scientific fields, so in the dismal science a consensus emerges about what is right and what is wrong, what research is worthy a doctoral thesis and what is not. I have run counter-trend most of my professional career. In the 1960s, most theoretical economists were lionizing Bachelier and his heirs. The next decade, Wall Street embraced their theories. They were the intellectual foundation for stock-index funds, options exchanges, executive stock options, corporate capital-budgeting, bank risk-analysis, and much of the world financial industry as we know it today. Throughout this time, I was being heard, but as a near-lone voice denouncing the flaws in the logic. By the late 1980s and 1990s, however, I was no longer alone in seeing those flaws.

And if you have special insights into a stock, you could profit from being the first in the market to act on it. But you cannot be sure you are right or first; after all, the market is full of people at least as smart as you. So, in sum, it may not be worth your while to spend all that time and money getting the information in the first place. Cheaper and safer to ride with the market. Buy a stock index fund. Relax. Be passive. Or as Samuelson at MIT put it: “They also serve who only sit and hold.” His advice, then:A respect for evidence compels me to incline toward the hypothesis that most portfolio decision makers should go out of business—take up plumbing, teach Greek, or help produce the annual GNP by serving as corporate executives.

If fluctuations in stock prices suggested a second, better investment palette, then everybody would start moving their money into that new portfolio and abandoning the first. Soon, there would again be just one portfolio, the “market portfolio.” So the market, itself, was doing the Markowitz calculations. It was the most powerful computer of all, producing tick-by-tick the optimum investment fund. Thus was born the notion of a stock-index fund: a big pool of money, from thousands of investors, holding shares in exactly the same proportion as the real market overall. Of course, the details are not so simple. First decide what you mean by “the market”: just the thirty industrial stocks in the Dow, or the hundred shares in the British FTSE index?


pages: 139 words: 33,246

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

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

Costs are certain but returns aren’t and it makes no sense to pay any more than you have to in order to gain access to the stockmarket. Index funds basically deliver the returns of the overall stockmarket, but at much lower costs than funds managed by clever people who try to outperform the market. Jack Bogle is the founder of Vanguard, which with around £3 trillion is the second-largest mutual fund manager in the world. This is what he has to say about investing: ‘The index fund is a most unlikely hero for the typical investor. It is no more (nor less) than a broadly diversified portfolio, typically run at rock-bottom costs, without the putative benefit of a brilliant, resourceful, and highly skilled portfolio manager.

It is no more (nor less) than a broadly diversified portfolio, typically run at rock-bottom costs, without the putative benefit of a brilliant, resourceful, and highly skilled portfolio manager. The index fund simply buys and holds the securities in a particular index, in proportion to their weight in the index. The concept is simplicity writ large.’48 So there really is no need to pay high annual charges to have your money managed by a manager who makes decisions on what companies to buy, when and how much. An index or tracker fund approach should be your default. PRINCIPLE 3: DON’T PUT ALL YOUR INVESTMENT EGGS IN ONE BASKET. Unless you are starting your own business, diversifying across asset classes and investing in a variety of companies lowers risk without lowering potential returns.


pages: 283 words: 81,376

The Doomsday Calculation: How an Equation That Predicts the Future Is Transforming Everything We Know About Life and the Universe by William Poundstone

Albert Einstein, anthropic principle, Any sufficiently advanced technology is indistinguishable from magic, Arthur Eddington, Bayesian statistics, behavioural economics, Benoit Mandelbrot, Berlin Wall, bitcoin, Black Swan, conceptual framework, cosmic microwave background, cosmological constant, cosmological principle, CRISPR, cuban missile crisis, dark matter, DeepMind, digital map, discounted cash flows, Donald Trump, Doomsday Clock, double helix, Dr. Strangelove, Eddington experiment, Elon Musk, Geoffrey Hinton, Gerolamo Cardano, Hans Moravec, heat death of the universe, Higgs boson, if you see hoof prints, think horses—not zebras, index fund, Isaac Newton, Jaron Lanier, Jeff Bezos, John Markoff, John von Neumann, Large Hadron Collider, mandelbrot fractal, Mark Zuckerberg, Mars Rover, Neil Armstrong, Nick Bostrom, OpenAI, paperclip maximiser, Peter Thiel, Pierre-Simon Laplace, Plato's cave, probability theory / Blaise Pascal / Pierre de Fermat, RAND corporation, random walk, Richard Feynman, ride hailing / ride sharing, Rodney Brooks, Ronald Reagan, Ronald Reagan: Tear down this wall, Sam Altman, Schrödinger's Cat, Search for Extraterrestrial Intelligence, self-driving car, Silicon Valley, Skype, Stanislav Petrov, Stephen Hawking, strong AI, tech billionaire, Thomas Bayes, Thomas Malthus, time value of money, Turing test

Bessembinder’s data justify one familiar rule of personal investing: buy index funds (mutual funds or ETFs that hold a portfolio replicating a market index, such as the S&P 500). Many investors disdain the indexes’ returns as merely “average.” The error of this view is generally demonstrated when a small investor tries picking stocks himself. A few randomly chosen stocks are likely to perform much worse than “average.” We’ve all heard of the chimpanzee that throws darts at the stock listings. The ape is usually cited to dismiss the value of expertise. Most professional stock pickers do no better than the “random” picks of an index fund. But that chimp is not in fact a good metaphor for index funds.

Statistics on corporate survival—and on tenure on ranked lists or indexes like the Fortune 500 or the S&P 500—show a Copernican effect. How long a company has existed (or been on the ranked list) is a rough predictor of how long it will survive (remain on the list). The Copernican principle has some relation to the survivor bias that plagues stock investors. At any given time, an index fund or portfolio tends to be weighted with stocks that have done well in the immediate past, but that are unlikely to perform comparably well in the long run. Investors are always grabbing gold that crumbles to ashes in their hands. A Broadway show is a special type of business. Like corporations, plays run for as long as their investors can hope to make a profit.

But that chimp is not in fact a good metaphor for index funds. Consider a different experiment. The chimp throws a dart at the front page of the Wall Street Journal. It buys whatever stock is mentioned in the editorial story that the dart hits. This will probably not be such an average stock. It’s disproportionately likely to be a large-capitalization firm with many investors, employees, and customers. The Journal’s editorial policy is biased, naturally, toward companies with a large economic presence. Most of the firms that make the front page have already survived long past the average stock-issuing company’s lifespan.


pages: 537 words: 144,318

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

Albert Einstein, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, bond market vigilante , book value, 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, equity risk premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, global macro, Greenspan put, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, inverted yield curve, invisible hand, junk bonds, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, market microstructure, Minsky moment, 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, proprietary trading, purchasing power parity, quantitative easing, random walk, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, SoftBank, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, tail risk, The Great Moderation, Thomas Bayes, time value of money, too big to fail, Tragedy of the Commons, transaction costs, two and twenty, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

If Buffett wins, the intended recipient is Girls Inc. of Omaha. To see more information about the bet, go to www.longbets.org. During the course of 2008, the Vanguard S&P 500 fund was down 37 percent and on average (net of all fees, costs, and expenses) the five funds-of-funds selected by Protégé were down 23.9 percent. At year-end 2009, the Vanguard 500 Index Fund’s (VFINX) return was 26.5 percent while the HFRI Fund of Funds Composite Index (a proxy for the five funds-of-hedge-funds) was up 11.2 percent for the year. After two years of performance, the approximate BAV (Bet Asset Value) is: Protégé 84.6; Buffett 79.7. You cannot have it both ways. Either you take an absolute return approach regardless of the market environment, or you just go for efficient beta and be happy with the outcome.

Speaking at a conference in the spring of 2008, I said there is a good chance the market goes to hell because the system needs to be cleaned and we have to pay for an orgy of credit. People thought I was crazy. A year ago I was a cash manager. Then I became a corporate bond buyer—I did not care about stocks. Six months ago I became a value stock buyer, buying all the deep value I could find. Now I am a long-only index fund, trying not to get whipsawed by the market’s gyrations and trying not to get distracted by people talking about the end of the rally. I am working from the principle that the big fear is behind us. Because people are only as good as their last six months in our industry, those who were negative and have not participated in the recent rally are looking for an excuse.

But this year I probably made 10 times more money in bank stocks than a traditional mutual fund financial specialist made over the last few years because financials were completely wiped out. Identifying a new subject and having the flexibility and the skill to go trade it is what is required. So you read the papers and watch the tape all day, every day, in markets around the world? At times like the present, I do nothing—again, I am an index fund right now. I do not want to watch the tape—I do not care about the tape. Sometimes it is very important to look at the tape, but not right now. Sometimes, as a fund manager, it is very important to escape from the markets in order to avoid getting disturbed by the noise. I try to stay out of the office now.


pages: 1,088 words: 228,743

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

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk 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 macro, 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, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, 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, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, 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

(This could have been accepted, had they not as a group consistently underperformed index funds.) Lumping alpha and beta together in a tie-in sale made sense for sellers who could add some long-run value by providing access to the equity premium (and camouflaging any underperformance), but not for buyers, who could access the equity premium much more cheaply through index funds. Add a notion that HF managers can provide positive alpha even after their costs and fees—unlike traditional managers—and, voilà, alpha–beta separation is the way to go. A barbell of very cheap index funds (beta providers) and more expensive hedge funds (alpha providers) can be more cost-effective than investment in a traditional long-only fund.

A key example is the S&P 500 inclusion effect—the finding that new entries to the S&P 500 index experience a sudden and persistent price jump, presumably due to new buying pressure from index funds. Shleifer (1986) argued that if stocks have horizontal demand curves, no price impact is expected, but if demand curves are downward sloping, the rightward shift in the demand curve implies a sudden price increase, consistent with the evidence. Later research shows that the degree of substitutability varies (some stocks to be included have close counterparts, while others have much lower correlations—and thus have greater arbitrage risk). Stocks lacking close substitutes experience higher price jumps upon inclusion into the S&P 500. Still, index funds are expected by their investors to hold every stock in the S&P 500 index and some price pressure effect should be observed for any stock added to that index, no matter how many close substitutes the stock has.

A barbell of very cheap index funds (beta providers) and more expensive hedge funds (alpha providers) can be more cost-effective than investment in a traditional long-only fund. This argument became a great defense against institutional investors’ qualms about high HF fees: the blended fee in a portfolio of index funds and hedge funds is arguably competitive with traditional active long-only managers if we consider their alpha–beta mix (both contain equity beta but HFs much less than traditional long-only) and insist that beta exposure should earn only an index fund fee. Not surprisingly, most institutional inflows after the millennium have gone into the alpha–beta barbell—not to traditional managers. A variation on this strategy is alpha transport (portable alpha).


pages: 195 words: 63,455

Damsel in Distressed: My Life in the Golden Age of Hedge Funds by Dominique Mielle

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", activist fund / activist shareholder / activist investor, airline deregulation, Alan Greenspan, banking crisis, Bear Stearns, Black Monday: stock market crash in 1987, blood diamond, Boris Johnson, British Empire, call centre, capital asset pricing model, Carl Icahn, centre right, collateralized debt obligation, Cornelius Vanderbilt, coronavirus, COVID-19, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, family office, fear of failure, financial innovation, fixed income, full employment, glass ceiling, high net worth, hockey-stick growth, index fund, intangible asset, interest rate swap, John Meriwether, junk bonds, Larry Ellison, lateral thinking, Long Term Capital Management, low interest rates, managed futures, mega-rich, merger arbitrage, Michael Milken, Myron Scholes, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, offshore financial centre, Paul Samuelson, profit maximization, Reminiscences of a Stock Operator, risk free rate, risk tolerance, risk-adjusted returns, satellite internet, Savings and loan crisis, Sharpe ratio, Sheryl Sandberg, SoftBank, survivorship bias, Tesla Model S, too big to fail, tulip mania, union organizing

In 2007, Warren Buffett bet $1 million that investment professionals could not put together a portfolio of hedge funds that would outperform an S&P 500 index fund over a ten-year period. The bet ended in December 31, 2017, and you guessed it, Buffett won. On that exact day, I quit in a regal display of integrity and intestinal fortitude. I’m kidding. It was pure coincidence. During the ten-year period of Buffett’s bet, the S&P index fund returned 7.1 percent compounded annually versus the 2.2 percent average return of a basket of five hedge funds handpicked by Ted Seides, then an asset manager with Protégé Partners, the only fund that stepped forward to pick up the gauntlet.

He explained it thusly in a 2016 shareholder letter: “In Berkshire Hathaway’s 2005 annual report, I argued that active investment management by professionals—in aggregate—would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients—again in aggregate—worse off than if the amateurs simply invested in an unmanaged low-cost index fund.” It wasn’t a judgment of the ability of any particular hedge fund manager. It was a bet that the industry had matured and was now charging so much that net returns, that is to say after paying fees, would not beat the market anymore. The outperformance ship had sailed. The industry changes were so profound, the abyss of 2008 was so searing, and the 2009 rebound so befuddling that they forced me to broaden my perspective.

“In an investment committee meeting a year or so ago,” the veteran CIO recalled, “one of the committee members asked why we had zero low-cost index managers [passive managers, whose portfolios only mirror an index like the S&P 500 or Nasdaq, or the Barclays U.S. Corporate High Yield Total Return Index] in the portfolio. I hesitated for a moment, then told the truth: I get paid to beat the indices. The easiest way to ensure that I don’t get paid is to invest in an indexed fund—because by definition, once subtracting the fees imposed by the manager, I will underperform the index. So even if 80 percent of active managers underperformed this year, I would still be compelled to try to pick the winners. With venture capital and hedge funds, you are basically buying a lottery ticket.


pages: 263 words: 89,368

925 Ideas to Help You Save Money, Get Out of Debt and Retire a Millionaire So You Can Leave Your Mark on the World by Devin D. Thorpe

asset allocation, buy and hold, call centre, diversification, estate planning, fixed income, Home mortgage interest deduction, index fund, junk bonds, knowledge economy, low interest rates, money market fund, mortgage tax deduction, payday loans, random walk, risk tolerance, Skype, Steve Jobs, transaction costs, women in the workforce, zero-sum game

Funds that seek to beat market returns are often called actively managed funds; these funds tend to charge more. Funds that seek to match the return of a market index are called index funds. They can match market returns more easily because they simply buy a basket of stocks (or bonds) that represent the index well. The composition of most indexes changes infrequently so little management of index funds is required so their costs are much lower. Since most funds don’t beat the market consistently and those that try have higher fees, buying index funds with low expense ratios seems a good bet. Other Fees and Expenses: Mutual funds may charge you a variety of fees and expenses, but all must be disclosed before you make your purchase.

The “load” refers to the fee to enter the investment and the “expense ratio” refers to the annual cost. If you invest in a fund with a 6% load and a 2% expense ratio, your fund will need to generate an 8% annual return (tough to do) just for you to break even in the first year. Look for “no load” funds and funds with low expense ratios. Many of the lowest cost funds are “index” funds that don’t try to beat a market index, they just try to match it. Given that very few funds consistently beat the market, focusing on fees is a great way to keep your money growing. Evaluate the risk: consider your personal appetite for risk and screen mutual funds to find those that appeal to your sense of adventure or your fear of falling, as the case may be.

Bond funds are suitable investments for both retirement savings and college savings accounts. For college funds, emphasize short and intermediate term funds. Sector Funds: There are number of funds that focus all of their investments on stocks in a particular sector. These funds tend to be much riskier. The broad index funds provide real diversification because they invest in a variety of companies from across the economic landscape. Sector funds concentrate their bets on a single industry. All of the companies in an industry face the same economic challenges—and benefits together. Hence, these funds behave much more like individual stocks with much greater swings in value.


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

Abraham Wald, Albert Einstein, Bayesian statistics, Bear Stearns, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk tolerance, risk/return, Robert Solow, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, Thales and the olive presses, Thales of Miletus, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

He also developed the Sharpe ratio, a measure of the risk of a mutual or index fund versus its reward. Sharpe continued to work to make financial concepts more democratic and more accessible. He helped develop Financial Engines, an Internetbased application to deliver investment advice online. 78 The Rise of the Quants Ever concerned about the practitioner’s side of finance, Sharpe began to consult with investment houses, first Merrill Lynch and then Wells Fargo. At Merrill Lynch, he helped set up their CAPM analysis capacity. At Wells Fargo, he helped develop methodologies for the creation of index funds and the assessment of portfolio risk.

In addition, the market portfolio must contain all securities in proportion to their relative capitalization, and each security is efficiently priced according to its risk. If we accept these premises, there is an important consequence. An individual investor is freed from analyzing the entire market and can simply hold a market portfolio, or an efficient index fund. The investor can price additions to the portfolio by simply considering the security’s beta. Then the market acts as a pool of the risk aversion of all participants, weighted by their holdings, and each individual security is simply priced relative to its covariance relative to the market variance.

Lorie was renowned at the time for his creation of the Center for Research in Stock Prices (CRSP) database, still the most commonly employed finance database for financial academics today. He had also Applications 119 come across Black when Black and Associates was advocating for Wells Fargo to create various index funds. At the same time, O’Connor had risen to leadership at the CBOT and had convinced skeptics on the Board that the time was ripe for the world’s first options exchange. O’Connor was convincing and helped bring the CBOE to fruition in 1973, within months of Black and Scholes’ publication. William Brodsky, Chairman of the CBOE, reported that: “Although the idea came from Ed and a couple of others at the Board of Trade, they were constantly fighting at the Board of Trade about whether it should even happen and whether it should continue to be funded.


One Up on Wall Street by Peter Lynch

air freight, Apple's 1984 Super Bowl advert, Boeing 747, book value, buy and hold, Carl Icahn, corporate raider, cuban missile crisis, Donald Trump, fixed income, index fund, Irwin Jacobs, Isaac Newton, junk bonds, large denomination, money market fund, prediction markets, random walk, shareholder value, Silicon Valley, Teledyne, vertical integration, Y2K, Yom Kippur War, zero-sum game

That this return can be achieved without your having to do any homework or spending any extra money is a useful benchmark against which you can measure your own performance, and also the performance of the managed equity funds such as Magellan. If professionals who are employed to pick stocks can’t outdo the index funds that buy everything at large, then we aren’t earning our keep. But give us a chance. First consider the kind of fund you’ve invested in. The best managers in the world won’t do well with a gold-stock fund when gold prices are dropping. Nor is it fair to judge a fund for a single year’s performance.

So if Houndstooth turns over the portfolio once a year, he’s lost as much as four percent to commissions. This means he’s four percent in the hole before he starts. So to get his 12–15 percent after expenses, he’s going to have to make 16–19 percent from picking stocks. And the more he trades, the harder it’s going to be to outperform the index funds or any other funds. (The newer “families” of funds may charge you a 3–8½ percent fee to join, but that’s the end of it, and from then on you can switch from stocks to bonds to money-market funds and back again without ever paying another commission.) All these pitfalls notwithstanding, the individual investor who manages to make, say, 15 percent over ten years when the market average is 10 percent has done himself a considerable favor.

Now if we don’t have 150-million-share days, people think something is wrong. I know I do my part to contribute to the cause, because I buy and sell every day. But my biggest winners continue to be stocks I’ve held for three and even four years. The rapid and wholesale turnover has been accelerated by the popular index funds, which buy and sell billions of shares without regard to the individual characteristics of the companies involved, and also by the “switch funds,” which enable investors to pull out of stocks and into cash, or out of cash and into stocks, without delay or penalty. Soon enough we’ll have a 100 percent annual turnover in stocks.


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

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

Technical systems are easier to build and run, but in another example of barriers to entry the additional effort required for including fundamental rules is usually rewarded with higher returns. The examples in this book are all technical, but only because they are simpler to explain. Portfolio size There are successful traders who only ever trade one futures contract. At the other extreme large equity index funds could have thousands of holdings. Remember that the law of active management shows that diversification is the best source of additional risk adjusted returns. Both traders and investors should hold more positions when they can; ideally across several asset classes to get the greatest possible benefit.

Others have characteristics which make them worse than other alternatives, or would force you to trade them in a particular way. Finally there is often a choice of how you can access a particular market; you could get Euro Stoxx 50 European equity index exposure by buying the individual shares, trading a future, a spread bet, a contract for difference, a passive index fund or an active fund. Which is best? 101 Systematic Trading Chapter overview Necessities The minimum requirements that need to be met before you can trade an instrument. Instrument choice and trading style Characteristics that influence instrument choice alternatives and how to trade particular instruments.

Hedge funds are an extreme example of active funds. As distinct from passive funds and passive management. See page 106. Alpha The returns of an active manager or trader can be split into beta and alpha. The beta are the returns you could get from investing in the general market, i.e. in a passive index fund. Any additional return due to the manager’s skill is alpha. Alternative beta A kind of beta, but which requires active trading to achieve. So for example to earn the equity value premium, which is the return from being long low price:earnings (PE) and short high PE equities, you need to buy and sell the appropriate shares at the right time.


pages: 249 words: 77,342

The Behavioral Investor by Daniel Crosby

affirmative action, Asian financial crisis, asset allocation, availability heuristic, backtesting, bank run, behavioural economics, Black Monday: stock market crash in 1987, Black Swan, book value, buy and hold, cognitive dissonance, colonial rule, compound rate of return, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, disinformation, diversification, diversified portfolio, Donald Trump, Dunning–Kruger effect, endowment effect, equity risk premium, fake news, feminist movement, Flash crash, haute cuisine, hedonic treadmill, housing crisis, IKEA effect, impact investing, impulse control, index fund, Isaac Newton, Japanese asset price bubble, job automation, longitudinal study, loss aversion, market bubble, market fundamentalism, mental accounting, meta-analysis, Milgram experiment, moral panic, Murray Gell-Mann, Nate Silver, neurotypical, Nick Bostrom, passive investing, pattern recognition, Pepsi Challenge, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Richard Feynman, Richard Thaler, risk tolerance, Robert Shiller, science of happiness, Shai Danziger, short selling, South Sea Bubble, Stanford prison experiment, Stephen Hawking, Steve Jobs, stocks for the long run, sunk-cost fallacy, systems thinking, TED Talk, Thales of Miletus, The Signal and the Noise by Nate Silver, Tragedy of the Commons, trolley problem, tulip mania, Vanguard fund, When a measure becomes a target

The rise of passive investing also means that stocks included in large indices tend to be less informationally efficient than those not in such company. Michael Mauboussin and company report that, “in mid-2016, passive index funds and ETFs owned 10 percent or more of 458 of the 500 companies in the S&P 500. In 2005, that was true for only 2 of the 500.” Increasingly, large swaths of a corporation are being bought and sold out of habit and not conviction, meaning that prices are less and less reflective of true value. Speaking to this phenomenon Jesse Felder has said, “‘passive investing’ will ultimately become a victim of its own success. The massive shift to index funds over the past 15 years or so drove the valuations of the largest index components to levels which guarantee poor returns going forward.

But before I render a nuanced behavioral critique of passive investing (and anger an army of Bogleheads with pitchforks), let me speak to some of its considerable strengths. To be as direct as possible, passive investing should be the de facto choice of those uninterested in the art and science of investment management. By buying a diversified basket of index funds that covers a variety of asset classes, know nothing investors (who often know a great deal) are likely to beat more than 90% of active managers and have time to focus on pursuits more meaningful than compounding wealth. Since passive management eschews costly research and rock star managers, passive vehicles tend to be far less expensive than their active brethren; a huge win for investors.

But if there is one lesson to be learned from financial history, it is that universal consensus tends to portend bad news. As Aaron Task said in his thoughtful blog piece, ‘Pride Cometh Before the Fall: Indexing Edition’: “when ‘everybody’ knows something, it’s usually a good time to head in the opposite direction. And what ‘everybody’ knows now is that the very best, smartest investment you can make is an index fund.” Is it possible that indexing being the de facto right answer is somehow making it less right? A victim of success One Cobra Effect of indexing is that the very inclusion of a company in an index leads to an immediate increase in the price-to-earnings and price-to-book ratios of the stock.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

Abraham Wald, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Andrei Shleifer, anti-communist, AOL-Time Warner, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, book value, Bretton Woods, British Empire, business cycle, capital asset pricing model, carbon tax, Carl Icahn, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, George Akerlof, Glass-Steagall Act, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Nixon triggered the end of the Bretton Woods system, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, precautionary principle, price discrimination, price stability, principal–agent problem, profit maximization, proprietary trading, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Tax Reform Act of 1986, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, Two Sigma, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

“Technical strategies are usually amusing, often comforting, but of no real value.” The efficient market hypothesis transformed Wall Street. Most immediately, it raised the popularity of “index funds”—mutual funds that bought large baskets of stocks, seeking to replicate the performance of the overall market. If fundamental analysis doesn’t work and most fund managers routinely fail to outperform the market, there can be no justification for the hefty fees that actively managed mutual funds charge investors. Investing in index funds, which keep their fees at minimal levels, is much more sensible. By 2000, tens of millions of Americans had taken Malkiel’s advice and placed much of their retirement money in these types of savings vehicles.

By 2000, tens of millions of Americans had taken Malkiel’s advice and placed much of their retirement money in these types of savings vehicles. (For many years, Malkiel served as a director of the Vanguard Group, which pioneered index funds. Fama joined another firm that manages index funds, Dimensional Fund Advisors.) The rise of efficient market theory also signaled the beginning of quantitative finance. In addition to the random walk model of stock prices, the period between 1950 and 1970 saw the development of the mean-variance approach to portfolio diversification, which Harry Markowitz, another Chicago economist, pioneered; the capital asset pricing model, which a number of different scholars developed independently of one another; and the Black-Scholes option pricing formula, which Fischer Black, an applied mathematician from Harvard, and Myron Scholes, a finance Ph.D. from Chicago, developed.

The argument for diversification was the same one that applies to salting away your retirement savings in mutual funds rather than investing in individual stocks. If you put all of your money in one company and it goes bankrupt, you lose everything; if you invest in five hundred companies, through an index fund, say, and one of them goes out of business, it shouldn’t have much impact on the value of the fund. A bit more formally, the Nobel-winning financial theorist Harry Markowitz demonstrated back in the 1950s that diversification allows investors to minimize the impact of particular damaging events, or what is often referred to as “idiosyncratic risk.”


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accelerated depreciation, accounting loophole / creative accounting, Airbus A320, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, Boeing 747, book value, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, capital controls, Carl Icahn, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cross-subsidies, currency risk, discounted cash flows, disintermediation, diversified portfolio, Dutch auction, equity premium, equity risk premium, eurozone crisis, fear index, financial engineering, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, James Webb Space Telescope, junk bonds, Kenneth Rogoff, Larry Ellison, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, PalmPilot, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk free rate, risk tolerance, risk/return, Robert Shiller, Scaled Composites, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, Skype, SpaceShipOne, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, systematic bias, Tax Reform Act of 1986, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, vertical integration, yield curve, zero-coupon bond, zero-sum game, Zipcar

Amanda Reckonwith, Percival’s financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor’s 500 Index. The index has an expected return of 14%, and its standard deviation is 16%. a. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 6%. b. Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is +.1. 17. Cost of capital Gianni Schicchi is evaluating an expansion of his business.

A large mutual fund group such as Fidelity offers a variety of funds. They include sector funds that specialize in particular industries and index funds that simply invest in the market index. Log on to www.fidelity.com and find first the standard deviation of returns on the Fidelity Spartan 500 Index Fund, which replicates the S&P 500. Now find the standard deviations for different sector funds. Are they larger or smaller than the figure for the index fund? How do you interpret your findings? ___________ 1See E. Dimson, P. R. Marsh, and M. Staunton, Triumph of the Optimists: 101 Years of Investment Returns (Princeton, NJ: Princeton University Press, 2002). 2Treasury bills were not issued before 1919.

They simply “buy the index,” which maximizes diversification and cuts costs to the bone. Individual investors can buy index funds, which are mutual funds that track stock market indexes. There is no active management, so costs are very low. For example, management fees for the Vanguard 500 Index Fund, which tracks the S&P 500 Index, were .17% per year in 2011 (.06% per year for investments over $10,000). The size of this fund was $102 billion. How far could indexing go? Not to 100%: If all investors hold index funds then nobody will be collecting information and prices will not respond to new information when it arrives.


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, Cass Sunstein, classic study, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, Cornelius Vanderbilt, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, equity risk premium, financial engineering, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, land bank, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, means of production, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, public intellectual, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, subprime mortgage crisis, Suez canal 1869, Suez crisis 1956, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, tontine, too big to fail, trade liberalization, trade route, transatlantic slave trade, tulip mania, wage slave

The prediction it makes about equilibrium rates of expected return for high-beta stocks and low-beta stocks is used in corporate decision-making and risk analysis. The prediction about the universal demand for holding a capital-weighted portfolio of assets led to the development of a new type of investment product, an index fund. INDEXATION The development of passive index-based investing came about from the convergence of two streams of academic research in the 1970s. The first is the CAPM result about the market portfolio. Sharpe’s model was a marketer’s dream, because it predicts immediate, widespread demand for a very simple product.

To the horror of much of the investment management community, over the next thirty-five years, the Vanguard Market Index Trust regularly beat the majority of equity mutual funds each year, even though their managers were unquestionably smart, experienced, well-educated, dedicated professionals whose compensation depended on doing well. It didn’t seem to matter much. Long-term, investors were better off investing in the index fund than with active managers. Like Gary Kasparov being beaten by Deep Blue, a low-cost, mechanical rule of holding US equities in proportion to their company size turns out to eventually perform better than most managers. Even though by chance some active managers may beat the market in the long term, it is hard to figure out in advance who will outperform.

Simple: low fees and low trading costs. Active managers are expensive. They do a lot of research; they gather and digest information. They maintain staffs of analysts covering the prospects for various industries. They monitor economic developments that might affect the value of their securities. In contrast, index funds simply hold everything. They are so diversified that even if there were some bad stocks in the portfolio, these do not have a proportionally large effect. By weighting by the size of the company, there is no need to buy and sell stocks to rebalance the portfolio. It does so automatically as prices for individual securities go up and down.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

Alan Greenspan, Andrei Shleifer, asset allocation, Bear Stearns, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, financial engineering, fixed income, follow your passion, global macro, Gordon Gekko, high net worth, index fund, it's over 9,000, John Bogle, John Meriwether, Long Term Capital Management, mail merge, managed futures, margin call, mass immigration, merger arbitrage, Michael Milken, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, short squeeze, Silicon Valley, tail risk, Thales and the olive presses, Thales of Miletus, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule, Vanguard fund, Y2K, Yogi Berra, zero-sum game

Anson, The Handbook of Alternative Assets (Hoboken, NJ: John Wiley & Sons, 2006), 123. Chapter One What Is a Hedge Fund? The Traditional Long-Only Portfolio versus the Alternative Hedge Fund Portfolio Hedge funds are generally perceived to be the investment of choice of the rich and the informed, and they are more interesting and fun to discuss than your Vanguard index fund. —Cliff Asness, AQR Capital Management The year was 1989. I had just started working at Goldman Sachs in the world of investment banking—the industry adored by many Ivy League students and business school graduates. A few floors up, legendary research director Lee Cooperman was asked by Goldman Sachs to create a mutual fund and lead the Asset Management Division.

A system of money management that allows the manager and the capital to have an efficient, symbiotic, and symmetrical relationship. Here’s the deal. There are boring ways to run money, the blunt instruments of asset management—long-only mutual funds and their arch nemeses, the exchange-traded fund (ETF) and the index fund. These products have their followers, and, of course, the true believers will assert the sanctity of their respective product lines with religious ferocity and certainty. Then there are the curmudgeons of finance, the Old Salts who have been there and done that. Can’t fool them—ever—and while there is a sucker born every minute there are 10 sages born in a century, and each of them knows it all.

Chapter Nine The Men Behind the Curtains Fund of Hedge Funds A fund of funds due to the fees involved will, over time, underperform the ETF on the S&P 500. I’ll betcha. —Warren Buffett (well, not really) Okay. Warren buffett never uttered the words above, but he may as well have. In 2008, the Oracle of Omaha bet Protégé Partners LLC—a money management firm that runs a fund of hedge funds—that the returns from a low-cost S&P 500 Index fund sold by Vanguard will outperform the average returns delivered by 5 fund of hedge funds (net of fees, costs, and expenses) over 10 years. Having put up roughly $320,000 on each side, this winner-takes-all wager is serious business. Although the 2007 to 2009 economic crisis put Buffett behind, he is now closing the gap.


pages: 172 words: 49,890

The Dhandho Investor: The Low-Risk Value Method to High Returns by Mohnish Pabrai

asset allocation, backtesting, beat the dealer, Black-Scholes formula, book value, business intelligence, call centre, cuban missile crisis, discounted cash flows, Edward Thorp, Exxon Valdez, fixed income, hiring and firing, index fund, inventory management, John Bogle, Mahatma Gandhi, merger arbitrage, passive investing, price mechanism, Silicon Valley, time value of money, transaction costs, two and twenty, zero-sum game

Said another way, just 10 percent to 20 percent of funds beat the broad indexes over the long haul. Because of these fundamental facts, investors are better off investing in an index fund versus most of the actively managed mutual fund universe. My take on Mr. Buffett’s fee structure was that it was very fair. If stocks on average deliver 10 percent a year, the typical mutual fund investor would net about 8.5 percent, the typical hedge fund investor would net about 6.8 percent (assuming a 1.5 percent and 20 percent structure), and an index fund investor would net around 9.7 percent. In this scenario, an investor in the Buffett Partnerships would net 9 percent—higher than virtually all active management options.

In this scenario, an investor in the Buffett Partnerships would net 9 percent—higher than virtually all active management options. If markets were up just 5 percent in a given year, the average mutual fund investor would net 3.5 percent, the hedge fund investor would net just 2.8 percent, the index fund investor would net 4.7 percent, and Buffett Partnership investors would net the full 5 percent—higher than all options. Investors in the Buffett Partnerships pay a below-average fee if returns are below 10 percent annualized. They pay an above-average fee (versus mutual funds) if returns are over 12 percent annualized. Mr. Buffett only ends up charging a higher fee than a 1 and 20 hedge fund if his average annualized returns are over 50 percent.


pages: 306 words: 82,909

A Hacker's Mind: How the Powerful Bend Society's Rules, and How to Bend Them Back by Bruce Schneier

4chan, Airbnb, airport security, algorithmic trading, Alignment Problem, AlphaGo, Automated Insights, banking crisis, Big Tech, bitcoin, blockchain, Boeing 737 MAX, Brian Krebs, Capital in the Twenty-First Century by Thomas Piketty, cloud computing, computerized trading, coronavirus, corporate personhood, COVID-19, cryptocurrency, dark pattern, deepfake, defense in depth, disinformation, Donald Trump, Double Irish / Dutch Sandwich, driverless car, Edward Thorp, Elon Musk, fake news, financial innovation, Financial Instability Hypothesis, first-past-the-post, Flash crash, full employment, gig economy, global pandemic, Goodhart's law, GPT-3, Greensill Capital, high net worth, Hyman Minsky, income inequality, independent contractor, index fund, information security, intangible asset, Internet of things, Isaac Newton, Jeff Bezos, job automation, late capitalism, lockdown, Lyft, Mark Zuckerberg, money market fund, moral hazard, move fast and break things, Nate Silver, offshore financial centre, OpenAI, payday loans, Peter Thiel, precautionary principle, Ralph Nader, recommendation engine, ride hailing / ride sharing, self-driving car, sentiment analysis, Skype, smart cities, SoftBank, supply chain finance, supply-chain attack, surveillance capitalism, systems thinking, TaskRabbit, technological determinism, TED Talk, The Wealth of Nations by Adam Smith, theory of mind, TikTok, too big to fail, Turing test, Uber and Lyft, uber lyft, ubercab, UNCLOS, union organizing, web application, WeWork, When a measure becomes a target, WikiLeaks, zero day

SOCIETAL HACKS ARE OFTEN NORMALIZED 89Cisco announced multiple vulnerabilities: Michael Cooney (5 May 2022), “Cisco warns of critical vulnerability in virtualized network software,” Network World, https://www.networkworld.com/article/3659872/cisco-warns-of-critical-vulnerability-in-virtualized-network-software.html. 89F5 warned its customers: Harold Bell (5 May 2022), “F5 warns of BIG-IP iControl REST vulnerability,” Security Boulevard, https://securityboulevard.com/2022/05/f5-warns-of-big-ip-icontrol-rest-vulnerability. 89AVG Corporation announced: Charlie Osborne (5 May 2022), “Decade-old bugs discovered in Avast, AVG antivirus software,” ZD Net, https://www.zdnet.com/article/decade-old-bugs-discovered-in-avast-avg-antivirus-software. 90a history of normalization: I could have written much the same story about index funds. Annie Lowrey (Apr 2021), “Could index funds be ‘worse than Marxism’?” Atlantic, https://www.theatlantic.com/ideas/archive/2021/04/the-autopilot-economy/618497. 91Normalization isn’t a new phenomenon: Robert Sabatino Lopez and Irving W. Raymond (2001), Medieval Trade in the Mediterranean World: Illustrative Documents, Columbia University Press. 22.

Cornman, 113 explainability problem, 212–15, 234 exploits, 21, 22 externalities, 63–64 Facebook, 184, 236, 243 facial recognition, 210, 217 fail-safes, 61, 67 Fairfield, Joshua, 248 fake news, 81 Fate of the Good Soldier Švejk during the World War, The (Hašek), 116 fear, 195–97 Federal Deposit Insurance Corporation (FDIC), 96 Federal Election Campaign Act (1972), 169 federal enclaves, 113–14 Fifteenth Amendment, 161, 164 filibuster, 154–55 financial exchange hacks, 79–82, 83–85 Financial Industry Regulatory Authority, 84 financial system hack normalization as subversive, 90–91 banking, 75, 76–77, 119, 260n financial exchange hacks, 84, 85 index funds, 262n innovation and, 72, 90 wealth/power and, 119 financial system hacks AI and, 241–43, 275n banking, 74–78, 119, 260n financial exchanges, 79–82, 83–85 identifying vulnerabilities and, 77–78 medieval usury, 91 See also financial system hack normalization Fischer, Deb, 190 Fitting, Jim, 1 flags of convenience, 130 foie gras bans, 113–14 foldering, 26 food delivery apps, 99, 124 Ford, Martin, 272n foreknowledge, 54 Fourteenth Amendment, 141 Fourth Amendment, 136 Fox News, 197 frequent-flier hacks, 38–40, 46 Friess, Foster, 169 front running, 80, 82 Fukuyama, Francis, 140 Gaedel, Ed, 41 gambling, 186 gambrel roof, 109 GameStop, 81 Garcia, Ileana, 170 Garland, Merrick, 121 General Motors, 104 genies, 232–33 geographic targeting orders, 87–88 gerrymandering, 165–66 “get out of jail free” card, 260n Getty, Paul, 95 Ghostwriter, 201 gig economy, 99, 100, 101, 116, 123–25, 264n Go, 212, 241 Gödel, Kurt, 25, 27 Goebbels, Joseph, 181 Goldin, Daniel, 115 Goodhart’s law, 115 Google, 185 GPT-3, 220 Great Depression, 74 Great Recession, 96, 173–74 Greensill Capital, 102 Grossman, Nick, 245 Grubhub, 99 Hacker Capture the Flag, 228 hackers competitions for, 228 motivations of, 47 types, 22 hacking as parasitical, 45–47, 84, 173 by the disempowered, 103, 119, 120, 121–22, 141 cheating as practicing for, 2–3 context of, 157–60, 237 defined, 1–2, 9–12, 255n destruction as result of, 172–75 existential risks of, 251–52 hierarchy of, 200–202 innovation and, 139–42, 158–59, 249–50, 252 life cycle of, 21–24 public knowledge of, 23, 256n ubiquity of, 25–28 hacking defenses, 48–52, 53–57 accountability and, 67–68 AI hacking and, 236–39 cognitive hacks and, 53–54, 182, 185, 198–99 detection/recovery, 54–56 economic considerations, 63 governance systems, 245–48 identifying vulnerabilities, 56–57, 77–78, 237–38 legislative process hacks and, 147–49, 151, 154, 156 reducing effectiveness, 53–54, 61 tax hacks and, 15–16 threat modeling, 62–63, 64 See also patching hacking normalization as subversive, 90–91 casino hacks, 35–36, 37 hacking as innovation and, 158–59 “too big to fail” hack, 97–98 wealth/power and, 73, 104, 119, 120, 122 See also financial system hack normalization Hadfield, Gillian, 248 Han, Young, 170 Handy, 124 Harkin, Tom, 146 Harris, Richard, 35 Hašek, Jaroslav, 116 Haselton, Ronald, 75 hedge funds, 82, 275n Herd, Pamela, 132 HFT (high-frequency trading), 83–85 hierarchy of hacking, 200–202 high-frequency trading (HFT), 83–85 hijacking, 62 Holmes, Elizabeth, 101 hotfixes, 52 Huntsman, Jon, Sr., 169 illusory truth effect, 189 Independent Payment Advisory Board (IPAB), 153–54 “independent spoiler” hack, 169–70 index funds, 262n indulgences, 71–72, 73, 85, 260n innovation, 101, 139–42, 158–59, 249–50, 252 insider trading, 79–80 intention ATM hacks and, 32 definition of hacking and, 2, 10, 16 definition of system and, 19 Internet, 64–65 See also social media Internet of Things (IoT) devices bugs in, 14 patching for, 23, 49 reducing hack effectiveness in, 54 Intuit, 190 Investment Company Act (1940), 82 Jack, Barnaby, 34 jackpotting, 33–34 Jaques, Abby Everett, 233 Joseph Weizenbaum, 217 jurisdictional rules, 112–13, 128–31 Kemp, Brian, 167 Keynes, John Maynard, 95 Khashoggi, Jamal, 220 King Midas, 232 labor organizing, 115–16, 121–22 Law, John, 174 laws accountability and, 68 definition of hacking and, 12 market and, 93 rules and, 18, 19 threat model shifts and, 65 See also legal hacks; tax code legal hacks, 109–11 bureaucracy and, 115–18 common law as, 135–38 Covid-19 payroll loans and, 110–11 loopholes and, 112–14 tax code and, 109–10 legislative process hacks, 145–49 defenses against, 147–49, 151, 154, 156 delay and delegation, 153–56 lobbying and, 146–47 must-pass bills, 150–52 vulnerabilities and, 147–48, 267n Lessig, Lawrence, 169 Levitt, Arthur, 80 literacy tests, 162 lobbying, 77, 78, 146–47, 158 lock-in, 94 loopholes deliberate, 146 legal hacks and, 112–14 systems and, 18 tax code and, 15, 16, 120 See also regulation avoidance loot boxes, 186 Luther, Martin, 72 luxury real estate hacks, 86–88 Lyft, 101, 123, 125 machine learning (ML) systems, 209 Malaysian sharecropping hacks, 116 Manafort, Paul, 26 Mandatory Worldwide Combined Reporting (MWCR), 129 mansard roof, 109 market hacks capitalism and, 92–93 market elements and, 93–94 private equity, 101–2 “too big to fail,” 95–98 venture capital as, 99–101 Mayhem, 228–29 McSorley, Marty, 44 medical diagnosis, 213 medieval usury hacks, 91 Meltdown, 48 MercExchange, 137 microtargeting, 184, 185, 216 Mihon, Jude (St.

Cornman, 113 explainability problem, 212–15, 234 exploits, 21, 22 externalities, 63–64 Facebook, 184, 236, 243 facial recognition, 210, 217 fail-safes, 61, 67 Fairfield, Joshua, 248 fake news, 81 Fate of the Good Soldier Švejk during the World War, The (Hašek), 116 fear, 195–97 Federal Deposit Insurance Corporation (FDIC), 96 Federal Election Campaign Act (1972), 169 federal enclaves, 113–14 Fifteenth Amendment, 161, 164 filibuster, 154–55 financial exchange hacks, 79–82, 83–85 Financial Industry Regulatory Authority, 84 financial system hack normalization as subversive, 90–91 banking, 75, 76–77, 119, 260n financial exchange hacks, 84, 85 index funds, 262n innovation and, 72, 90 wealth/power and, 119 financial system hacks AI and, 241–43, 275n banking, 74–78, 119, 260n financial exchanges, 79–82, 83–85 identifying vulnerabilities and, 77–78 medieval usury, 91 See also financial system hack normalization Fischer, Deb, 190 Fitting, Jim, 1 flags of convenience, 130 foie gras bans, 113–14 foldering, 26 food delivery apps, 99, 124 Ford, Martin, 272n foreknowledge, 54 Fourteenth Amendment, 141 Fourth Amendment, 136 Fox News, 197 frequent-flier hacks, 38–40, 46 Friess, Foster, 169 front running, 80, 82 Fukuyama, Francis, 140 Gaedel, Ed, 41 gambling, 186 gambrel roof, 109 GameStop, 81 Garcia, Ileana, 170 Garland, Merrick, 121 General Motors, 104 genies, 232–33 geographic targeting orders, 87–88 gerrymandering, 165–66 “get out of jail free” card, 260n Getty, Paul, 95 Ghostwriter, 201 gig economy, 99, 100, 101, 116, 123–25, 264n Go, 212, 241 Gödel, Kurt, 25, 27 Goebbels, Joseph, 181 Goldin, Daniel, 115 Goodhart’s law, 115 Google, 185 GPT-3, 220 Great Depression, 74 Great Recession, 96, 173–74 Greensill Capital, 102 Grossman, Nick, 245 Grubhub, 99 Hacker Capture the Flag, 228 hackers competitions for, 228 motivations of, 47 types, 22 hacking as parasitical, 45–47, 84, 173 by the disempowered, 103, 119, 120, 121–22, 141 cheating as practicing for, 2–3 context of, 157–60, 237 defined, 1–2, 9–12, 255n destruction as result of, 172–75 existential risks of, 251–52 hierarchy of, 200–202 innovation and, 139–42, 158–59, 249–50, 252 life cycle of, 21–24 public knowledge of, 23, 256n ubiquity of, 25–28 hacking defenses, 48–52, 53–57 accountability and, 67–68 AI hacking and, 236–39 cognitive hacks and, 53–54, 182, 185, 198–99 detection/recovery, 54–56 economic considerations, 63 governance systems, 245–48 identifying vulnerabilities, 56–57, 77–78, 237–38 legislative process hacks and, 147–49, 151, 154, 156 reducing effectiveness, 53–54, 61 tax hacks and, 15–16 threat modeling, 62–63, 64 See also patching hacking normalization as subversive, 90–91 casino hacks, 35–36, 37 hacking as innovation and, 158–59 “too big to fail” hack, 97–98 wealth/power and, 73, 104, 119, 120, 122 See also financial system hack normalization Hadfield, Gillian, 248 Han, Young, 170 Handy, 124 Harkin, Tom, 146 Harris, Richard, 35 Hašek, Jaroslav, 116 Haselton, Ronald, 75 hedge funds, 82, 275n Herd, Pamela, 132 HFT (high-frequency trading), 83–85 hierarchy of hacking, 200–202 high-frequency trading (HFT), 83–85 hijacking, 62 Holmes, Elizabeth, 101 hotfixes, 52 Huntsman, Jon, Sr., 169 illusory truth effect, 189 Independent Payment Advisory Board (IPAB), 153–54 “independent spoiler” hack, 169–70 index funds, 262n indulgences, 71–72, 73, 85, 260n innovation, 101, 139–42, 158–59, 249–50, 252 insider trading, 79–80 intention ATM hacks and, 32 definition of hacking and, 2, 10, 16 definition of system and, 19 Internet, 64–65 See also social media Internet of Things (IoT) devices bugs in, 14 patching for, 23, 49 reducing hack effectiveness in, 54 Intuit, 190 Investment Company Act (1940), 82 Jack, Barnaby, 34 jackpotting, 33–34 Jaques, Abby Everett, 233 Joseph Weizenbaum, 217 jurisdictional rules, 112–13, 128–31 Kemp, Brian, 167 Keynes, John Maynard, 95 Khashoggi, Jamal, 220 King Midas, 232 labor organizing, 115–16, 121–22 Law, John, 174 laws accountability and, 68 definition of hacking and, 12 market and, 93 rules and, 18, 19 threat model shifts and, 65 See also legal hacks; tax code legal hacks, 109–11 bureaucracy and, 115–18 common law as, 135–38 Covid-19 payroll loans and, 110–11 loopholes and, 112–14 tax code and, 109–10 legislative process hacks, 145–49 defenses against, 147–49, 151, 154, 156 delay and delegation, 153–56 lobbying and, 146–47 must-pass bills, 150–52 vulnerabilities and, 147–48, 267n Lessig, Lawrence, 169 Levitt, Arthur, 80 literacy tests, 162 lobbying, 77, 78, 146–47, 158 lock-in, 94 loopholes deliberate, 146 legal hacks and, 112–14 systems and, 18 tax code and, 15, 16, 120 See also regulation avoidance loot boxes, 186 Luther, Martin, 72 luxury real estate hacks, 86–88 Lyft, 101, 123, 125 machine learning (ML) systems, 209 Malaysian sharecropping hacks, 116 Manafort, Paul, 26 Mandatory Worldwide Combined Reporting (MWCR), 129 mansard roof, 109 market hacks capitalism and, 92–93 market elements and, 93–94 private equity, 101–2 “too big to fail,” 95–98 venture capital as, 99–101 Mayhem, 228–29 McSorley, Marty, 44 medical diagnosis, 213 medieval usury hacks, 91 Meltdown, 48 MercExchange, 137 microtargeting, 184, 185, 216 Mihon, Jude (St.


pages: 200 words: 54,897

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading by Peter Kovac

bank run, barriers to entry, bash_history, Bernie Madoff, compensation consultant, computerized markets, computerized trading, Flash crash, housing crisis, index fund, locking in a profit, London Whale, market microstructure, merger arbitrage, payment for order flow, prediction markets, price discovery process, proprietary trading, Sergey Aleynikov, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, zero day

For example, P&G is a large component of the Dow Jones Industrials stock index. If you sold 3,000 shares of the Dow index fund, you might hedge that sale by purchasing the number of shares of P&G that trade represents – about 190 shares. Or if you sold 2,000 shares of the Dow index fund, you might hedge that sale by purchasing the number of shares of P&G that trade represents – about 130 shares. (The ratios change over time, and vary slightly based on the precise model used.) So imagine this: some trader sells 3,000 shares of DIA, an exchange-traded index fund that represents the Dow Jones index. He wants to immediately hedge his risk in P&G and looks to buy the equivalent number of shares.


pages: 661 words: 185,701

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance by Eswar S. Prasad

access to a mobile phone, Adam Neumann (WeWork), Airbnb, algorithmic trading, altcoin, bank run, barriers to entry, Bear Stearns, Ben Bernanke: helicopter money, Bernie Madoff, Big Tech, bitcoin, Bitcoin Ponzi scheme, Bletchley Park, blockchain, Bretton Woods, business intelligence, buy and hold, capital controls, carbon footprint, cashless society, central bank independence, cloud computing, coronavirus, COVID-19, Credit Default Swap, cross-border payments, cryptocurrency, deglobalization, democratizing finance, disintermediation, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, Ethereum, ethereum blockchain, eurozone crisis, fault tolerance, fiat currency, financial engineering, financial independence, financial innovation, financial intermediation, Flash crash, floating exchange rates, full employment, gamification, gig economy, Glass-Steagall Act, global reserve currency, index fund, inflation targeting, informal economy, information asymmetry, initial coin offering, Internet Archive, Jeff Bezos, Kenneth Rogoff, Kickstarter, light touch regulation, liquidity trap, litecoin, lockdown, loose coupling, low interest rates, Lyft, M-Pesa, machine readable, Mark Zuckerberg, Masayoshi Son, mobile money, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, offshore financial centre, open economy, opioid epidemic / opioid crisis, PalmPilot, passive investing, payday loans, peer-to-peer, peer-to-peer lending, Peter Thiel, Ponzi scheme, price anchoring, profit motive, QR code, quantitative easing, quantum cryptography, RAND corporation, random walk, Real Time Gross Settlement, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, risk/return, Robinhood: mobile stock trading app, robo advisor, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seigniorage, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, smart contracts, SoftBank, special drawing rights, the payments system, too big to fail, transaction costs, uber lyft, unbanked and underbanked, underbanked, Vision Fund, Vitalik Buterin, Wayback Machine, WeWork, wikimedia commons, Y Combinator, zero-sum game

This averaging out across stocks has an important implication—an investment in a fund that tracks the index tends to be more stable than an investment in a particular stock. Investing in an index fund reduces the risk of investing in an individual stock but also reduces the average return over long periods. This may still be better than keeping one’s money in a bank deposit, which is an even safer option but yields a commensurately low rate of return. Investing in an S&P index fund would have resulted in a gain of almost 200 percent in the two decades since 2000, certainly a much better return than that on bank deposits. The principle of diversification applies not just to investment portfolios.

A US investor who has an account at a financial services firm such as Fidelity or Vanguard can simply buy an international index fund offered by those brokerages. Investment managers at those funds manage the foreign investments so all that an investor has to do is pick a fund that gives her the diversification she is looking for. Of course, there are risk-return trade-offs even among international funds. Investing in an emerging market fund could yield higher returns but is also riskier; by contrast, investing in advanced economy government bonds is safe but typically yields low returns. International index funds are readily available to all US investors, although fees and minimum investment amounts can deter investors who might have limited funds.

Another such online advisor, Wealthfront, was set up in 2008 and soon hired Burton Malkiel, a Princeton University finance professor, as its chief investment officer. Malkiel’s influential 1973 book, A Random Walk down Wall Street, launched the passive investing revolution four decades ago. His basic thesis was that the typical investor would be better off buying and holding low-cost index funds rather than trading in individual securities or investing in actively managed index funds. There might be some gains to undertaking a carefully crafted set of investments in other financial assets, but high fees and trading costs would render any gains in returns modest at best. The strategy of investing in low-cost funds and simply holding them turns out to work better over the long term than the returns generated by a majority of investment managers.


pages: 201 words: 62,593

The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich by David Bach

asset allocation, diversified portfolio, financial independence, index fund, job automation, late fees, money market fund, Own Your Own Home, risk tolerance, robo advisor, transaction costs, Vanguard fund

THE ROBO ADVISORS—NEW PLAYERS TO MAKE IT AUTOMATIC One of the biggest changes in investing since I wrote the original version of this book is the appearance of a new type of investment advisory service generally referred to as “robo advisors.” Using technology, these primarily online-only firms offer professionally managed portfolios made up of low-cost funds (usually ETFs and index funds). Here’s how it works: You go online and answer a series of questions on an automated form. Based on the information you provide, the system automatically builds a model portfolio for you in seconds. These professionally managed portfolios are then run on “autopilot” for a fraction of what it would cost to work with a traditional human advisor.

Most companies also offer what is called a balanced fund. A balanced fund offers professional management and an asset allocation that is typically 60 percent stock and 40 percent bonds. Some companies may be now offering a version of the robo advisor model I discussed before, primarily using ETFs and index funds to keep costs low. Also many companies are now offering a service provided by a company called FinancialEngines (www.​financialengines.​com) to help you build, monitor, and rebalance your investments in your 401(k) retirement account automatically. You may want to check them out to help you build your portfolio and plan for retirement.

Even better, if you invest in one balanced fund or asset allocation fund that diversifies your portfolio for you AND you automate your contributions—which, after all, is the point of this little book—you’ll have a really boring financial life. The same is true if you use a robo advisory firm or a model portfolio of index funds and ETFs. Your money will be totally diversified, professionally balanced and managed, and your savings plan will be on automatic pilot. Of course, if you did this, you’d have nothing to talk about at cocktail parties when people bring up the subject of how they are investing their money. No one brags about having a really simple, well-diversified investment portfolio.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Credit Default Swap, cross-subsidies, currency risk, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jim Simons, John Meriwether, junk bonds, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, M-Pesa, market design, Mary Meeker, megaproject, Michael Milken, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, reality distortion field, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Ronald Reagan, Schrödinger's Cat, seminal paper, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, vertical integration, Washington Consensus, We are the 99%, Yom Kippur War

Passive investment has steadily grown in scale, and much of the activity of BlackRock, Vanguard and State Street is in the management of indexed funds, an activity that can now be entrusted to a computer. There are significant economies of scale in passive investment, and these large incumbents derive competitive advantage from their size. The total costs of intermediation include management fees, administrative, custodial and regulatory costs, the costs of remunerating intermediaries, paying trading commissions and spreads between bid and offer price. If you invest directly in an indexed fund, you might be able to reduce these annual costs to 25–50 basis points (the finance sector describes one-hundredth of 1 per cent as a ‘basis point’).

The persuasive rationale of passive management was that most active management was not worth what it cost; the motivation of savers in seeking passive funds is to secure better value for money, not to minimise tracking error, and tracking error is a measure of risk for fund managers, not investors. A passive fund that buys and holds a well-considered selection of stocks achieves the same goal as an index fund, probably more effectively – and avoids the problem, evident on the London Stock Exchange, in which companies of doubtful reputation seek listings in order to force holders of passive funds to buy their stock. There should be more managed intermediation. Transparency and liquidity seem at first sight a good thing, and so of course is the prevention of fraud, and certainly the regulatory provisions have been made with good intentions.

., 2012, A Random Walk down Wall Street, 10th edn, New York and London, W.W. Norton. pp. 177–83. Porter, G.E., and Trifts, J.W., 2014, ‘The Career Paths of Mutual Fund Managers: The Role of Merit’, Financial Analysts Journal, 70 (4), July/August, pp. 55–71. Philips, C.B., Kinniry Jr, F.M., Schlanger, T., and Hirt, J.M., 2014, ‘The Case for Index-Fund Investing’, Vanguard Research, April, https://advisors.vanguard.com/VGApp/iip/site/advisor/researchcommentary/article/IWE_InvComCase4Index. 20. Kahneman himself is not guilty of this: Kahneman, D., 2011, Thinking Fast and Slow, New York, Farrar, Straus and Giroux. 21. Rubin, R., 2004, In an Uncertain World, New York, Random House. 22.


How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Bear Stearns, Black-Scholes formula, Bob Litterman, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, business process, butter production in bangladesh, buy and hold, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, commoditize, computerized markets, corporate governance, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency risk, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, full employment, George Akerlof, global macro, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, Ivan Sutherland, John Bogle, John von Neumann, junk bonds, linear programming, Loma Prieta earthquake, Long Term Capital Management, machine readable, margin call, market friction, market microstructure, martingale, merger arbitrage, Michael Milken, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Richard Feynman, Richard Stallman, risk free rate, risk-adjusted returns, risk/return, seminal paper, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, subscription business, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

He had brought in Fischer Black and Myron Scholes, among many other finance notables, to work on the problem, and the ultimate outcome had been the creation of index funds. In that era he had met Oldrich, newly arrived from Czechoslovakia, and convinced him he should come work on finance problems at Wells (rather than analyzing dolphin communications, another offer Oldrich was contemplating at the time). Mac had departed Wells in the early 1970s for the life of an entrepreneur. At the time I met him, he had been involved with starting a small stock index fund, Dimensional Fund Advisors, in Los Angeles, as well as a premium California wine producer, Chalone Group.

As the Japanese products started to generate great investment returns, I switched to heading BGI’s active equity business in the United States. In early 2001, our biggest challenge was not investment performance, as our equity products had impressive track records. Instead, it was convincing prospects that we were more than just a big index fund provider. In part, this was just BGI’s problem. But in part it also spoke to the very limited legitimacy of quantitative active management. Over a two-year period, my colleague Scott Clifford and I devoted considerable amounts of our time toward changing these perceptions. As investors began to JWPR007-Lindsey 46 May 7, 2007 16:30 h ow i b e cam e a quant notice how BGI and other quantitative managers had managed to deliver on return promises while controlling risk over long periods of time, perceptions changed.

When I graduated from business school in 1983, I was offered a job in the treasurer’s department at Exxon. It was a dream come true. At the time, Exxon’s treasurer’s department was considered one of the spots in finance. Exxon managed much of its pension fund internally, including a large S&P500 index fund. It had also begun to issue its own debt, bypassing Wall Street bankers and fees. Exxon had global operations and had applied the latest thinking in project analysis using discounted cash flow methods and was analyzing and hedging the impact of currency changes on its operations. It should have been exciting.


pages: 346 words: 102,625

Early Retirement Extreme by Jacob Lund Fisker

8-hour work day, active transport: walking or cycling, barriers to entry, book value, buy and hold, caloric restriction, caloric restriction, clean water, Community Supported Agriculture, delayed gratification, discounted cash flows, diversification, dogs of the Dow, don't be evil, dumpster diving, Easter island, fake it until you make it, financial engineering, financial independence, game design, index fund, invention of the steam engine, inventory management, junk bonds, lateral thinking, lifestyle creep, loose coupling, low interest rates, market bubble, McMansion, passive income, peak oil, place-making, planned obsolescence, Plato's cave, Ponzi scheme, power law, psychological pricing, retail therapy, risk free rate, sunk-cost fallacy, systems thinking, tacit knowledge, the scientific method, time value of money, Tragedy of the Commons, transaction costs, wage slave, working poor

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

It would be a big mistake to think that a choice made now will also be valid only 10 years from now, just as any particular investment vehicle I could suggest now will probably sound silly a decade from now. Thirty years ago everybody hated stocks but loved gold. Twenty years ago mutual funds were the hottest thing. Then after a decade of trending stock markets, which moved up no matter what people owned, it was decided that the managers weren't needed and index funds came into fashion--why do you need a manager if markets go up all on their own? At that point nobody wanted to own gold. In the past 10 years the market has been in a trading range and now gold is more expensive than ever, so who knows what the future will bring? My suggestion is not to presume that one can pick an asset class and then stick with it forever.

This changed my attitude towards problems and solutions and I began to use the same approach that I used for my research job in the rest of my life, always trying to understand why something was the way it was, whether it could be different, and if so, how? Instead of adopting the standard moneymanagement plan of saving 15% in an index fund in my retirement plan while getting in debt up to my eyeballs thanks to a "starter home," I started looking into the principles behind the system I was living in. I realized that the standard option of becoming an indebted consumer was just one of many, but that if anyone wanted different options, they'd have to take a different and more active approach rather than just asking "what?"


pages: 224 words: 13,238

Electronic and Algorithmic Trading Technology: The Complete Guide by Kendall Kim

algorithmic trading, automated trading system, backtesting, Bear Stearns, business logic, commoditize, computerized trading, corporate governance, Credit Default Swap, diversification, en.wikipedia.org, family office, financial engineering, financial innovation, fixed income, index arbitrage, index fund, interest rate swap, linked data, market fragmentation, money market fund, natural language processing, proprietary trading, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, short selling, statistical arbitrage, Steven Levy, transaction costs, yield curve

Investment managers and traders executing on behalf of disciplines focused on value and growth with long-term horizons may lack the skill-set to be savvy enough to execute at the best available execution price. 96 Electronic and Algorithmic Trading Technology Management Style Trade Motivation Liquidity Demands Execution Costs Opportunity Costs Value Value Low Low Low Growth Value Low Low Low Information High High High Passive Variable Variable High Passive High High High Earnings Surprise Index-Fund Large-Cap Index-Fund Small-Cap Exhibit 9.3 Expectations—cost and management style. Source: David J. Leinweber, Trading and Portfolio Management: Ten Years Later, California Institute of Technology, May 2002. These traders may lack close relationships with the street to get the best prices through comparison shopping.

Patient disciplines such as value and growth investing with longer time horizons may be expected to have lower transaction costs. Investment strategies that depend on quicker execution to capture the market’s reaction to differences between expected and actual earnings may have higher transactions. Index funds tracking small capitalization stocks would theoretically be expected to have larger transaction costs because of the characteristics of smaller stock made up in those indexes. The theoretical expectations are shown in Exhibit 9.3. However, the actual observations are listed in Exhibit 9.4. Why is there such a wide deviation between the expectations summarized versus the actual observations?


pages: 121 words: 31,813

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

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

A fund manager’s performance is assessed relative to an index or his peers. His or her reviewers (employer and clients) are trying to decide whether the manager has been doing a good job. A comparison with an index is suitable because anyone invested in the fund is paying an active fund manager more than it costs to invest in a passive fund (an index fund or exchange-traded fund) that simply replicates the benchmark. For that extra fee, the client is expecting the fund manager to materially outperform. A comparison with peers is also fair because the client who has decided that he or she wants to pay for active management could have invested with a number of other active managers.

Given the fact that it is a requirement for most funds to file their holdings with the SEC, their study captured the majority of funds in existence that people could invest in during that period. The only caveat was that the fund had to have net assets of at least $5m and contain at least 20 stocks. Index funds were excluded for the obvious reason that they try to replicate the performance of an index, and the largest holdings cannot be said to represent an active manager’s best ideas. Their findings were startling. They discovered: •The single highest-conviction stock of every manager taken together outperformed the market, as well as the other stocks in those managers’ portfolios, by approximately 1–14%.


pages: 398 words: 111,333

The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham by Joe Carlen

Abraham Maslow, Albert Einstein, asset allocation, Bernie Madoff, book value, Bretton Woods, business cycle, business intelligence, discounted cash flows, Eugene Fama: efficient market hypothesis, full employment, index card, index fund, intangible asset, invisible hand, Isaac Newton, John Bogle, laissez-faire capitalism, margin call, means of production, Norman Mailer, oil shock, post-industrial society, price anchoring, price stability, reserve currency, Robert Shiller, the scientific method, Vanguard fund, young professional

Let him emphasize diversification more than individual selection.49 In his commentary in the 2003 edition of The Intelligent Investor, Jason Zweig recommends that modern defensive investors place 90 percent of their investment funds in an index fund (a fund modeled after a market index such as the S&P 500), leaving 10 percent with which to select their own individual securities. Such an approach is probably sensible for most defensive investors despite the fact that all components of an index do not necessarily adhere to Graham's principles. Nonetheless, since all represented companies tend to be large and well established, indexing generally provides a strong measure of both safety and diversification. Moreover, as a “passive” form of fund management (in the sense that an index fund merely replicates the composition of an existing market index (such as the S&P 500) and does not need to hire professionals to make independent investment-allocation decisions), index-fund management fees are considerably less expensive than those of actively managed mutual funds.

Moreover, as a “passive” form of fund management (in the sense that an index fund merely replicates the composition of an existing market index (such as the S&P 500) and does not need to hire professionals to make independent investment-allocation decisions), index-fund management fees are considerably less expensive than those of actively managed mutual funds. However, the defensive versus enterprising dichotomy is really more of a spectrum than a strict binary “either/or” classification. So, over time, the defensive investor may consider raising the percentage of personally directed investment funds well above 10 percent. After all, as more experience (and, hopefully, confidence) is gained with the value-investment selection process, it can be both educational and profitable to build on that momentum in a prudent, but steady, manner.

See Graham, Isaac Grossbaum, Louis, 70 Grossbaum & Sons, 21–24, 26 gross domestic product (GDP), 141 “group think,” 197 Guerin, Rick, 253 Guggenheim Exploration Company, dissolution of, 105 Guru Focus's Fair Value Calculator, 43–44 Hadassah (Women's Zionist Organization of America), 110 Hagstrom, Robert, 44, 49, 127, 130, 244 Hamburger, Robert, 270, 296, 301 Hamburger, Sonia, 270, 296 Harley-Davidson, 172, 176–78 Harris, Lou, 118, 141–43 Harris Raincoat Company, 118 Hawkes, Herbert, 71 Hayek, Friedrich, 210, 216, 293–94 Health South, 290 hedging, 112 Heilbrunn, Robert, 218 Herbert, Victor, 109 “herd instinct,” 37 Heseltine, Pi (granddaughter), 275, 295 H. Hentz and Co., 148 high-frequency trading (HFT), 127–28 Hobson, John A., 204 holding period, 127 Hood, Randolph, 166 Howard Marks/Oaktree Capital Management, 257 Hyman, Maxwell, 116 Hyman brothers, 143 importing business, 17 income statements, 121 independent judgment, 171 index fund, 93–94 “industrials,” 48 information technology, 168 Institute of Chartered Financial Analysts, 308 intangible assets, 96 Internal Revenue Service (IRS), 183 International Monetary Fund (IMF), 214 “Internet bubble,” 37 Interstate Commerce Commission (ICC), 145 intrinsic value, 39–43, 52–54, 125, 130 investment and speculation, distinction between, 38 investment capital, 122–23 “investment grade” securities, 39 investment operation, 36 investment research department, 104 investments, speculative, 130 Isaacson, Walter, 310 Janis, Cathy (granddaughter), 197 Janis, Irving (son-in-law), 197 Janis, Marjorie.


pages: 319 words: 106,772

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

Alan Greenspan, Andrei Shleifer, asset allocation, banking crisis, benefit corporation, Benoit Mandelbrot, book value, 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, Mahbub ul Haq, 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, Phillips curve, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, Suez crisis 1956, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, uptick rule, urban decay, Y2K

The article gives examples of investor successes and offers the hypothetical story of a twenty-two-year-old college graduate earning $30,000 a year with annual real income raises of 1%. “If she saved only 10% of her income and invested the savings in an S&P index fund she’d have a net worth of $1.4 million on retirement at age 67, in today’s dollars.”8 These calculations assume that the S&P index fund earns a riskless 8% real (inflation-corrected) return. There is no mention of the possibility that the return might not be so high over time, and that she might not end up a millionaire. An article with a very similar title, “Everybody Ought to Be Rich,” appeared in the Ladies’ Home Journal in 1929.9 It performed some very similar calculations, yet similarly omitted to describe the possibility that anything could go wrong in the long term.

Indeed, the flow of investment dollars into mutual funds seems to bear an important relation to market performance, as mutual fund inflows show an immediate and substantial reaction when the stock market goes up. See Vincent A. Warther, “Aggregate Mutual Fund Flows and Security Returns,” Journal of Financial Economics, 39 (1995): 209–35; and William Goetzmann and Massimo Massa, “Index Fund Investors,” unpublished paper, Yale University, 1999. 28. See my article “Why Do People Dislike Inflation?” in Christina D. Romer and David H. Romer (eds.), Reducing Inflation: Motivation and Strategy (Chicago: University of Chicago Press and National Bureau of Economic Research, 1997), pp. 13–65. 29.

Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. New York: Times Business/ Random House, 1999. Goetzmann, William, and Roger Ibbotson. “Do Winners Repeat? Patterns in Mutual Fund Performance.” Journal of Portfolio Management, 20 (1994): 9–17. Goetzmann, William, and Massimo Massa. “Index Fund Investors.” Unpublished paper, Yale University, 1999. Graham, Benjamin, and David Dodd. Securities Analysis. New York: McGraw-Hill, 1934. Grant, James. The Trouble with Prosperity: A Contrarian Tale of Boom, Bust, and Speculation. New York: John Wiley and Sons, 1996. Greetham, Trevor, Owain Evans, and Charles I.


pages: 344 words: 104,522

Woke, Inc: Inside Corporate America's Social Justice Scam by Vivek Ramaswamy

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 2021 United States Capitol attack, activist fund / activist shareholder / activist investor, affirmative action, Airbnb, Amazon Web Services, An Inconvenient Truth, anti-bias training, Bernie Sanders, Big Tech, BIPOC, Black Lives Matter, carbon footprint, clean tech, cloud computing, contact tracing, coronavirus, corporate governance, corporate social responsibility, COVID-19, critical race theory, crony capitalism, cryptocurrency, defund the police, deplatforming, desegregation, disinformation, don't be evil, Donald Trump, en.wikipedia.org, Eugene Fama: efficient market hypothesis, fudge factor, full employment, George Floyd, glass ceiling, global pandemic, green new deal, hiring and firing, Hyperloop, impact investing, independent contractor, index fund, Jeff Bezos, lockdown, Marc Benioff, Mark Zuckerberg, microaggression, military-industrial complex, Network effects, Parler "social media", plant based meat, Ponzi scheme, profit maximization, random walk, ride hailing / ride sharing, risk-adjusted returns, Robert Bork, Robinhood: mobile stock trading app, Ronald Reagan, Salesforce, self-driving car, shareholder value, short selling, short squeeze, Silicon Valley, Silicon Valley billionaire, Silicon Valley ideology, single source of truth, Snapchat, social distancing, Social Responsibility of Business Is to Increase Its Profits, source of truth, sovereign wealth fund, Susan Wojcicki, the scientific method, Tim Cook: Apple, too big to fail, trade route, transcontinental railway, traveling salesman, trickle-down economics, Vanguard fund, Virgin Galactic, WeWork, zero-sum game

Subramanian went so far as to argue that ESG metrics are the best measure for signaling future earnings risk—superior even to financial risk factors like the level of a company’s leverage, or debt burden.6 Harvard Business School professor George Serafeim, working in collaboration with Boston mutual fund manager State Street, observed that “during the market collapse” in the early stages of the COVID-19 pandemic, “firms experiencing more positive sentiment on their human capital, supply chain, and operational response to COVID-19 experienced higher institutional money flows” and less downside in share prices.7 Similar analyses abound. Morningstar found that sustainable index funds outperformed traditional index funds in the first quarter of 2020.8 Hermes Investment Management observed in 2018 that companies with good or improving ESG characteristics outperform companies with poor or worsening characteristics.9 Countless other reports come to similar conclusions. So which one is right: the theoretical account or the empirical account?

If she reached the opposite conclusion, she might be out of a job. The same might go for Larry Fink: a cynic may rightly conclude that he just needed to find a new excuse for raising capital to actively manage under his mutual fund complex—and to justify higher fees than passive index funds like Vanguard charge their clients. Passive index funds were starting to take market share from the higher-fee mutual fund business, so the rise of ESG investing may well have saved the day for the likes of Fink. At the end of the day, it’s debatable whether ESG investment strategies have outperformed or underperformed conventional investment strategies.


pages: 369 words: 107,073

Madoff Talks: Uncovering the Untold Story Behind the Most Notorious Ponzi Scheme in History by Jim Campbell

algorithmic trading, Bear Stearns, Bernie Madoff, currency risk, delta neutral, family office, fear of failure, financial thriller, fixed income, forensic accounting, full employment, Gordon Gekko, high net worth, index fund, Jim Simons, margin call, merger arbitrage, money market fund, mutually assured destruction, offshore financial centre, payment for order flow, Ponzi scheme, proprietary trading, Renaissance Technologies, risk free rate, riskless arbitrage, Robinhood: mobile stock trading app, Sharpe ratio, short selling, sovereign wealth fund, time value of money, two and twenty, walking around money

Further, Madoff didn’t allow due diligence. Avoid complex investments when you can “keep it simple, stupid.” The power of compounding is the safest way to get rich. Put a little away consistently into a stock index fund. In the long run, even with the vagaries of the market, wealth will build. It’s averaged 9 percent growth for a century. Warren Buffett’s advice to nonprofessional investors is to invest in low-cost index funds. I would add, don’t even watch the daily movements. Let it sit for years. Madoff was delivering a fake 11 percent toward the end. Take the 9 percent and sleep. HOW WOULD BERNIE HAVE STOPPED BERNIE?

The trade confirms were neatly arranged chronologically. However, monthly statements would not normally contain the trade confirms, which would typically be sent separately as the trades occur. Of course we know Madoff ran the fake trades at one time each month with the phony statements, off the AS/400. Included brazenly were Fidelity money market index funds along with all the fake portfolio holdings. Revealingly, despite Madoff’s claims he only charged commissions and passed on money management fees, the confirms often had no commissions listed. Madoff would say if it was a market-making transaction acting as principal the price would be net of the markup, so no commission would show.

It would have been so much easier and so much simpler to run a legitimate hedge fund or just stick to his knitting, the market maker. His Ponzi scheme hedge fund returns hovered around 11 percent in the final years. They were not obscene, one reason he was able to get away with it. He could have run a straight index fund and earned the market average of 9 percent, goosed a bit, perhaps, from a legitimate SSC strategy over the long term. Bruce Dubinsky, the forensic investigative lead, felt similarly about the exhausting nature of everything Madoff had to do to keep it going. “Holy shit, the amount of work that went into perpetrating it was mind-boggling.


pages: 270 words: 75,803

Wall Street Meat by Andy Kessler

accounting loophole / creative accounting, Alan Greenspan, Andy Kessler, automated trading system, banking crisis, Bob Noyce, George Gilder, index fund, Jeff Bezos, John Bogle, junk bonds, market bubble, Mary Meeker, Menlo Park, Michael Milken, Pepto Bismol, pets.com, Robert Metcalfe, rolodex, Salesforce, Sand Hill Road, Silicon Valley, Small Order Execution System, Steve Jobs, technology bubble, undersea cable, Y2K

., if you can’t beat the market, just become the market. Index the whole thing. The bulk of the market was represented by the Standards and Poor (S&P) 500 index, the top 500 valuable public companies in the U.S. Bogle offered an index fund that did neither better, nor worse than the market, and it caught on as a savior of investors. Money came out of banks and into mutual funds, much of which were index funds. By 1996, over $1 trillion was in mutual funds. Quacking Ducks But indexing is dull. Those looking for better returns tried other ways to beat the market. General Electric, worth $240 billion makes up 4% of the $8 trillion S&P 500 index.

It was worth $1 billion on its first day of trading. I thought it was a bargain at half the price. Shows you what I know, it kept going up. The problem was that there just weren’t that many Internet companies to go around. Every momo had to own a piece of Yahoo, and bid it up. As the performance of momo funds improved, more money came out of index funds and into momo funds. What was needed was more public Internet companies. Not a problem, for there were plenty of companies that 173 Wall Street Meat could quickly adopt the Internet, put dotcom at the end of their name, and get fed to the ducks. Wall Street was happy to oblige, for a modest 7% fee. · · · One of the first high profile deals Frank won was Amazon.com, an online bookseller in Seattle.


pages: 258 words: 74,942

Company of One: Why Staying Small Is the Next Big Thing for Business by Paul Jarvis

Abraham Maslow, Airbnb, big-box store, Boeing 747, Cal Newport, call centre, content marketing, corporate social responsibility, David Heinemeier Hansson, digital nomad, drop ship, effective altruism, Elon Musk, en.wikipedia.org, endowment effect, follow your passion, fulfillment center, gender pay gap, glass ceiling, growth hacking, Inbox Zero, independent contractor, index fund, job automation, Kickstarter, Lyft, Mark Zuckerberg, Naomi Klein, passive investing, Paul Graham, pets.com, remote work: asynchronous communication, remote working, Results Only Work Environment, ride hailing / ride sharing, Ruby on Rails, Salesforce, Sheryl Sandberg, side project, Silicon Valley, Skype, Snapchat, social bookmarking, software as a service, Steve Jobs, supply-chain management, TED Talk, Tim Cook: Apple, too big to fail, uber lyft, web application, William MacAskill, Y Combinator, Y2K

Third, with your salary and runway buffer covered, you can reinvest money in your company; if things are going well, you should be able to get a better than 3 percent return on such an investment. Alternatively, if you don’t need to invest more in your company—maybe your business costs are covered and you have no reason to grow them—you can invest any extra money in something like index funds. I use a robo-investor with very low management fees and keep my money in index funds that require no upkeep on my end. Once a quarter, I check in on my investments, and if I have questions I talk to someone at the company. But since these investments are long-term, I’m not worried about daily or even monthly losses or gains. I just want to see my money grow over decades.

A family member falling ill or passing away can require you to take time off that you hadn’t planned for. In this event a recurring income stream and runway buffer can be a great help at a difficult time. Savings Alongside a salary and a runway buffer, I truly think companies of one should invest as much money as they can save up in passive investments like index funds. If inflation is approximately 3 percent per year, then you’re losing money on any assets you’ve got that aren’t making at least 3 percent per year in returns. This applies, by the way, to all the money in your bank account, since checking and savings accounts pay barely any interest. Since I don’t have an employer putting money into a 401(k) or Registered Retirement Savings Plan, created by the Canadian government for Canadians like me, I’ve got to consider how I can make the most of being in the prime of my earning potential and save for the future, when that might not be the case.


pages: 253 words: 79,214

The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, bond market vigilante , bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, foreign exchange controls, Glass-Steagall Act, guns versus butter model, Hyman Minsky, index fund, intangible asset, interest rate swap, inverted yield curve, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", joint-stock company, junk bonds, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, low interest rates, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, proprietary trading, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

Both offer savings schemes, ways of investing on a monthly basis to smooth out some of the market peaks and troughs. If an investor can find a fund with a good performance record and a low-cost savings scheme, it probably does not matter whether it is a unit or investment trust. INDEX FUNDS One type of fund that has only become available to small investors in recent years is the index-tracker. Rather than research the market and look for attractive stocks, an index fund attempts to match the performance of a particular benchmark, such as the FTSE 100 Index. Investors can buy index-trackers in the form of a unit trust or as an exchange traded fund (see Chapter 8). The advantage of trackers is their lower costs.

The only thing that will cause a share price to move is genuine ‘news’ which by definition cannot be known in advance. Efficient market theory still prompts much debate among academics and is derided by many fund managers, but the facts are that only around 20 per cent of fund managers beat the index over the long run. Index funds will almost never be the best performers but their low costs and broad spread means that they will not be the worst. They are an attractive option for private investors. All the above funds, however, will fall in value when the general market drops, as it did in 2008. Buying any kind of equity-linked investment is only for the long-term, i.e. several years. 16 Controlling the City The credit crunch caused politicians and regulators to rethink their approach to the financial sector completely.


pages: 272 words: 76,154

How Boards Work: And How They Can Work Better in a Chaotic World by Dambisa Moyo

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Airbnb, algorithmic trading, Amazon Web Services, AOL-Time Warner, asset allocation, barriers to entry, Ben Horowitz, Big Tech, bitcoin, Black Lives Matter, blockchain, Boeing 737 MAX, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, carbon footprint, collapse of Lehman Brothers, coronavirus, corporate governance, corporate social responsibility, COVID-19, creative destruction, cryptocurrency, deglobalization, don't be evil, Donald Trump, fake news, financial engineering, gender pay gap, geopolitical risk, George Floyd, gig economy, glass ceiling, global pandemic, global supply chain, hiring and firing, income inequality, index fund, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, knowledge economy, labor-force participation, long term incentive plan, low interest rates, Lyft, money: store of value / unit of account / medium of exchange, multilevel marketing, Network effects, new economy, old-boy network, Pareto efficiency, passive investing, Pershing Square Capital Management, proprietary trading, remote working, Ronald Coase, Savings and loan crisis, search costs, shareholder value, Shoshana Zuboff, Silicon Valley, social distancing, Social Responsibility of Business Is to Increase Its Profits, SoftBank, sovereign wealth fund, surveillance capitalism, The Nature of the Firm, Tim Cook: Apple, too big to fail, trade route, Travis Kalanick, uber lyft, Vanguard fund, Washington Consensus, WeWork, women in the workforce, work culture

Forbes, August 27, 2018. www.forbes.com/sites/simonmainwaring/2018/08/27/how-chobani-builds-a-purposeful-culture-around-social-impact/#42c6a14720f7. Marcec, Dan. “CEO Tenure Rates.” Harvard Law School Forum on Corporate Governance, February 12, 2018. https://corpgov.law.harvard.edu/2018/02/12/ceo-tenure-rates/. Massa, Annie. “Index Funds to Overtake Active in U.S. by 2021, Moody’s Says.” Bloomberg, March 14, 2019. www.bloomberg.com/news/articles/2019-03-14/index-funds-to-pass-stock-pickers-in-u-s-by-2021-moody-s-says. Matsui, Kathy, Hiromi Suzuki, Kazunori Tatebe, and Tsumugi Akiba. Womenomics 4.0: Time to Walk the Talk. New York: Goldman Sachs, 2014. www.goldmansachs.com/insights/pages/macroeconomic-insights-folder/womenomics4-folder/womenomics4-time-to-walk-the-talk.pdf.

But the shift toward passive funds and away from active investing is having a profound impact on the relationship between investors and boards, leading to a reordering of stock ownership and share registers so that boards are expected to engage with their shareholders in ways not previously seen. The growing scale of passive investors, combined with their status as holders of permanent capital, means they wield ever-greater power over boards and corporations. According to a January 2020 Bloomberg Businessweek article entitled “The Hidden Dangers of the Great Index Fund Takeover,” passive funds form the biggest shareholder group on the S&P 500, with 22 percent of these companies’ equity typically held by three investors (BlackRock, Vanguard, and State Street), up from 14 percent in 2008. The sheer dominance of these investors is raising questions of possible anti-competitive behavior and concerns that concentrated ownership can lead to higher prices and reduced innovation.


pages: 403 words: 119,206

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

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

Given the assumptions of the model, the most risk-efficient portfolio that an investor could select was the market itself; in other words, an investor should buy proportional amounts of all stocks in the market rather than attempting to select only certain stocks that would hopefully outperform the market. This startling assertion ultimately provided the intellectual basis for “index” funds—that is, mutual funds that arbitrarily invested in all stocks included in a given index, such as the Standard & Poor’s 500 Industrials. But that would come much later. In 1964, Sharpe’s research, like that of Markowitz before him, was largely ignored by the Wall Street community. One man who could not be ignored was Eugene Fama.

In spite of this limitation, however, the dollar amount invested in equity index mutual funds has grown dramatically over the last two decades, indicating that many people have come to accept the idea that it is very difficult, if not impossible, to consistently “beat” the market. But what if all investors took this advice, and simply invested in index funds? Would the market still be efficient? The answer is clearly no, and represents an interesting paradox. For a market to be efficient, most participants must believe that it isn’t. The diligent work of sophisticated analysts like Benjamin Graham is required to search out stocks that are mispriced; their buying and selling of these stocks then moves prices back into line.

Harrison, George Hartwell, John Harvard University; Business School Hassert, Kevin Haupt, Ira, & Company Hay, William Hayden, Stone brokerage firm hedge funds hedging Hediger, Fred Heimann, John Heinze, Frederick Augustus Hertz, John D. Hill, James Jerome Hirohito, emperor of Japan Homer, Sidney Honeywell Hoover, Herbert Hopping Foods House of Representatives, U.S.; Pujo Committee Hudson and Mohawk Railroad Hume, David Humphrey, George Hunt brothers Immigration Service, U.S. income taxation index arbitrage index funds Individual Retirement Accounts (IRAs) industrial revolution industrials inflation; Federal Reserve policies to control; growth investing and; OPEC oil price increases and Inland Steel insider trading; outlawed Institutional Investor institutional investors; and crash of 1962; Nifty Fifty and; portfolio insurance and; reduction in transaction costs for; see also mutual funds; pension funds insurance companies: investments by; stocks of Internal Revenue Service (IRS) International Business Machines (IBM) International Mercantile Marine Internet investment trusts Investors Overseas Services (IOS) ITT Izvestia Johnson, Edward Crosby, II Johnson, Lyndon B.


pages: 354 words: 118,970

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

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Abraham Maslow, Affordable Care Act / Obamacare, Airbnb, airline deregulation, Alan Greenspan, Albert Einstein, augmented reality, basic income, Bear Stearns, behavioural economics, Bernie Sanders, Black-Scholes formula, Blitzscaling, buy and hold, capital controls, Carl Icahn, computerized trading, Cornelius Vanderbilt, corporate governance, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, deal flow, dematerialisation, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, Fairchild Semiconductor, financial deregulation, financial innovation, fixed income, future of work, George Akerlof, gig economy, Glass-Steagall Act, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Ida Tarbell, index fund, information asymmetry, invisible hand, Irwin Jacobs, Joi Ito, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, life extension, Long Term Capital Management, Mark Zuckerberg, Mary Meeker, mass immigration, means of production, Metcalfe’s law, Michael Milken, money market fund, Mont Pelerin Society, moral hazard, Myron Scholes, Neal Stephenson, new economy, Norman Mailer, obamacare, PalmPilot, Paul Samuelson, Performance of Mutual Funds in the Period, Peter Thiel, price mechanism, principal–agent problem, profit maximization, proprietary trading, prudent man rule, public intellectual, quantitative trading / quantitative finance, Ralph Nader, Richard Thaler, road to serfdom, Robert Bork, Robert Metcalfe, rolodex, Ronald Coase, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Snow Crash, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, TaskRabbit, TED Talk, The Nature of the Firm, the payments system, the strength of weak ties, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, transaction costs, universal basic income, War on Poverty, white flight, working poor

The Chicago Board of Trade created the Chicago Board Options Exchange, the world’s first public marketplace for options, in 1973, and the new techniques were being used there almost immediately. The first index fund was founded in 1971. Wells Fargo Bank launched a short-lived mutual fund in 1974 that was based on a model devised by Black, Scholes, and Jensen. Within just a few years, the derivatives markets—options, futures, index funds, swaps, mortgage-backed securities; anything that could be assembled out of existing financial instruments and then priced, packaged, and traded—had gone from being insignificantly small to producing billions of dollars in activity every year, far more than the traditional stock and bond markets.

Did the professionals produce a premium over the market’s overall movement—something he named “alpha,” a term that has become part of the basic vocabulary of the investing world? The answer, he found, was a resounding no. As Jensen drily noted, “The mutual fund industry … shows very little evidence of an ability to forecast security prices.” There was an obvious application of Jensen’s result, which would be for somebody to invent what we’d now call an index fund—a mutual fund based on replicating the overall performance of the market rather than quixotically attempting to find alpha by handpicking just the right stocks. That didn’t happen immediately, owing to a lack of computing power. Still, Jensen’s findings powerfully reinforced the theories of his Chicago colleagues.

Hofstadter, Richard Holy Cross Hospital home equity loans Honda H-1B visas Hong Kong Hoover, Herbert Hoover, Larry Hopkins, Harry hostile takeovers; see also leveraged buyouts House of Mirth, The (Wharton) housing: abandoned; discrimination in; price of; in projects; see also mortgages How to Win Friends and Influence People (Carnegie) Hoyer, Steny Hubbard, L. Ron Hubler, Howie Huffington, Arianna Hyde Park Iacocca, Lee IBM Icahn, Carl identity politics Illinois legislature immigrants, undocumented index funds, invention of India individualism; end of Industrial Revolution; corporate revolution compared to inequality: economic, see wealth, concentration of; racial, see racism inflation; interest rates and; wages and information asymmetry Inner-City Muslim Action Network Instagram institutions: individualism vs.; loss of faith in; as mature groups; as necessary for pluralism; transaction-based order vs.; see also corporations; federal government; Organization Man insurance companies Intel Interest Equalization Tax interest groups; desire to eliminate; successes of; types of interest rates; deregulation and; Greenspan and; inflation and; on mortgages Internal Revenue Service International Nickel International Typographical Union Internet; bubble of 2000; early conceptions of; financial industry on; as predicted in fiction; regulation of; see also networks; Silicon Valley interstate banking Interstate Commerce Commission Investing in US investment banking; academic paradigm shift in; antitrust suit against; changes to in 1970s; commercial banking vs.; computerization of; deregulation of, see deregulation; diversified portfolios in; Glass-Steagall Act and, see Glass-Steagall Act; SEC and, see Securities and Exchange Commission; shifting clients of; see also Morgan Stanley; specific financial instruments Irish Americans Italian Americans Itô, Kiyosi ITT Jackson, Andrew Jackson, Jesse Jackson, Mahalia Jacobs, Irwin Japan; auto industry in Jdate Jefferson, Thomas Jensen, Michael; as advocate for free markets; background of; character of; corporations studied by; at Harvard; on integrity; in Landmark; mind shift of; at Rochester; at University of Chicago Jensen, Stephanie Jews; in finance Jhering, Rudolf von Jobs, Steve Johns Hopkins University Johnson, Earl Johnson, Jonathan Jones, Doug Journal of Applied Corporate Finance Journal of Financial Economics J.P.


pages: 130 words: 11,880

Optimization Methods in Finance by Gerard Cornuejols, Reha Tutuncu

asset allocation, call centre, constrained optimization, correlation coefficient, diversification, financial engineering, finite state, fixed income, frictionless, frictionless market, index fund, linear programming, Long Term Capital Management, passive investing, Sharpe ratio, transaction costs, value at risk

RETURNS-BASED STYLE ANALYSIS 5.3 63 Returns-Based Style Analysis In two ground-breaking articles, Sharpe described how constrained optimization techniques can be used to determine the effective asset mix of a fund using only the return time series for the fund and a number of carefully chosen asset classes [13, 14]. Often, passive indices or index funds are used to represent the chosen asset classes and one tries to determine a portfolio of these funds/indices whose returns provide the best match for the returns of the fund being analyzed. The allocations in the portfolio can be interpreted as the fund’s style and consequently, this approach has become to known as returns-based style analysis, or RBSA.

(5.8) In this equation, wit quantities represent the sensitivities of Rt to each one of the n fach iT tors, and t represents the non-factor return. We use the notation wt = w1t , . . . , wnt h i and Ft = F1t , . . . , Fnt . The linear factor model (5.8) has the following convenient interpretation when the factor returns Fit correspond to the returns of passive investments, such as those in an index fund for an asset class: One can form a benchmark portfolio of the passive investments (with weights wit ) and the difference between the fund return Rt and the return of the benchmark portfolio Ft wt is the non-factor return contributed by the fund manager using stock selection, market timing, etc.


pages: 293 words: 81,183

Doing Good Better: How Effective Altruism Can Help You Make a Difference by William MacAskill

barriers to entry, basic income, behavioural economics, Black Swan, Branko Milanovic, Cal Newport, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, clean water, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Brooks, Edward Jenner, effective altruism, en.wikipedia.org, end world poverty, experimental subject, follow your passion, food miles, immigration reform, income inequality, index fund, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, job automation, job satisfaction, Lean Startup, M-Pesa, mass immigration, meta-analysis, microcredit, Nate Silver, Peter Singer: altruism, power law, public intellectual, purchasing power parity, quantitative trading / quantitative finance, randomized controlled trial, self-driving car, Skype, Stanislav Petrov, Steve Jobs, Steve Wozniak, Steven Pinker, The Future of Employment, The Wealth of Nations by Adam Smith, Tyler Cowen, universal basic income, William MacAskill, women in the workforce

Finally, the independent development think tank Innovations for Poverty Action has run a randomized controlled trial on GiveDirectly, so we can be confident not just about the efficacy of cash transfers in general but also about cash transfers as implemented by GiveDirectly. Because cash transfers is such a simple program, and because the evidence in favor of them is so robust, we could think about them as like the “index fund” of giving. Money invested in an index fund grows (or shrinks) at the same rate as the stock market; investing in an index fund is the lowest-fee way to invest in stocks. Actively managed mutual funds, in contrast, take higher management fees, and it’s only worth investing in one if that fund manages to beat the market by a big enough margin that the additional returns on investment are greater than the additional management costs.


pages: 219 words: 15,438

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

book value, business logic, buy and hold, compensation consultant, compound rate of return, corporate governance, Dissolution of the Soviet Union, diversified portfolio, dividend-yielding stocks, fixed income, George Santayana, Henry Singleton, index fund, intangible asset, invisible hand, junk bonds, large denomination, low cost airline, Michael Milken, oil shock, passive investing, price stability, Ronald Reagan, stock buybacks, Tax Reform Act of 1986, Teledyne, the market place, transaction costs, Yogi Berra, zero-coupon bond

Buffett responds with a quip and some advice: the quip is that devotees of his investment philosophy should probably endow chairs to ensure the perpetual teaching of efficient market dogma; the advice is to ignore modern finance theory and other quasi-sophisticated views of the market and stick to investment knitting. That can best be done for many people through long-term investment in an index fund. Or it can be done by conducting hardheaded analyses of businesses within an investor's competence to evaluate. In that kind of thinking, the risk that matters is not beta or volatility, but the possibility of loss or injury from an investment. Assessing that kind of investment risk requires thinking about a company's management, products, competitors, and debt levels.

Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb. On the other hand, if you are a know-something investor, able to understand business economics and to find five to ten sensiblypriced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you.

All too often, we've seen value stagnate in the presence of hubris or of boredom that caused the attention of managers to wander. That's not going to happen again at Coke and Gillette, however-not given their current and prospective managements. * * * * * Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals. Should you choose, however, to construct your own portfolio, there are a few thoughts worth remembering. Intelligent investing is not complex, though that is far from saying that it is easy.


pages: 317 words: 84,400

Automate This: How Algorithms Came to Rule Our World by Christopher Steiner

23andMe, Ada Lovelace, airport security, Al Roth, algorithmic trading, Apollo 13, backtesting, Bear Stearns, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, call centre, Charles Babbage, cloud computing, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, Donald Trump, Douglas Hofstadter, dumpster diving, financial engineering, Flash crash, G4S, Gödel, Escher, Bach, Hacker News, High speed trading, Howard Rheingold, index fund, Isaac Newton, Jim Simons, John Markoff, John Maynard Keynes: technological unemployment, knowledge economy, late fees, machine translation, Marc Andreessen, Mark Zuckerberg, market bubble, Max Levchin, medical residency, money market fund, Myron Scholes, Narrative Science, PageRank, pattern recognition, Paul Graham, Pierre-Simon Laplace, prediction markets, proprietary trading, quantitative hedge fund, Renaissance Technologies, ride hailing / ride sharing, risk tolerance, Robert Mercer, Sergey Aleynikov, side project, Silicon Valley, Skype, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, upwardly mobile, Watson beat the top human players on Jeopardy!, Y Combinator

O’Connor & Associates, also in Chicago, was employing very similar tactics to Peterffy’s, outfitting its traders with cheat sheets for valuing options and supplementing that information with computers that constantly crunched data upstairs while piping new numbers down to the pits. O’Connor was so secretive about its methods that when it bought two hundred Symbolics computers in the mid-1980s, executives shredded the packaging so Dumpster-diving competitors couldn’t determine what technology the firm used.6 THE ALGORITHMS SPREAD COAST TO COAST By 1987, index funds, which tracked groups of stocks such as the S&P 500, had grown popular not only with the public but also with professional traders. But certain indexes, the S&P 500 included, could only be licensed for trade in one market. In the case of the S&P 500, the license belonged to the Chicago Mercantile Exchange.

., 170 NASA mission control in, 166, 175 Howes, Ash, 78–79 Hull, Blair, 40, 46 Hull Trading, 40, 46 human intuition, algorithms and, 127, 129 human irrationality, 132–33 humanities, education in, 139–40, 219 human personalities, 61, 163–83 compatibility among types of, 174–76 Kahler’s types of, 172–74 and NASA predictive science, 61, 164, 165–72, 174–77, 180 Hungary, 18, 20 Huygens, Christiaan, 67 hybrid vigor, 161 hyperparathyroidism, 162 IBM, 33, 144, 214 Brown and Mercer at, 178–79 Deep Blue chess-playing computer developed by, 126–27, 129, 133, 141 options on stock of, 21–22 Watson computer by, 127, 161–62 IBM PCs, Peterffy’s trading via, 12–16 identity theft, 193 “I Kissed a Girl,” 89 ILLIAC computer, 92 Illiac Suite, 92 Illinois, University of, 91–92, 188 at Urbana-Champaign, 95, 116, 219 Illinois Institute of Technology, 115 indexes of refraction, 115 index funds, 40–46 index futures, 113 India, 154, 218 Indiana University, 97 infants, preterm delivery of, 158 Infinite Ascent (Berlinski), 60 Infinium Capital Management, 51–52, 116 influencers, social, 212–14 “In My Life,” 110–11 inputs, in algorithms, 54 insider trading, 30 insurance, 66–67 health, 162, 181 intelligence: backgrounds of personnel in, 139–40 game theory and algorithms in, 135–40 information gathering by, 138 subjective calls in, 137 Interactive Brokers, 47–48 interest: compound, 68 payment systems, 57 rates, 22, 130 Intermountain Medical Center, algorithms used by, 157–58 international nuclear weapons nonproliferation treaty, 139 Internet, 116, 205 algorithms and, 112 dial-up, 117 hubs and authorities on, 214 influencers on, 213 Internet dating sites, algorithms for, 144–45, 214 “Into the Great Wide Open,” 84 Investigation of the Laws of Thought (Boole), 72 investment banks, 189, 192, 201, 206, 208, 210 algorithms used by, 46 iPads, 37, 159 iPhones, 159 IPO, for Interactive Brokers, 47–48 Iran, 137, 138–39 IRAs, 50 Ireland, 72, 193 Isaacson, Leonard, 92 Israel, 138 Istanbul Museum, 55 Italy, 56, 80 “I’ve Got a Feeling,” 78 Iverson, Allen, 143 Ivy League, 140, 143, 207 “I Want to Hold Your Hand,” 103 Jackson, Miss., 116 James, Brent, 157–58 Jarecki, Henry, 20, 21–24, 26–27, 34 Java, 189 Jennings, Ken, 127 Jeopardy!

., 140, 165 Nobel Prize, 23, 106 North Carolina, 48, 204 Northwestern University, 145, 186 Kellogg School of Management at, 10 Novak, Ben, 77–79, 83, 85, 86 NSA, 137 NuclearPhynance, 124 nuclear power, 139 nuclear weapons, in Iran, 137, 138–39 number theory, 65 numerals: Arabic-Indian, 56 Roman, 56 NYSE composite index, 40, 41 Oakland Athletics, 141 Obama, Barack, 46, 218–19 Occupy Wall Street, 210 O’Connor & Associates, 40, 46 OEX, see S&P 100 index Ohio, 91 oil prices, 54 OkCupid, 144–45 Olivetti home computers, 27 opera, 92, 93, 95 Operation Match, 144 opinions-driven people, 173, 174, 175 OptionMonster, 119 option prices, probability and statistics in, 27 options: Black-Scholes formula and, 23 call, 21–22 commodities, 22 definition of, 21 pricing of, 22 put, 22 options contracts, 30 options trading, 36 algorithms in, 22–23, 24, 114–15 Oregon, University of, 96–97 organ donor networks: algorithms in, 149–51, 152, 214 game theory in, 147–49 oscilloscopes, 32 Outkast, 102 outliers, 63 musical, 102 outputs, algorithmic, 54 Pacific Exchange, 40 Page, Larry, 213 PageRank, 213–14 pairs matching, 148–51 pairs trading, 31 Pakistan, 191 Pandora, 6–7, 83 Papanikolaou, Georgios, 153 Pap tests, 152, 153–54 Parham, Peter, 161 Paris, 56, 59, 121 Paris Stock Exchange, 122 Parse.ly, 201 partial differential equations, 23 Pascal, Blaise, 59, 66–67 pathologists, 153 patient data, real-time, 158–59 patterns, in music, 89, 93, 96 Patterson, Nick, 160–61 PayPal, 188 PCs, Quotron data for, 33, 37, 39 pecking orders, social, 212–14 Pennsylvania, 115, 116 Pennsylvania, University of, 49 pension funds, 202 Pentagon, 168 Perfectmatch.com, 144 Perry, Katy, 89 Persia, 54 Peru, 91 Peterffy, Thomas: ambitions of, 27 on AMEX, 28–38 automated trading by, 41–42, 47–48, 113, 116 background and early career of, 18–20 Correlator algorithm of, 42–45 early handheld computers developed by, 36–39, 41, 44–45 earnings of, 17, 37, 46, 48, 51 fear that algorithms have gone too far by, 51 hackers hired by, 24–27 independence retained by, 46–47 on index funds, 41–46 at Interactive Brokers, 47–48 as market maker, 31, 35–36, 38, 51 at Mocatta, 20–28, 31 Nasdaq and, 11–18, 32, 42, 47–48, 185 new technology innovated by, 15–16 options trading algorithm of, 22–23, 24 as outsider, 31–32 profit guidelines of, 29 as programmer, 12, 15–16, 17, 20–21, 26–27, 38, 48, 62 Quotron hack of, 32–35 stock options algorithm as goal of, 27 Timber Hill trading operation of, see Timber Hill traders eliminated by, 12–18 trading floor methods of, 28–34 trading instincts of, 18, 26 World Trade Center offices of, 11, 39, 42, 43, 44 Petty, Tom, 84 pharmaceutical companies, 146, 155, 186 pharmacists, automation and, 154–56 Philips, 159 philosophy, Leibniz on, 57 phone lines: cross-country, 41 dedicated, 39, 42 phones, cell, 124–25 phosphate levels, 162 Physicians’ Desk Reference (PDR), 146 physicists, 62, 157 algorithms and, 6 on Wall Street, 14, 37, 119, 185, 190, 207 pianos, 108–9 Pincus, Mark, 206 Pisa, 56 pitch, 82, 93, 106 Pittsburgh International Airport, security algorithm at, 136 Pittsburgh Pirates, 141 Pius II, Pope, 69 Plimpton, George, 141–42 pneumonia, 158 poetry, composed by algorithm, 100–101 poker, 127–28 algorithms for, 129–35, 147, 150 Poland, 69, 91 Polyphonic HMI, 77–79, 82–83, 85 predictive algorithms, 54, 61, 62–65 prescriptions, mistakes with, 151, 155–56 present value, of future money streams, 57 pressure, thriving under, 169–70 prime numbers, general distribution pattern of, 65 probability theory, 66–68 in option prices, 27 problem solving, cooperative, 145 Procter & Gamble, 3 programmers: Cope as, 92–93 at eLoyalty, 182–83 Peterffy as, 12, 15–16, 17, 20–21, 26–27, 38, 48, 62 on Wall Street, 13, 14, 24, 46, 47, 53, 188, 191, 203, 207 programming, 188 education for, 218–20 learning, 9–10 simple algorithms in, 54 Progress Energy, 48 Project TACT (Technical Automated Compatibility Testing), 144 proprietary code, 190 proprietary trading, algorithmic, 184 Prussia, 69, 121 PSE, 40 pseudocholinesterase deficiency, 160 psychiatry, 163, 171 psychology, 178 Pu, Yihao, 190 Pulitzer Prize, 97 Purdue University, 170, 172 put options, 22, 43–45 Pythagorean algorithm, 64 quadratic equations, 63, 65 quants (quantitative analysts), 6, 46, 124, 133, 198, 200, 202–3, 204, 205 Leibniz as, 60 Wall Street’s monopoly on, 183, 190, 191, 192 Queen’s College, 72 quizzes, and OkCupid’s algorithms, 145 Quotron machine, 32–35, 37 Rachmaninoff, Sergei, 91, 96 Radiohead, 86 radiologists, 154 radio transmitters, in trading, 39, 41 railroad rights-of-way, 115–17 reactions-based people, 173–74, 195 ReadyForZero, 207 real estate, 192 on Redfin, 207 recruitment, of math and engineering students, 24 Redfin, 192, 206–7, 210 reflections-driven people, 173, 174, 182 refraction, indexes of, 15 regression analysis, 62 Relativity Technologies, 189 Renaissance Technologies, 160, 179–80, 207–8 Medallion Fund of, 207–8 retirement, 50, 214 Reuter, Paul Julius, 122 Rhode Island hold ‘em poker, 131 rhythms, 82, 86, 87, 89 Richmond, Va., 95 Richmond Times-Dispatch, 95 rickets, 162 ride sharing, algorithm for, 130 riffs, 86 Riker, William H., 136 Ritchie, Joe, 40, 46 Rochester, N.Y., 154 Rolling Stones, 86 Rondo, Rajon, 143 Ross, Robert, 143–44 Roth, Al, 147–49 Rothschild, Nathan, 121–22 Royal Society, London, 59 RSB40, 143 runners, 39, 122 Russia, 69, 193 intelligence of, 136 Russian debt default of 1998, 64 Rutgers University, 144 Ryan, Lee, 79 Saint Petersburg Academy of Sciences, 69 Sam Goody, 83 Sandberg, Martin (Max Martin), 88–89 Sandholm, Tuomas: organ donor matching algorithm of, 147–51 poker algorithm of, 128–33, 147, 150 S&P 100 index, 40–41 S&P 500 index, 40–41, 51, 114–15, 218 Santa Cruz, Calif., 90, 95, 99 satellites, 60 Savage Beast, 83 Saverin, Eduardo, 199 Scholes, Myron, 23, 62, 105–6 schools, matching algorithm for, 147–48 Schubert, Franz, 98 Schwartz, Pepper, 144 science, education in, 139–40, 218–20 scientists, on Wall Street, 46, 186 Scott, Riley, 9 scripts, algorithms for writing, 76 Seattle, Wash., 192, 207 securities, 113, 114–15 mortgage-backed, 203 options on, 21 Securities and Exchange Commission (SEC), 185 semiconductors, 60, 186 sentence structure, 62 Sequoia Capital, 158 Seven Bridges of Königsberg, 69, 111 Shannon, Claude, 73–74 Shuruppak, 55 Silicon Valley, 53, 81, 90, 116, 188, 189, 215 hackers in, 8 resurgence of, 198–211, 216 Y Combinator program in, 9, 207 silver, 27 Simons, James, 179–80, 208, 219 Simpson, O.


pages: 266 words: 86,324

The Drunkard's Walk: How Randomness Rules Our Lives by Leonard Mlodinow

Albert Einstein, Alfred Russel Wallace, Antoine Gombaud: Chevalier de Méré, Atul Gawande, behavioural economics, Brownian motion, butterfly effect, correlation coefficient, Daniel Kahneman / Amos Tversky, data science, Donald Trump, feminist movement, forensic accounting, Gary Kildall, Gerolamo Cardano, Henri Poincaré, index fund, Isaac Newton, law of one price, Monty Hall problem, pattern recognition, Paul Erdős, Pepto Bismol, probability theory / Blaise Pascal / Pierre de Fermat, RAND corporation, random walk, Richard Feynman, Ronald Reagan, Stephen Hawking, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, V2 rocket, Watson beat the top human players on Jeopardy!

Solomon, “Psychology of Novice and Expert Wine Talk,” American Journal of Psychology 103, no. 4 (Winter 1990): 495–517. 23. Rivlin, “In Vino Veritas.” 24. Ibid. 25. Hal Stern, “On the Probability of Winning a Football Game,” American Statistician 45, no. 3 (August 1991): 179–82. 26. The graph is from Index Funds Advisors, “Index Funds.com: Take the Risk Capacity Survey,” http://www.indexfunds3.com/step3page2.php, where it is credited to Walter Good and Roy Hermansen, Index Your Way to Investment Success (New York: New York Institute of Finance, 1997). The performance of 300 mutual fund managers was tabulated for ten years (1987–1996), based on the Morningstar Principia database. 27.

And though many studies show that these past market successes are not good indicators of future success—that is, that the successes were largely just luck—most people feel that the recommendations of their stockbrokers or the expertise of those running mutual funds are worth paying for. Many people, even intelligent investors, therefore buy funds that charge exorbitant management fees. In fact, when a group of savvy students from the Wharton business school were given a hypothetical $10,000 and prospectuses describing four index funds, each composed in order to mirror the S&P 500, the students overwhelmingly failed to choose the funds with the lowest fees.19 Since paying even an extra 1 percent per year in fees could, over the years, diminish your retirement fund by as much as one-third or even one-half, the savvy students didn’t exhibit very savvy behavior.


pages: 444 words: 124,631

Buy Now, Pay Later: The Extraordinary Story of Afterpay by Jonathan Shapiro, James Eyers

Airbnb, Alan Greenspan, Apple Newton, bank run, barriers to entry, Big Tech, Black Lives Matter, blockchain, book value, British Empire, clockwatching, cloud computing, collapse of Lehman Brothers, computer age, coronavirus, corporate governance, corporate raider, COVID-19, cryptocurrency, delayed gratification, diversification, Dogecoin, Donald Trump, Elon Musk, financial deregulation, George Floyd, greed is good, growth hacking, index fund, Jones Act, Kickstarter, late fees, light touch regulation, lockdown, low interest rates, managed futures, Max Levchin, meme stock, Mount Scopus, Network effects, new economy, passive investing, payday loans, paypal mafia, Peter Thiel, pre–internet, Rainbow capitalism, regulatory arbitrage, retail therapy, ride hailing / ride sharing, Robinhood: mobile stock trading app, rolodex, Salesforce, short selling, short squeeze, side hustle, Silicon Valley, Snapchat, SoftBank, sovereign wealth fund, tech bro, technology bubble, the payments system, TikTok, too big to fail, transaction costs, Vanguard fund

A better option was to pay lower fees and accept the returns of the market indices via the index funds. The net result was a global increase in passively managed funds from US$2.4 trillion a decade ago to US$12 trillion. But the speed of Afterpay’s acceleration up the market capitalisation rankings caught these funds off guard. The sheer size of Afterpay, and its ability to swing, left the likes of Blackrock scrambling to buy shares. Traders at the big firms had rung the big investment banks to put them on notice that they would buy any large blocks of Afterpay that were up for sale. Vanguard, the multitrillion-dollar index fund giant, had owned 2.1 million Afterpay shares at the end of 2018, and had increased its holding to 7 million shares a year later.

There was no single reason for this, but most put it down to Australia’s superannuation system, in which 9 per cent of workers’ wages were paid into their pension fund each month. That meant there was always new money coming into the market, of which a fair proportion made its way into the share market, bidding up fast-growing stocks disproportionately. Another explanation was that fast-growing companies tended to be tightly held by their founders, by index funds and by a small cohort of funds that specifically targeted growth companies. The rest of the market had to clamour for a small float of available shares. Unusually, the most expensive shares, measured by the highest price-to-earnings ratios, were the ones that were going up in price, while the cheapest stocks fell further.

Vanguard, the multitrillion-dollar index fund giant, had owned 2.1 million Afterpay shares at the end of 2018, and had increased its holding to 7 million shares a year later. By mid-2020, Vanguard owned 9.7 million shares. By the end of the year, it had upped this to 15.7 million. Blackrock, the other index fund titan, had to scramble harder. In the fourth quarter alone it had upped its stake in Afterpay from 4.5 million shares to 14.5 million, spending about $1 billion in the process. Afterpay’s rapid ascent had transformed the share-market index. In doing so, it had confronted Australian investors of all sizes who had been accustomed to buying steady, monopolistic businesses that were compelled by their shareholders to distribute a high share of their profits in the form of tax-advantageous dividends.


pages: 1,239 words: 163,625

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated by Gautam Baid

Abraham Maslow, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, Albert Einstein, Alvin Toffler, Andrei Shleifer, asset allocation, Atul Gawande, availability heuristic, backtesting, barriers to entry, beat the dealer, Benoit Mandelbrot, Bernie Madoff, bitcoin, Black Swan, book value, business process, buy and hold, Cal Newport, Cass Sunstein, Checklist Manifesto, Clayton Christensen, cognitive dissonance, collapse of Lehman Brothers, commoditize, corporate governance, correlation does not imply causation, creative destruction, cryptocurrency, Daniel Kahneman / Amos Tversky, deep learning, delayed gratification, deliberate practice, discounted cash flows, disintermediation, disruptive innovation, Dissolution of the Soviet Union, diversification, diversified portfolio, dividend-yielding stocks, do what you love, Dunning–Kruger effect, Edward Thorp, Elon Musk, equity risk premium, Everything should be made as simple as possible, fear index, financial independence, financial innovation, fixed income, follow your passion, framing effect, George Santayana, Hans Rosling, hedonic treadmill, Henry Singleton, hindsight bias, Hyman Minsky, index fund, intangible asset, invention of the wheel, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, Joseph Schumpeter, junk bonds, Kaizen: continuous improvement, Kickstarter, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, low interest rates, Mahatma Gandhi, mandelbrot fractal, margin call, Mark Zuckerberg, Market Wizards by Jack D. Schwager, Masayoshi Son, mental accounting, Milgram experiment, moral hazard, Nate Silver, Network effects, Nicholas Carr, offshore financial centre, oil shock, passive income, passive investing, pattern recognition, Peter Thiel, Ponzi scheme, power law, price anchoring, quantitative trading / quantitative finance, Ralph Waldo Emerson, Ray Kurzweil, Reminiscences of a Stock Operator, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, Savings and loan crisis, search costs, shareholder value, six sigma, software as a service, software is eating the world, South Sea Bubble, special economic zone, Stanford marshmallow experiment, Steve Jobs, Steven Levy, Steven Pinker, stocks for the long run, subscription business, sunk-cost fallacy, systems thinking, tail risk, Teledyne, the market place, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, time value of money, transaction costs, tulip mania, Upton Sinclair, Walter Mischel, wealth creators, Yogi Berra, zero-sum game

The amount of earnings a company retains from year to year is left to the company’s discretion. Earnings retention is one of the lesser appreciated marvels of capitalism. It provides anyone with a brokerage account and some patience cheap access to the productive power of a business (or an entire market economy, if investing in a total market index fund). 2. Maturity. Stocks are meant to be perpetual and do not have an obvious maturity date. Businesses are going concerns, which means they are intended to last forever. Creative destruction, however, has ensured that few companies in history have been able to survive forever. In fact, most companies have extinguished their stock well before infinity.

Over the years, I have come to appreciate the fact that investing is a field of simplifications and approximations rather than of extreme precision and quantitative wizardry. I also have realized that investing is less a field of finance and more a field of human behavior. The key to investing success is not how much you know but how you behave. Your behavior will matter far more than your fees, your asset allocation, or your analytical abilities. Even low-cost index funds won’t be able to help you if you succumb to behavioral biases. Most of the time, the real risk is not in the markets but in our behavior. Emotional intelligence has a much bigger impact on the success or failure of investors than the college they attended or the complexity of their investment strategy.

Since March 2009, numerous worrisome headlines have driven many investors to sell out of fear and exit the market completely. The fact that bad news is disseminated ten times as fast as positive news is one of the biggest reasons why it’s so difficult to just capture market returns. You would think it’s as simple as buying the total market index fund and leaving it alone. And it is that simple, but it certainly isn’t that easy, because bad news smashes your face against an amplifier, while good news just plays quietly in the background [emphasis added]. —Michael Batnick Progress happens too slowly to notice; setbacks happen too quickly to ignore.


pages: 385 words: 128,358

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

Abraham Maslow, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, currency risk, diversification, diversified portfolio, family office, financial engineering, fixed income, glass ceiling, Glass-Steagall Act, global macro, Greenspan put, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, inverted yield curve, John Meriwether, junk bonds, land bank, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, Market Wizards by Jack D. Schwager, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, out of africa, panic early, paper trading, Paul Samuelson, Peter Thiel, price anchoring, proprietary trading, purchasing power parity, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, tail risk, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, Vision Fund, yield curve, zero-coupon bond, zero-sum game

If you were advising an institution—let’s say a conservative university endowment—where would you recommend they invest their funds? Commodities and non–U.S. dollar assets. Fifty-fifty or how would you split it up? If I had told the board of trustees of Princeton University to put all its money into an S&P index fund in 1982, they would have run me out of town. But that is what they should have done. THE PIONEER 221 Now, in 2005, a large amount of their assets should go into commodities either via a commodity index fund, which is probably the best way, or via a manager, which traditionally has not been the best way.They should have a large part of their assets in raw materials.At what percentage, I leave that to you, but the rest of the assets, if there are any left over, should go into non–U.S. dollar investments.

There seem to be a lot of artificial opportunities in the investment world because money management companies have rules such as “You can’t buy a stock below ten dollars.” Absolutely. Another favorite of mine, obviously, is commodities. It was the end of 1998 when I started this commodities index fund because I was convinced that the 20-year bear market in commodities was coming to an end.You cannot believe the ridicule I used to get on CNBC.They were all giggling and drooling and talking about dot-com this and dot-com that, while I was sitting there saying, “I am starting a commodities index fund and China is a great place to invest.”Well, you know the rest of that story. That has been a nice one.There are many mistakes I could tell you about, but you asked about my favorites.


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, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, book value, 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, currency risk, diversification, diversified portfolio, financial engineering, fixed income, global macro, high net worth, implied volatility, index fund, interest rate swap, invisible hand, managed futures, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk free rate, risk tolerance, risk-adjusted returns, risk/return, search costs, 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

(Of course, if 118 THE NEW SCIENCE OF ASSET ALLOCATION EXHIBIT 6.5 Comparison Correlations for Benchmark, Core, and Satellite Groupings Benchmark Core Correlations to Benchmark Satellite 1 Investments Correlations to Benchmark Satellite 1 Investments Correlations to Core ■ Russell 1000 Russell 2000 iShares Russell 1000 Index Fund iShares Russell 2000 Index Fund 1.00 1.00 Lipper Lg-Cap Core Lipper Sm-Cap Core 1.00 0.98 Lipper Lg-Cap Core 1.00 MSCI EAFE MSCI EM BarCap US Gov BarCap US Agg iShares MSCI EAFE iShares MSCI EM iShares Barclays Government/ Credit Bond Fund iShares Barclays Aggregate Bond Fund 0.98 Lipper Non US Stock 0.97 Lipper Emerg Mkt Fd 0.86 0.95 Lipper A Rated Bnd Fd Lipper Gen US Govt Fd 0.99 Lipper Emerg Mkt Fd 0.97 0.94 Lipper Sm-Cap Core 0.93 Lipper Non US Stock Lipper A Rated Bnd Fd Lipper Gen US Govt Fd 0.98 0.95 0.97 0.89 0.87 wealth or investment levels decrease, systematic reductions would also be conducted.)

., invest in unfamiliar asset classes). 119 Core and Satellite Investment: Market/Manager Based Alternatives BarCap US Corporate High-Yield Private Equity Index SPDR Barclays Capital High Yield Bond ETF S&P GSCI FTSE NAREIT ALL REITS CISDM EW HF Index CISDM CTA EW Index PowerShares Listed Private Equity Portfolio iShares S&P GSCI Commodity Indexed Trust iShares FTSE NAREIT Real Estate 50 Index Fund HF Replication CTA Replication 0.95 0.94 0.99 0.99 0.94 Lipper HI Cur Yld Bd Private Equity MF Lipper Nat Res Fd IX Lipper Real Estate Fd HF Investable (Mgr. Based) 0.73 CTA Investable (Mgr. Based) 0.98 0.68 0.63 0.99 0.90 Lipper HI Cur Yld Bd Private Equity MF Lipper Nat Res Fd IX Lipper Real Estate Fd HF Investable (Mgr.


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, book value, business cycle, business logic, capital asset pricing model, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, Fairchild Semiconductor, financial engineering, fixed income, index fund, intangible asset, junk bonds, Long Term Capital Management, naked short selling, new economy, place-making, price mechanism, quantitative trading / quantitative finance, Richard Thaler, risk free rate, search costs, 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

Market is quoting. Information and understanding do make a difference. But when the value investor's search for new ideas fails to turn up anything promising, then the default option may indeed be a broad-based index fund or some variant of it. If the manager is being measured against other equity managers, the option of sitting with large amounts of cash may not be wise. The justification for holding an index fund as a portion of the portfolio is straightforward. Historically, the stock market has outperformed bonds or cash over most five-year periods.' In the absence of particular knowledge or information, an index is indeed the best choice available.

When Venator, the name Woolworth chose to make people forget its notso-illustrious recent history, lost its place in the S&P 500, the share price dropped from $6 to around $3 in a few days. Less than three months later, it was selling at $10. When assets are sold for noneconomic reasons, the most common explanation is that some type of institutional constraint obligated the owner to move. An index fund's charter is one such constraint-own only the securities in the index. Some of the other constraints that have given Klarman an opening include the following: • Spin-offs, in which a large company takes a division, creates a new firm, and sends shares in the new company to existing stockholders in some proportion to their holdings.


pages: 367 words: 97,136

Beyond Diversification: What Every Investor Needs to Know About Asset Allocation by Sebastien Page

Andrei Shleifer, asset allocation, backtesting, Bernie Madoff, bitcoin, Black Swan, Bob Litterman, book value, business cycle, buy and hold, Cal Newport, capital asset pricing model, commodity super cycle, coronavirus, corporate governance, COVID-19, cryptocurrency, currency risk, discounted cash flows, diversification, diversified portfolio, en.wikipedia.org, equity risk premium, Eugene Fama: efficient market hypothesis, fixed income, future of work, Future Shock, G4S, global macro, implied volatility, index fund, information asymmetry, iterative process, loss aversion, low interest rates, market friction, mental accounting, merger arbitrage, oil shock, passive investing, prediction markets, publication bias, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, robo advisor, seminal paper, shareholder value, Sharpe ratio, sovereign wealth fund, stochastic process, stochastic volatility, stocks for the long run, systematic bias, systematic trading, tail risk, transaction costs, TSMC, value at risk, yield curve, zero-coupon bond, zero-sum game

Like taking away the wrong Jenga piece will make the tower of blocks collapse, if we take away this important theoretical building block, the CAPM edifice crumbles. Markowitz demonstrates that the market portfolio is no longer “efficient,” which means that other portfolios offer a better expected risk-adjusted return, and the key conclusions and applications of the model are no longer valid (an interesting conclusion given the popularity of index funds). At the Q Group conferences, which bring together academics and investment professionals, we’ve had the chance on a few occasions to hear Markowitz and Sharpe debate these and related issues. I’ve felt lucky to be part of an industry group where Nobel Prize winners engage in intellectual debates and exchange ideas with practitioners.

Smoothed returns look great in asset liability studies. (One manager selection professional once told me that if we could deliver a smoothed version of the S&P 500 index, many asset owners would be prepared to pay very high fees for it, even though the underlying return stream can be obtained for about 5 bps in an index fund.) But to use self-reported appraisals when marked-to-market data are available would be bad practice from a risk management perspective, akin to how ostriches put their head in the sand. In our research, we will estimate the benefit of leverage and lockups as applied to actively managed public market funds.

Once the long positions were established, she would have applied discipline to determine when to sell them, considering market developments and the health of the sector and the companies involved. Last, although the strategy identifies ETF volume spikes and conditions them on down days, it does not condition on the size or duration of the sell-off. Focusing on the largest sell-offs, with a flexible time horizon, might have enhanced performance. Volumes across ETFs and index funds also need to be monitored, of course, because several index products may trade in the same sector. Ultimately, a lot more can be done when the strategy incorporates fundamental analysis. Hence, our goal is to indicate the potential size of the opportunity, not to design a purely systematic approach.


pages: 234 words: 53,078

The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer by Dean Baker

accelerated depreciation, accounting loophole / creative accounting, affirmative action, Alan Greenspan, Asian financial crisis, Bretton Woods, business cycle, corporate governance, declining real wages, full employment, index fund, Jeff Bezos, low interest rates, McDonald's hot coffee lawsuit, medical malpractice, medical residency, money market fund, offshore financial centre, price discrimination, public intellectual, risk tolerance, spread of share-ownership

They recognized the high administrative costs associated with the existing system of defined contribution pensions in the United States, as well as the costs of privatized Social Security systems in other countries. In order to reduce the costs of a privatized system, they proposed having a single centralized system which would pool workers’ savings from all over the country. Their proposal called for having a limited number of investments options (e.g. a stock index fund, a bond index fund, a money market fund, and possibly one or two other options) and limited opportunities to switch between funds. According to the Bush commission’s estimates, the administrative costs of this bare-bones system would be approximately 5 percent of the money paid into the system. While this is still very expensive compared to the 0.5 percent in administrative fees charged by Social Security, it is far less than the 15-20 percent in fees charged by financial firms for operating private sector defined contribution pensions in the United States, or that financial firms charge to operate privatized Social Security accounts in other countries.


pages: 205 words: 55,435

The End of Indexing: Six Structural Mega-Trends That Threaten Passive Investing by Niels Jensen

Alan Greenspan, Basel III, Bear Stearns, declining real wages, deglobalization, disruptive innovation, diversification, Donald Trump, driverless car, eurozone crisis, falling living standards, fixed income, full employment, Greenspan put, income per capita, index fund, industrial robot, inflation targeting, job automation, John Nash: game theory, liquidity trap, low interest rates, moral hazard, offshore financial centre, oil shale / tar sands, old age dependency ratio, passive investing, Phillips curve, purchasing power parity, pushing on a string, quantitative easing, regulatory arbitrage, rising living standards, risk free rate, risk tolerance, Robert Solow, secular stagnation, South China Sea, total factor productivity, working-age population, zero-sum game

Its share of total dollar volume is now in the neighbourhood of one-third of the total US mutual fund market – a market share that continues to grow almost exponentially, and informed sources expect index-tracking mutual funds to have captured more than half of total funds under management within a handful of years.1 With that growth rate in mind, why on earth do I believe the end of indexing is nigh? Well, admittedly, the title for this book was chosen to provoke slightly, but only slightly. Of course, I don’t expect index-investing to disappear altogether. For many years to come, index funds will remain part of the menu investors can select from when making their investments; however, I firmly believe investors will soon begin to realise that the investment environment we are entering is entirely unsuitable for index-tracking strategies, and that they will begin to exit what they have all piled into in recent years.

Unless investors would suddenly be prepared to pay ridiculous earnings multiples for equities (and why would they?), low corporate profitability leads to modest equity returns. All this has led me to conclude that the broader equity indices are more than likely to deliver disappointing returns in the years to come. Simply put, investors need an entirely different approach to investing. Index funds will no longer do the job. * * * 1 Source: Financial Times (2017). 2 Source: Kobalt Music Group. 3 In early summer 2017 Amazon announced plans to begin lending to small businesses. 1. The Declining Everything The world we wake up to every morning is so different from the one many of us grew up in.


pages: 829 words: 186,976

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

airport security, Alan Greenspan, Alvin Toffler, An Inconvenient Truth, availability heuristic, Bayesian statistics, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, book value, Broken windows theory, business cycle, buy and hold, Carmen Reinhart, Charles Babbage, classic study, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, disinformation, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Ford Model T, Freestyle chess, fudge factor, Future Shock, George Akerlof, global pandemic, Goodhart's law, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, Japanese asset price bubble, John Bogle, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, Laplace demon, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, negative equity, new economy, Norbert Wiener, Oklahoma City bombing, PageRank, pattern recognition, pets.com, Phillips curve, Pierre-Simon Laplace, Plato's cave, power law, prediction markets, Productivity paradox, proprietary trading, public intellectual, random walk, Richard Thaler, Robert Shiller, Robert Solow, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, SimCity, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, Timothy McVeigh, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, Wayback Machine, wikimedia commons

.* And while most individual, retail-level investors make common mistakes like trading too often and do worse than the market average, a select handful probably do beat the street.91 Buy High, Sell Low You should not rush out and become an options trader. As the legendary investor Benjamin Graham advises, a little bit of knowledge can be a dangerous thing in the stock market.92 After all, any investor can do as well as the average investor with almost no effort. All he needs to do is buy an index fund that tracks the average of the S&P 500.93 In so doing he will come extremely close to replicating the average portfolio of every other trader, from Harvard MBAs to noise traders to George Soros’s hedge fund manager. You have to be really good—or foolhardy—to turn that proposition down. In the stock market, the competition is fierce.

It is hard to tell how many investors beat the stock market over the long run, because the data is very noisy, but we know that most cannot relative to their level of risk, since trading produces no net excess return but entails transaction costs, so unless you have inside information, you are probably better off investing in an index fund. The first approximation—the unqualified statement that no investor can beat the stock market—seems to be extremely powerful. By the time we get to the last one, which is full of expressions of uncertainty, we have nothing that would fit on a bumper sticker. But it is also a more complete description of the objective world.

Sharpe, “Mutual Fund Performance,” Journal of Business, 39, 1 (January 1966), part 2: Supplement on Security Prices, pp. 119–138. http://finance.martinsewell.com/fund-performance/Sharpe1966.pdf. 29. The sample consists of all mutual funds listed as balanced large-capitalization American equities funds by E*Trade’s mutual funds screener as of May 1, 2012, excluding index funds. Funds also had to have reported results for each of the ten years from 2002 through 2006. There may be a slight bias introduced in that some funds that performed badly from 2002 through 2011 may no longer be offered to investors. 30. Charts A, B, C, and E are fake. Chart D depicts the actual movement of the Dow over the first 1,000 days of the 1970s, and chart F depicts the actual movement of the Dow over the first 1,000 days of the 1980s.


pages: 850 words: 254,117

Basic Economics by Thomas Sowell

affirmative action, air freight, airline deregulation, Alan Greenspan, American Legislative Exchange Council, bank run, barriers to entry, big-box store, British Empire, business cycle, clean water, collective bargaining, colonial rule, corporate governance, correlation does not imply causation, cotton gin, cross-subsidies, David Brooks, David Ricardo: comparative advantage, declining real wages, Dissolution of the Soviet Union, diversified portfolio, European colonialism, fixed income, Ford Model T, Fractional reserve banking, full employment, global village, Gunnar Myrdal, Hernando de Soto, hiring and firing, housing crisis, income inequality, income per capita, index fund, informal economy, inventory management, invisible hand, John Maynard Keynes: technological unemployment, joint-stock company, junk bonds, Just-in-time delivery, Kenneth Arrow, knowledge economy, labor-force participation, land reform, late fees, low cost airline, low interest rates, low skilled workers, means of production, Mikhail Gorbachev, minimum wage unemployment, moral hazard, offshore financial centre, oil shale / tar sands, payday loans, Phillips curve, Post-Keynesian economics, price discrimination, price stability, profit motive, quantitative easing, Ralph Nader, rent control, rent stabilization, road to serfdom, Ronald Reagan, San Francisco homelessness, Silicon Valley, surplus humans, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, transcontinental railway, Tyler Cowen, Vanguard fund, War on Poverty, We are all Keynesians now

Some actively managed mutual funds do in fact do better than index mutual funds, but in many years the index funds have had higher rates of return than most of the actively managed funds, much to the embarrassment of the latter. In 2005, for example, of 1,137 actively managed mutual funds dealing in large corporate stocks, just 55.5 percent did better than the Standard & Poor’s Index.{489} On the other hand, the index funds offer little chance of a big killing, such as a highly successful actively managed fund might. A reporter for the Wall Street Journal who recommended index funds for people who don’t have the time or the confidence to buy their own stocks individually said: “True, you might not laugh all the way to the bank.

With the restoration of price stability in the last two decades of the twentieth century, both stocks and bonds had positive rates of real returns.{483} But, during the first decade of the twenty-first century, all that changed, as the New York Times reported: If you invested $100,000 on Jan. 1, 2000, in the Vanguard index fund that tracks the Standard & Poor’s 500, you would have ended up with $89,072 by mid-December of 2009. Adjust that for inflation by putting it in January 2000 dollars and you’re left with $69,114.{484} With a more diversified portfolio and a more complex investment strategy, however, the original $100,000 investment would have grown to $313,747 over the same time period, worth $260,102 in January 2000 dollars, taking inflation into account.{485} Risk is always specific to the time at which a decision is made.

A reporter for the Wall Street Journal who recommended index funds for people who don’t have the time or the confidence to buy their own stocks individually said: “True, you might not laugh all the way to the bank. But you will probably smile smugly.”{490} However, index mutual funds lost 9 percent of their value in the year 2000,{491} so there is no complete freedom from risk anywhere. For mutual funds as a whole—both managed funds and index funds—a $10,000 investment in early 1998 would by early 2003 be worth less than $9,000.{492} Out of a thousand established mutual funds, just one made money every year of the decade ending in 2003.{493} What matters, however, is whether they usually make money. While mutual funds made their first appearance in the last quarter of the twentieth century, the economic principles of risk-spreading have long been understood by those investing their own money.


pages: 202 words: 58,823

Willful: How We Choose What We Do by Richard Robb

activist fund / activist shareholder / activist investor, Alvin Roth, Asian financial crisis, asset-backed security, Bear Stearns, behavioural economics, Bernie Madoff, Brexit referendum, capital asset pricing model, cognitive bias, collapse of Lehman Brothers, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, delayed gratification, diversification, diversified portfolio, effective altruism, endowment effect, Eratosthenes, experimental subject, family office, George Akerlof, index fund, information asymmetry, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, loss aversion, market bubble, market clearing, money market fund, Paradox of Choice, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, Philippa Foot, principal–agent problem, profit maximization, profit motive, Richard Thaler, search costs, Silicon Valley, sovereign wealth fund, survivorship bias, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, trolley problem, ultimatum game

Sectors can include domestic public equity, global equity, credit, illiquid credit, private equity, cash, absolute return (hedge funds), and the like. The CIO assigns specialists to look after each sector. Equity managers handle equity; credit managers handle credit. For the public equities sector, some CIOs farm out stock selection to outside managers, and others invest passively in an index fund to hold down costs. Often a risk management department monitors the entire portfolio. In the case of pension funds, the board pays attention to how assets match liabilities to pensioners. Funds define risk mainly in terms of exposure to the market as a whole. The term “alpha” is supposed to describe the expected return beyond what can be explained by correlation with the stock market.

See also mercy ambiguity effect, 24 American Work-Sports (Zarnowski), 191 Anaximander, 190 anchoring, 168 angel investors, 212–213n1 “animal spirits,” 169 Antipater of Tarsus, 134–135, 137 “anxious vigilance,” 73, 82 arbitrage, 70, 78 Aristotle, 200, 220n24 Asian financial crisis (1997–1998), 13 asset-backed securities, 93–95 asset classes, 75 astrology, 67 asymmetric information, 96, 210n2 authenticity, 32–37, 114 of challenges, 176–179 autism, 58, 59 auto safety, 139 Bank of New York Mellon, 61 Battle of Waterloo, 71, 205 Bear Stearns, 85 Becker, Gary, 33, 108–109 behavioral economics, 4, 10, 198–199 assumptions underlying, 24 insights of, 24–25 rational choice complemented by, 6 Belgium, 191 beliefs: attachment to, 51 defined, 50 evidence inconsistent with, 54, 57–58 formation of, 53, 92 persistence of, 26–28, 54 transmissibility of, 92–93, 95–96 Bentham, Jeremy, 127, 197–198 “black swans,” 62–64 blame aversion, 57, 72 brain hemispheres, 161 Brexit, 181–185 “bull markets,” 78 capital asset pricing model, 64 care altruism, 38, 104, 108–114, 115, 120, 135, 201 Casablanca (film), 120, 125 The Cask of Amontillado (Poe), 126–127 challenges, 202–203 authenticity of, 176–179 staying in the game linked to, 179–181 changes of mind, 147–164 charity, 40, 45–46, 119, 128 choice: abundance of, 172–174 intertemporal, 149–158, 166 purposeful vs. rational, 22–23 Christofferson, Johan, 83, 86, 87, 88 Cicero, 133–134 Clark, John Bates, 167 cognitive bias, 6, 23, 51, 147–148, 167, 198–199 confirmation bias, 200 experimental evidence of, 10–11, 24 for-itself behavior disguised as, 200–201 gain-loss asymmetry, 10–11 hostile attribution bias, 59 hyperbolic discounting as, 158 lawn-mowing paradox and, 33–34 obstinacy linked to, 57 omission bias, 200 rational choice disguised as, 10–11, 33–34, 199–200 salience and, 29, 147 survivor bias, 180 zero risk bias, 24 Colbert, Claudette, 7 Columbia University, 17 commitment devices, 149–151 commodities, 80, 86, 89 commuting, 26, 38–39 competitiveness, 11, 31, 41, 149, 189 complementary skills, 71–72 compound interest, 79 confirmation bias, 57, 200 conspicuous consumption, 31 consumption planning, 151–159 contrarian strategy, 78 cooperation, 104, 105 coordination, 216n15 corner solutions, 214n8 cost-benefit analysis: disregard of, in military campaigns, 117 of human life, 138–143 credit risk, 11 crime, 208 Dai-Ichi Kangyo Bank (DKB), 12–14, 15, 17, 87, 192–193 Darwin, Charles, 62–63 depression, psychological, 62 de Waal, Frans, 118 Diogenes of Seleucia, 134–135, 137 discounting of the future, 10, 162–164 hyperbolic, 158, 201 disjunction effect, 174–176 diversification, 64–65 divestment, 65–66 Dostoevsky, Fyodor, 18 drowning husband problem, 6–7, 110, 116, 123–125 effective altruism, 110–112, 126, 130, 135–136 efficient market hypothesis, 69–74, 81–82, 96 Empire State Building, 211–212n12 endowment effect, 4 endowments, of universities, 74 entrepreneurism, 27, 90, 91–92 Eratosthenes, 190 ethics, 6, 104, 106–108, 116, 125 European Union, 181–182 experiential knowledge, 59–61 expert opinion, 27–28, 53, 54, 56–57 extreme unexpected events, 61–64 fairness, 108, 179 family offices, 94 Fear and Trembling (Kierkegaard), 53–54 “felicific calculus,” 197–198 financial crisis of 2007–2009, 61, 76, 85, 93–94, 95 firemen’s muster, 191 flow, and well-being, 201–202 Foot, Philippa, 133–134, 135 for-itself behavior, 6–7, 19, 21, 27, 36, 116, 133–134, 204–205, 207–208 acting in character as, 51–53, 55–56, 94–95, 203 acting out of character as, 69, 72 analyzing, 20 authenticity and, 33–35 charity as, 39–40, 45–46 comparison and ranking lacking from, 19, 24, 181 consequences of, 55–64 constituents of, 26–31 defined, 23–24 difficulty of modeling, 204 expert opinion and, 57 extreme unexpected events and, 63–64 flow of time and, 30 free choice linked to, 169–172 in groups, 91–100 incommensurability of, 140–143 in individual investing, 77–78 in institutional investing, 76 intertemporal choice and, 168, 175, 176 job satisfaction as, 189 mercy as, 114 misclassification of, 42, 44, 200–201 out-of-character trading as, 68–69 purposeful choice commingled with, 40–43, 129, 171 rationalizations for, 194–195 in trolley problem, 137 unemployment and, 186 France, 191 Fuji Bank, 14 futures, 80–81 gain-loss asymmetry, 10–11 Galperti, Simone, 217n1 gambler’s fallacy, 199 gamifying, 177 Garber, Peter, 212n1 Germany, 191 global equity, 75 Good Samaritan (biblical figure), 103, 129–130, 206 governance, of institutional investors, 74 Great Britain, 191 Great Depression, 94 Greek antiquity, 190 guilt, 127 habituation, 201 happiness research (positive psychology), 25–26, 201–202 Hayek, Friedrich, 61, 70 hedge funds, 15–17, 65, 75, 78–79, 93, 95 herd mentality, 96 heroism, 6–7, 19–20 hindsight effect, 199 holding, of investments, 79–80 home country bias, 64–65 Homer, 149 Homo ludens, 167–168 hostile attribution bias, 59 housing market, 94 Huizinga, Johan, 167–168 human life, valuation of, 138–143 Hume, David, 62, 209n5 hyperbolic discounting, 158, 201 illiquid markets, 74, 94 index funds, 75 individual investing, 76–82 Industrial Bank of Japan, 14 information asymmetry, 96, 210n2 innovation, 190 institutional investing, 74–76, 82, 93–95, 205 intergenerational transfers, 217n1, 218n4 interlocking utility, 108 intertemporal choice, 149–159, 166 investing: personal beliefs and, 52–53 in start-ups, 27 Joseph (biblical figure), 97–99 Kahneman, Daniel, 168 Kantianism, 135–136 Keynes, John Maynard, 12, 58, 167, 169, 188–189 Kierkegaard, Søren, 30, 53, 65, 88 Knight, Frank, 145, 187 Kranton, Rachel E., 210–211n2 labor supply, 185–189 Lake Wobegon effect, 4 lawn-mowing paradox, 33–34, 206 Lehman Brothers, 61, 86, 89, 184 leisure, 14, 17, 41, 154, 187 Libet, Benjamin, 161 life, valuation of, 138–143 Life of Alexander (Plutarch), 180–181 Locher, Roger, 117, 124 long-term vs. short-term planning, 148–149 loss aversion, 70, 199 lottery: as rational choice, 199–200 Winner’s Curse, 34–36 love altruism, 104, 116, 123–125, 126, 203 lying, vs. omitting, 134 Macbeth (Shakespeare), 63 MacFarquhar, Larissa, 214n6 Madoff, Bernard, 170 malevolence, 125–127 Malthus, Thomas, 212n2 manners, in social interactions, 104, 106, 107, 116, 125 market equilibrium, 33 Markowitz, Harry, 65 Marshall, Alfred, 41, 167 Mass Flourishing (Phelps), 189–191 materialism, 5 merchant’s choice, 133–134, 137–138 mercy, 104, 114–116, 203 examples of, 116–120 inexplicable, 45–46, 120–122 uniqueness of, 119, 129 mergers and acquisitions, 192 “money pump,” 159 monks’ parable, 114, 124 Montaigne, Michel de, 114, 118 mortgage-backed securities, 93 Nagel, Thomas, 161 Napoleon I, emperor of the French, 71 neoclassical economics, 8, 10, 11, 22, 33 Nietzsche, Friedrich, 21, 43, 209n5 norms, 104, 106–108, 123 Norway, 66 Nozick, Robert, 162 observed care altruism, 108–112 Odyssey (Homer), 149–150 omission bias, 200 On the Fourfold Root of the Principle of Sufficient Reason (Schopenhauer), 209n5 “on the spot” knowledge, 61, 70, 80, 94, 205 Orico, 13 overconfidence, 57, 200 “overearning,” 44–45 The Palm Beach Story (film), 7 The Paradox of Choice (Schwartz), 172 parenting, 108, 141, 170–171 Pareto efficiency, 132–133, 136, 139–140 Peirce, Charles Sanders, 53–54, 67, 94 pension funds, 66, 74–75, 93, 95 permanent income hypothesis, 179 Pharaoh (biblical figure), 97–99 Phelps, Edmund, 17, 189–191 Philip II, king of Macedonia, 181 planning, 149–151 for consumption, 154–157 long-term vs. short-term, 148–149 rational choice applied to, 152–158, 162 play, 44–45, 167, 202 pleasure-pain principle, 18 Plutarch, 180–181 Poe, Edgar Allan, 126 pollution, 132–133 Popeye the Sailor Man, 19 portfolio theory, 64–65 positive psychology (happiness research), 25–26, 201–202 preferences, 18–19, 198 aggregating, 38–39, 132, 164 altruism and, 28, 38, 45, 104, 110, 111, 116 in behavioral economics, 24, 168 beliefs’ feedback into, 51, 55 defined, 23 intransitive, 158–159 in purposeful behavior, 25, 36 risk aversion and, 51 stability of, 33, 115, 147, 207, 208 “time-inconsistent,” 158, 159, 166, 203 present value, 7, 139 principal-agent problem, 72 Principles of Economics (Marshall), 41 prisoner’s dilemma, 105 private equity, 75 procrastination, 3, 4, 19, 177–178 prospect theory, 168 protectionism, 185–187 Prussia, 191 public equities, 75 punishment, 109 purposeful choice, 22–26, 27, 34, 36, 56, 133–134, 204–205 altruism compatible with, 104, 113–114, 115–116 commensurability and, 153–154 as default rule, 43–46 expert opinion and, 57 extreme unexpected events and, 62–63 flow of time and, 30 for-itself behavior commingled with, 40–43, 129, 171 mechanistic quality of, 68 in merchant’s choice, 135, 137–138 Pareto efficiency linked to, 132 rational choice distinguished from, 22–23 regret linked to, 128 social relations linked to, 28 stable preferences linked to, 33 in trolley problem, 135–136 vaccination and, 58–59 wage increases and, 187.


pages: 398 words: 108,889

The Paypal Wars: Battles With Ebay, the Media, the Mafia, and the Rest of Planet Earth by Eric M. Jackson

bank run, business process, call centre, creative destruction, disintermediation, Elon Musk, index fund, Internet Archive, iterative process, Joseph Schumpeter, market design, Max Levchin, Menlo Park, Metcalfe’s law, money market fund, moral hazard, Multics, Neal Stephenson, Network effects, new economy, offshore financial centre, PalmPilot, Peter Thiel, Robert Metcalfe, Sand Hill Road, shareholder value, Silicon Valley, Silicon Valley startup, telemarketer, The Chicago School, the new new thing, Turing test

Harris bragged to The Wall Street Journal that he had received CEO offers from more than one hundred startups but chose X.com because he saw it as “a blank canvas upon which to write new rules on the delivery of financial services.”2 X.com also generated some additional buzz toward the end of 1999 with a no-fee, no-minimum balance S&P 500 index fund, the only one of its kind.3 This loss leader product had been rationalized as a way to attract new users who could be up-sold to X.com’s other financial products, including its bond and money market funds, interest-bearing checking accounts, and low APR credit lines. X.com certainly seemed eager to become a financial services supermarket, but Confinity had not seen any sign that it held an interest in following PayPal into person-to-person payments.

For one thing, they actually have almost two hundred thousand users, about as many as we do!” Luke confided. “They were careful not to make it public, but as part of the due diligence we found this out. I guess that $20 bonus they were giving out to people to sign up really worked! “Also, with all of the financial services like money markets, index funds, and debit cards that they offer, each of their accounts is probably worth a lot more than ours,” he continued. “And since we were beginning to burn through cash pretty quickly and will have to do some more financing soon, merging with our top competitor will help us raise a lot more funds. “Plus, Peter felt that there was probably only a market for one player in this space to go public, and whoever had an IPO first would have enough resources to crush the competition.

See Oracle/Windows schism at X.com (PayPal) Wining Bidder Notification (WBN) feature, 191–192 wireless PayPal product, 135 Woolway, Mark, 91, 303 “World Domination Index,” 19 deactivation of, 102 “world domination” speech, 25–26, 269 World Trade Center attacks, 218–222 “X,” associations with the letter, 129, 139 X.com business model, 40 challenge to Confinity, 39–41 competition with PayPal on eBay, 54 customer base, 167–168 dogging of PayPal, 66 domain name cost, 131 focus groups research, 131–132 PayPal merger announcement, 69 vs. Confinity corporate culture, 118 . See also Musk, Elon; X.com (PayPal) X.com financial services after merger with PayPal, 103 difficulty of integrating PayPal with, 120–121, 123 no-minimum-balance index fund, 40, 76 X.com (PayPal) achievements, 88–89 benefits of merger, 79 branding issues, 110–111, 128–132 business development deals, 104–105 business model, 76–77 cash flow problems, 121 corporate structure, 75, 78–79 customer reactions to merger, 81–82 customer service overload, 98–101 databases, 76 effect of eBay/Wells Fargo partnership, 81 e-mail system incompatibilities, 103 fallout from ouster of CEO, 165 fraud loss amounts, 147, 148 internal communications, 112 marketing strategy, 97 merger woes and remedy, 118 press release, 81 problems resolved in early 2000, 138 product development halt announcement, 143–144 promise not to charge sellers, 127, 153 reaction to dotBank buyout, 83–84 reaction to Half.com buyout, 133–134 reason for merger, 72–73 response to customer service crisis, 100–101, 107–108 response to eBay logo policy, 86 shift of business model, 122 spending limit fiasco, 125–128 venture capital financing, 89–91 web server crisis, 101–103 .


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

Alan Greenspan, asset light, bank run, Bear Stearns, Bernie Madoff, book value, business cycle, buy and hold, Carl Icahn, cloud computing, disintermediation, Dissolution of the Soviet Union, dumpster diving, Edward Thorp, Henry Singleton, hindsight bias, housing crisis, index fund, Jeff Bezos, market bubble, Network effects, new economy, oil shock, passive investing, peak oil, Pershing Square Capital Management, shareholder value, Silicon Valley, SimCity, Stanford marshmallow experiment, Steve Jobs, stock buybacks, survivorship bias, Teledyne, The Great Moderation, The Wisdom of Crowds, tontine

The previous low was 12.9 percent in 1995 and the average over the previous quarter-century is 38.6 percent. Glushkov says that 2014 “is likely to enter the record books” as the year when active managers—as opposed to index funds—“delivered their worst performance relative to the index, net of fees, since at least 1989.” And they did. MISCELLANEOUS MENTATION ON 100-BAGGERS 1 31 Faced with that experience, people poured money into passive funds—such as S&P index funds. As nearly everyone knows, the universe of stock pickers can’t beat the market because of fees. Still, this year was an epic rout. There’s been a lot of ink spilled about why this is.


pages: 44 words: 12,675

Turning the Flywheel: A Monograph to Accompany Good to Great by Jim Collins

Amazon Web Services, fulfillment center, index fund, Jeff Bezos, Socratic dialogue, Vanguard fund

Amazon, Vanguard, and Intel didn’t destroy their flywheels in response to a turbulent world; they disrupted the world around them by turning their flywheels. This doesn’t mean mindlessly repeating what you’ve done before. It means evolving, expanding, extending. It doesn’t mean just offering Jack Bogle’s revolutionary S&P 500 index fund; it means creating a plethora of low-cost funds in a wide range of asset categories that fit within the Vanguard flywheel. It doesn’t mean just selling books online; it means expanding and evolving the Amazon flywheel into the biggest, most comprehensive e-commerce-store system in the world, and later extending that flywheel into selling its own devices (such as the Kindle and Alexa) and moving into physical retail (Amazon bought Whole Foods in 2017).


pages: 363 words: 28,546

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

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

To illustrate how an investor might analyze a portfolio ex ante, let’s examine three simple portfolios as described on Paul c08 P2: c/d QC: e/f JWBT412-Marston T1: g December 8, 2010 17:51 Printer: Courier Westford 160 PORTFOLIO DESIGN 10.00% 9.00% Return per Annum P1: a/b 8.00% 7.00% Portfolios with three assets: Barclays Aggregate Bond, Russell 3000, and MSCI EAFE Stock Indexes 6.00% 5.00% 5% 7% 9% 11% 13% 15% Standard Deviation FIGURE 8.7 Model Portfolios Based on Table 8.3 Returns R . Data Sources: Barclays Capital, MSCI, and Russell B. Farrell’s MarketWatch.com web site. Farrell labels them Lazy Portfolios because they can be implemented easily using index funds.14 The three portfolios chosen are the three simplest of his eight portfolios. They are labeled A through C in Table 8.4, but on his web site they have the colorful names Margaritaville, Dr. Bernstein’s No Brainer, and Second Grader’s Starter.15 The portfolios range from conservative to aggressive with investment in bonds ranging from 33 percent, 25 percent, to 10 percent, respectively.

The Tremont hedge fund data set, for example, begins in 1994, while the HFRI data set begins in 1990. 13. Since geometric averages are involved, the premium is measured using the compound formula, (1.102)/(1.099) – 1 = 0.3%. And the estimate of the EAFE return based on the S&P 500’s 9.4 percent return is calculated as (1.094)∗(1.003) – 1 = 9.7%. 14. These portfolios are all invested in Vanguard Index Funds. The analysis below substitutes the bond and stock indexes which most closely correspond to the Vanguard funds involved. 15. Margaritaville was developed by Scott Burns, a Dallas Morning News financial columnist. Dr. Bernstein is a financial advisor to high net worth individuals, and Second Grader is presumably a young investor with a long enough horizon to invest 90 percent in equity!

Hedge funds are low in correlation TABLE 9.3 Correlations Between Hedge Funds and Other Assets, 1990–2009 HFRI Fund-Weighted Hedge Fund Index HFRI Fund-Weighted Hedge Fund Index Barclays Aggregate Bond Index Russell 3000 Stock Index MSCI EAFE Stock Index Barclays Aggregate Bond Index Russell 3000 Stock Index 1.00 0.11 1.00 0.77 0.17 1.00 0.65 0.14 0.73 R Data Sources: HFRI, Barclays Capital, Russell , and MSCI. P1: a/b c09 P2: c/d QC: e/f JWBT412-Marston T1: g December 20, 2010 17:1 Printer: Courier Westford 175 Hedge Funds TABLE 9.4 Betas and Alphas of HFRI Hedge Fund Indexes, 1990–2009 HFRI Hedge Fund Index Fund-Weighted (Aggregate) Event Driven Relative Value Equity Macro Emerging Market Correlation with R 3000 Standard Deviation Beta Alpha 0.77 0.73 0.51 0.75 0.36 0.64 7.1% 7.0% 4.5% 9.2% 7.8% 14.7% 0.36 0.33 0.15 0.46 0.18 0.62 6.1% 6.5% 5.7% 7.5% 8.6% 7.2% Note: Betas are calculated using the Russell 3000 index as the market benchmark.


Unknown Market Wizards by Jack D. Schwager

3D printing, algorithmic trading, automated trading system, backtesting, barriers to entry, Black Monday: stock market crash in 1987, Brexit referendum, buy and hold, commodity trading advisor, computerized trading, COVID-19, cryptocurrency, diversification, Donald Trump, eurozone crisis, family office, financial deregulation, fixed income, forward guidance, index fund, Jim Simons, litecoin, Long Term Capital Management, margin call, market bubble, Market Wizards by Jack D. Schwager, Nick Leeson, performance metric, placebo effect, proprietary trading, quantitative easing, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, Sharpe ratio, short squeeze, side project, systematic trading, tail risk, transaction costs

“I believe that the markets are efficient—a contention supported by thousands of academic papers. And it is not just a theoretical argument. Empirical studies repeatedly demonstrate that individual investors who make timing decisions do significantly worse than passive index funds. Even professional managers, on average, consistently do worse than the market. In light of all this evidence, trading is a fool’s game. People would be much better off just putting their money in index funds.” The rabbi, who has been listening intently, simply says, “You’re right.” Dave smiles smugly, quite content with the conversation outcome, and leaves the rabbi’s office. Sam walks in next.

The world of traders (or investors) can be divided into two categories: those who possess a methodology with an edge and those who do not. The second category is far larger than the first. Market participants who do not have any special skill in trading or investing—a group that includes most people—would be better off investing in index funds than in trying to make their own market decisions. So, ironically, although I do not believe the efficient market hypothesis is valid, I think most people would be best off behaving as if the theory were entirely accurate—a conclusion that would support the idea of index investing. This is the context in which Dave is right.


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

Affordable Care Act / Obamacare, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, impact investing, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, low interest rates, margin call, Mark Zuckerberg, McMansion, Minsky moment, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Savings and loan crisis, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Thales of Miletus, the long tail, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

Because trading often kept going beyond this point, “watermen” would dash whole buckets of water over the crowd in order to disperse them. The price that prevailed then—the okenedan, or “bucket price”—was the settlement price for the day. There were rules for everything.5 The need to standardize can be discerned in market after market. Indexes are one example. An index fund spreads risks across a lot of different securities in a fixed and transparent manner by mimicking the constituents of the index in question. The oldest US stock-market index is the Dow Jones Transportation Average, started in 1894; the still-celebrated Dow Jones Industrial Average began two years later; the S&P 500 index, widely considered the best representation of the health of the American stock market, kicked off in 1957.

See Credit-default swap Cecchetti, Stephen, 79 Church-tower principle, 207 Cigarettes, as means of payment, 5 Clark, Geoffrey Wilson, 144 Clearinghouse, 39 ClearStreet, 210 Clinical drug trials, indemnification of, xii–xiii Coates, John, 116 Code, simplification of, 63 Cohen, Ronald, 91–95, 97, 106, 108, 112 Coins, history of, 4 Collateral, xiv, 7, 38, 65, 76, 150, 177, 185, 204–206, 215 Collateralized-debt obligations (CDOs), 43, 234–235 Collective Health, 104 College graduates, earning power of, 170–171 Commenda, 7–8, 19 Commercial paper, 185 Commodity Futures Trading Commission, 54 CommonBond, 182, 184, 197 Confusion de Confusiónes (de la Vega), 24 Congressional Budget Office, 99, 169 Consumer Financial Protection Bureau overdraft fees and prepaid cards, concern about, 203–204 report on reverse mortgages, 141 survey on payday borrowing, 200 CoRI, 132 Corporate debt, in United States, 120 Corporate finance, 237–238 Correlation risk, 165 Cortisol and testosterone, effect of on risk appetite and aversion, 116 Counterparty risk, 22 Credit, industrialization of, 206 Credit Card Accountability, Responsibility, and Disclosure (Credit CARD) Act of 2009, 203 Credit cards, 203 Credit-default swap (CDS), 37, 64–65, 75, 124, 169, 238 Credit ratings, 24, 120–121, 233–236 Credit-reporting firms, 24 Credit risk, 200, 201, 237, 238 Credit scores, 47–49, 201, 216–217 Creditworthiness, xiv, 10, 12, 47, 121, 197, 202, 204, 216 Crowdcube, 152–155, 158–159, 162 Damelin, Errol, 208 Dark Ages, banking in, 11 Dark pools, 60 DCs (defined-contribution schemes), 129, 131 DE Shaw, 163 Debit cards, 204 Debt, 6, 7, 70, 149, 164 Decumulation, 138–139 Defined-benefit schemes, 129, 131 Defined-contribution (DC) schemes, 129, 131 Dependent variable, 201 Deposit insurance, 13, 43–44 Derivatives, 3, 9–10, 29–32, 38, 40 Desai, Samir, 189 Development-impact bonds, 103 Diabetes, cost of in United States, 102 Dimensional Fund Advisors, 129 Direct lending, 184 Discounting, 19 Disposition effect, 25 Diversification, 8, 12, 20, 117–119, 196, 236 Doorways to Dreams (D2D), 213–214 Dot-com boom, 148 Dow Jones Industrial Average, 40 Dow Jones Transportation Average, 40 Drug development, investment in, vii-viii, 114–115 Drug-development megafund adaptive market hypothesis and, 115–117 Alzheimer’s disease, 122 credit rating, importance of, 120–121 diversification and, 117, 119–120, 122 drug research, improvement of economics of, 114–115 financial engineering, need for, 119 guarantors for, 121 orphan diseases and, 118–119, 122 reactions to, 118 securitization and, 117–119, 122 Dumb money, comparison of to smart money, 155–158 Dun and Bradstreet, 24 Durbin Amendment (2010), 204 Dutch East India Company (VOC), 14–15, 38 E-Mini contracts, 54–55 Eaglewood Capital, 183–184 Ebola outbreak (2014), mortality rate of, 230 Ebrahimi, Rod, 210–211 Ecology, finance and, 113 Economist 2013 conference, xv on railways, 25 on worth of residential property, 70 Educational equity adverse selection in, 174, 175, 182 CareerConcept, 166 differences in funding rates, 176 enforceability, 177 in Germany, 166 Gu, Paul, 172, 175–176 income-share legislation, US Senate and, 172 information asymmetry, 174 Lumni, 165, 168, 175 Oregon, interest in income-share agreements, 172, 176 Pave, 166–168, 173, 175, 182 peer-to-peer insurance, 182 problems with, 167–168, 173–174 providers and recipients, contact between, 160, 175 risk-based pricing model, 176 student loans, 169–171 Upstart, 166–168, 173, 175, 182 Yale University and, 165 Efficient-market hypothesis, 115 Endogeneity, 239 Epidemiology, finance and, 113 Eqecat, 222 Equity, 7–8, 149–150, 186–187 Equity-crowdfunding in Britain, 154 Crowdcube, 152–155, 158–159, 162 Friendsurance, 182–183 Equity-crowdfunding in Britain (continued) herding, 159–160 social insurance, 182–183 Equity-derivatives contracts, 29 Equity-sharing, 7–8 Equity-to-assets ratio, 186 Eren, Selcuk, 73 Eroom’s law, 114 Essex County Council, 95 Eurobond market, 32 European Bank for Reconstruction and Development, 169 Exceedance-probability curve, 231–232, 232 figure 3 Exxon, 169 Facebook, 174 Fair, Bill, 47 False substitutes, 44 Fama, Eugene, 115 Fannie Mae, 48, 78, 85, 168 Farmer, Doyne, 60, 63 Farynor, Thomas, 16 FCIC (Financial Crisis Inquiry Commission), 50 Federal Deposit Insurance Corporation (FDIC), 186, 200 Federal Reserve Bank of New York, 170, 204, 205 Feynman, Richard, 115 Fibonacci (Leonardo of Pisa), 19 FICO score, 47–49 Films to rent, study of hyperbolic discounting, 133–134 Finance bailouts, 35–36 banks, purpose of, 11–14 collective-action problem in, 62 computerization of, 31–32 democratization of, 26–28 economic growth and, 33–34 fresh ideas, need for, xviii, 38–39, 80, 85–86 globalization and, 30, 225 heuristics, use of in, 45–50 illiteracy, financial, 134–135 importance of, 10 information, importance of, 10–11 inherent failings in, 241 misconceptions about, xiii–xvi panic, consequences of, 44 regulatory activity, results of, 33 risk assessment, 24, 45, 77–78 risk management, 55, 117–118, 123 as solution to real-world problems, 114 standardization, 39–41, 45, 47, 51 unconfirmed trades, backlog of, 64–65 use of catastrophe risk modeling in, 233–239 See also High-frequency trading (HFT); Internet Finance, history of bank, derivation of word, 12 Book of Calculation (Fibonacci), 19 call options, 10 Code of Hammurabi, 8 coins, 4 commodity forms of exchange, 4–5 credit and debt, 5–7 in Dark Ages, 11 democratization, 26–28 deposits, 6 derivatives, 29–32, 38 Dutch East India Company (VOC), 14–15, 38 early financial contracts, 5 early forms of finance, 3 equity contracts, 7–8 fire insurance, 16–17 first futures market, 29, 39–40 forward contracts, 38 in Greece, 11 industrialization and, 3, 27–28 inflation-protected bonds, 26 insurance, 8–10, 16–17, 20–22 interest, origin of, 5 in Italy, 9, 14 life annuities, 20–22 maritime trade and, 7–8, 14, 17, 23 payment, forms of, 4–5 put options, 9–10 railways, effect of on, 23–25 in Roman Empire, 7, 8, 11, 36 securities markets, 14 stock exchanges, 14, 24–25 Finance, innovation in absence of, xvi–xvii credit and debt, 5–7 derivatives, 9–10, 29–32 diffusion, pattern of, 45 drivers of, 22–26 equity, 7–8 importance of, 66, 242–243 insurance, 8–9, 16–17, 20–22 lessons from, 32–34 mathematical insights, 18–20 payment, forms of, 4–5 risks of, 145 stock exchanges, 14–16 Finance and the Good Society (Shiller), 242 Financial Crisis Inquiry Commission (FCIC), 50 Financial crisis of 2007–2008 causes of, xv, 34, 69 effects of, xx–xi future of finance, effect on, 243 mortgage debt, role of in, 69–70 new regulations since, 185, 187 Financial Times, quote from Chuck Prince in, 62 Fire insurance, early, 16–17 Fitch Ratings, 24 Flash Boys (Lewis), 57 Flash crash, 54–56, 63 Florida, hurricane damage in, 223, 225 Florida, new residents per day in, 225 Foenus nauticum, 8 Forward contracts, 38 Forward transactions, 15 France collapse of Mississippi scheme in, 36 eighteenth century life annuities in, 20–21 government spending in, 99 Freddie Mac, 48, 85 Fresno, California, social-impact bond pilot program in, 103–104 Friedman, Milton, 165 Friendsurance, 182–183 Fundamental sellers, 54–55 Funding Circle, 181–182, 189, 197 Futures, 29, 39–40 Galton Board, 17, 18 figure 1 Gaussian copula, 235 Geithner, Timothy, 64–65 Genentech, xii General Motors, bailout of, xi Geneva, Switzerland, annuity pools in, 21–22 Gennaioli, Nicola, 42, 44 Ginnie Mae, 168 Girouard, Dave, 166 Glaeser, Edward, 74 Globalization, finance and, 30, 225 Goldman Sachs, 61, 98, 156, 235 Google Trends, 218 Gorlin, Marc, 218 Government spending, rise in, 99–100 Governments, support for new financial products by, 168–169 Grameen Bank, 203 Greece, forerunners of banks in, 11 Greenspan, Alan, 236 Greenspan consensus, 236 Grillo, Baliano, 9 Gu, Paul, 162–164, 166, 172, 175–176 Guardian Maritime, 151 Haldane, Andy, 188 Halley, Edmund, 19–20 Hamilton, Alexander, 35–36 Hammurabi, Code of, 5, 8 Health conditions, SIB early detection programs for, 102–104 Health-impact bonds, 103–104 Hedge funds, 123, 158, 183 Hedging, 30–31, 54, 124, 129, 131, 156, 206, 227 Heiland, Frank, 73 Herding, 24, 159–160 Herengracht Canal properties, Amsterdam, real price level for, 74 Heuristics, 45–50 HFRX, 157–158 High-frequency trading (HFT) benefits of, 58 code, simplification of, 63 flash crash, 54–56 latency, attempts to lower, 53 pre-HFT era, 59–61 problems with, 56–58, 62–63 Hinrikus, Taavet, 190–191 HIV infection rates, SIB program for reduction of, 103 Holland, tulipmania in, 33, 36 Home equity, 139–140 Home-ownership rates, in United States, 85, 170 Homeless people, SIB program for, 96–97 Housing boom of mid-2000s, 148–149 Human capital contracts, 165, 167, 173–174, 176, 177 defined, 6 as illiquid asset, 177 Hurricane Andrew, effect of on insurers, 223–224, 225 Hurricane Hugo, 223 Hyperbolic discounting, 133–134, 211 IBM, 169 If You Don’t Let Us Dream, We Won’t Let You Sleep (drama), 111 IMF (International Monetary Fund), 125–126 Impact investing, 92 Implied volatility, 116 Impure altruism, 109–110 Income-share agreements, 167, 172–178 Independent variables, 201 Index funds, 40 India, CDS deals in, 37 India, social-impact bonds (SIBs) in, 103 Industrialization, effect of on finance, 3, 27–28 Inflation-protected Treasury bills, 131 Information asymmetry, 174 Innovator’s dilemma, 189 Instiglio, 103 Insurance, 8–10, 16–17, 142, 223–225 Insurance-linked securities, 222 Interbank markets, x Interest, origin of, 5 Interest-rate swaps, 29 International Maritime Bureau Piracy Reporting Centre, 151 International Monetary Fund (IMF), 125–126 International Swaps and Derivatives Association (ISDA), 40 Internet, role of in finance creditworthiness, determination of, 172–173, 202, 218 direct connection of suppliers and consumers, xviii, 32 equity crowdfunding, 152–155 income-share agreements, 172–173 ROSCAs, 210 small business loans, 216 speed and ease of borrowing, 189 student loans, 166–167 Intertemporal exchange, 6 Intuit, 218 Investment grade securities, 121 Ireland, banking crisis in, xiv–xv, 69 Isaac, Earl, 47 ISDA (International Swaps and Derivatives Association), 40 ISDA master agreement, 40 Israel, SIBs in, 97 Italy discrimination against female borrowers in, 208 financial liberalization and, 34 first securities markets in, 14 maritime trade partnerships in, 7–8 J.


pages: 416 words: 39,022

Asset and Risk Management: Risk Oriented Finance by Louis Esch, Robert Kieffer, Thierry Lopez

asset allocation, Brownian motion, business continuity plan, business process, capital asset pricing model, computer age, corporate governance, discrete time, diversified portfolio, fixed income, implied volatility, index fund, interest rate derivative, iterative process, P = NP, p-value, random walk, risk free rate, risk/return, shareholder value, statistical model, stochastic process, transaction costs, value at risk, Wiener process, yield curve, zero-coupon bond

For example, for the management of some types of portfolio, regulations dictate that each security should only be present to a fixed maximum extent, which is incompatible with passive management if a security represents a particularly high level of stock-exchange capitalisation on the market. Another problem is that the presence of some securities that not only have high rates but are indivisible, and this may lead to the construction of portfolios with a value so high that they become unusable in practice. These problems have led to the creation of ‘index funds’, collective investment organisations that ‘imitate’ the market. After choosing an index that represents the market in which one wishes to invest, one puts together a portfolio consisting of the same securities as those in the index (or sometimes simply the highest ones), in the same proportions.

., Economic Forces of the Stock Market, Journal of Business, No. 59, 1986, pp. 383–403. 286 Asset and Risk Management Absolute global risk European equities portfolio Systematic APT profile – systematic risk 0.10 100 % 0.08 90 % 0.06 80 % 0.04 70 % 0.02 60 % 0.00 –0.02 50 % –0.04 40 % –0.06 30 % 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Real European equities Target 20 % 10 % European equities portfolio 19.64 0.00 10.00 17.61 8.69 20/80 FT EURO 16.82 0.00 723.00 16.75 1.53 1/99 Global risk Target - portfolio stock overlap Number of securities Systematic Specific Specific/systematic ratio 0% Portolio/Cash FT Euro/Cash Specific Figure 11.1 Stock picking fund Absolute global risk European equities portfolio APT profile – systematic risk Systematic 0.10 100 % 0.08 0.06 90 % 0.04 80 % 0.02 70 % 0.00 60 % –0.02 50 % –0.04 –0.06 40 % 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Real European equities Global risk Target - portfolio stock overlap Number of securities Systematic Specific Specific/systematic ratio FT EURO 16.82 0.00 723.00 16.75 1.53 1/99 30 % 20 % Target European equities portfolio 17.27 3.14 72.00 17.04 2.83 3/97 10 % 0% Portfolio/Cash FT Euro/Cash Specific Figure 11.2 Index fund indicator of the a priori risk, and can be used as an indicator of overperformance or underperformance. When the portfolio reaches the upper range, 96 % (Figure 11.3), the probability of rising above the range will have dropped to 2 %. Conversely, the probability of arbitrage of the strategy by the market, in accordance with the theory of APT, is close to certainty (98 %).

INTERNET SITES http://www.aptltd.com http://www.bis.org/index.htm http://www.cga-canada.org/fr/magazine/nov-dec02/Cyberguide f.htm http://www.fasb.org http://www.iasc.org.uk/cmt/0001.asp http://www.ifac.org http://www.prim.lu Index absolute global risk 285 absolute risk aversion coefficient 88 accounting standards 9–10 accrued interest 118–19 actuarial output rate on issue 116–17 actuarial return rate at given moment 117 adjustment tests 361 Aitken extrapolation 376 Akaike’s information criterion (AIC) 319 allocation independent allocation 288 joint allocation 289 of performance level 289–90 of systematic risk 288–9 American option 149 American pull 158–9 arbitrage 31 arbitrage models 138–9 with state variable 139–42 arbitrage pricing theory (APT) 97–8, 99 absolute global risk 285 analysis of style 291–2 beta 290, 291 factor-sensitivity profile 285 model 256, 285–94 relative global risk/tracking error 285–7 ARCH 320 ARCH-GARCH models 373 arithmetical mean 36–7 ARMA models 318–20 asset allocation 104, 274 asset liability management replicating portfolios 311–21 repricing schedules 301–11 simulations 300–1 structural risk analysis in 295–9 VaR in 301 autocorrelation test 46 autoregressive integrated moving average 320 autoregressive moving average (ARMA) 318 average deviation 41 bank offered rate (BOR) 305 basis point 127 Basle Committee for Banking Controls 4 Basle Committee on Banking Supervision 3–9 Basle II 5–9 Bayesian information criterion (BIC) 319 bear money spread 177 benchmark abacus 287–8 Bernouilli scheme 350 Best Linear Unbiased Estimators (BLUE) 363 beta APT 290, 291 portfolio 92 bijection 335 binomial distribution 350–1 binomial formula (Newton’s) 111, 351 binomial law of probability 165 binomial trees 110, 174 binomial trellis for underlying equity 162 bisection method 380 Black and Scholes model 33, 155, 174, 226, 228, 239 for call option 169 dividends and 173 for options on equities 168–73 sensitivity parameters 172–3 BLUE (Best Linear Unbiased Estimators) 363 bond portfolio management strategies 135–8 active strategy 137–8 duration and convexity of portfolio 135–6 immunizing a portfolio 136–7 positive strategy: immunisation 135–7 bonds average instant return on 140 390 Index bonds (continued ) definition 115–16 financial risk and 120–9 price 115 price approximation 126 return on 116–19 sources of risk 119–21 valuing 119 bootstrap method 233 Brennan and Schwarz model 139 building approach 316 bull money spread 177 business continuity plan (BCP) 14 insurance and 15–16 operational risk and 16 origin, definition and objective 14 butterfly money spread 177 calendar spread 177 call-associated bonds 120 call option 149, 151, 152 intrinsic value 153 premium breakdown 154 call–put parity relation 166 for European options 157–8 canonical analysis 369 canonical correlation analysis 307–9, 369–70 capital asset pricing model (CAPM or MEDAF) 93–8 equation 95–7, 100, 107, 181 cash 18 catastrophe scenarios 20, 32, 184, 227 Cauchy’s law 367 central limit theorem (CLT) 41, 183, 223, 348–9 Charisma 224 Chase Manhattan 224, 228 Choleski decomposition method 239 Choleski factorisation 220, 222, 336–7 chooser option 176 chord method 377–8 classic chord method 378 clean price 118 collateral management 18–19 compliance 24 compliance tests 361 compound Poisson process 355 conditional normality 203 confidence coefficient 360 confidence interval 360–1 continuous models 30, 108–9, 111–13, 131–2, 134 continuous random variables 341–2 contract-by-contract 314–16 convergence 375–6 convertible bonds 116 convexity 33, 149, 181 of a bond 127–9 corner portfolio 64 correlation 41–2, 346–7 counterparty 23 coupon (nominal) rate 116 coupons 115 covariance 41–2, 346–7 cover law of probability 164 Cox, Ingersoll and Ross model 139, 145–7, 174 Cox, Ross and Rubinstein binomial model 162–8 dividends and 168 one period 163–4 T periods 165–6 two periods 164–5 credit risk 12, 259 critical line algorithm 68–9 debentures 18 decision channels 104, 105 default risk 120 deficit constraint 90 degenerate random variable 341 delta 156, 181, 183 delta hedging 157, 172 derivatives 325–7 calculations 325–6 definition 325 extrema 326–7 geometric interpretations 325 determinist models 108–9 generalisation 109 stochastic model and 134–5 deterministic structure of interest rates 129–35 development models 30 diagonal model 70 direct costs 26 dirty price 118 discrete models 30, 108, 109–11. 130, 132–4 discrete random variables 340–1 dispersion index 26 distortion models 138 dividend discount model 104, 107–8 duration 33, 122–7, 149 and characteristics of a bond 124 definition 121 extension of concept of 148 interpretations 121–3 of equity funds 299 of specific bonds 123–4 Index dynamic interest-rate structure 132–4 dynamic models 30 dynamic spread 303–4 efficiency, concept of 45 efficient frontier 27, 54, 59, 60 for model with risk-free security 78–9 for reformulated problem 62 for restricted Markowitz model 68 for Sharpe’s simple index model 73 unrestricted and restricted 68 efficient portfolio 53, 54 EGARCH models 320, 373 elasticity, concept of 123 Elton, Gruber and Padberg method 79–85, 265, 269–74 adapting to VaR 270–1 cf VaR 271–4 maximising risk premium 269–70 equities definition 35 market efficiency 44–8 market return 39–40 portfolio risk 42–3 return on 35–8 return on a portfolio 38–9 security risk within a portfolio 43–4 equity capital adequacy ratio 4 equity dynamic models 108–13 equity portfolio diversification 51–93 model with risk-free security 75–9 portfolio size and 55–6 principles 515 equity portfolio management strategies 103–8 equity portfolio theory 183 equity valuation models 48–51 equivalence, principle of 117 ergodic estimator 40, 42 estimated variance–covariance matrix method (VC) 201, 202–16, 275, 276, 278 breakdown of financial assets 203–5 calculating VaR 209–16 hypotheses and limitations 235–7 installation and use 239–41 mapping cashflows with standard maturity dates 205–9 valuation models 237–9 estimator for mean of the population 360 European call 158–9 European option 149 event-based risks 32, 184 ex ante rate 117 ex ante tracking error 285, 287 ex post return rate 121 exchange options 174–5 exchange positions 204 391 exchange risk 12 exercise price of option 149 expected return 40 expected return risk 41, 43 expected value 26 exponential smoothing 318 extrema 326–7, 329–31 extreme value theory 230–4, 365–7 asymptotic results 365–7 attraction domains 366–7 calculation of VaR 233–4 exact result 365 extreme value theorem 230–1 generalisation 367 parameter estimation by regression 231–2 parameter estimation using the semi-parametric method 233, 234 factor-8 mimicking portfolio 290 factor-mimicking portfolios 290 factorial analysis 98 fair value 10 fat tail distribution 231 festoon effect 118, 119 final prediction error (FPE) 319 Financial Accounting Standards Board (FASB) 9 financial asset evaluation line 107 first derivative 325 Fisher’s skewness coefficient 345–6 fixed-income securities 204 fixed-rate bonds 115 fixed rates 301 floating-rate contracts 301 floating-rate integration method 311 FRAs 276 Fréchet’s law 366, 367 frequency 253 fundamental analysis 45 gamma 156, 173, 181, 183 gap 296–7, 298 GARCH models 203, 320 Garman–Kohlhagen formula 175 Gauss-Seidel method, nonlinear 381 generalised error distribution 353 generalised Pareto distribution 231 geometric Brownian motion 112, 174, 218, 237, 356 geometric mean 36 geometric series 123, 210, 328–9 global portfolio optimisation via VaR 274–83 generalisation of asset model 275–7 construction of optimal global portfolio 277–8 method 278–83 392 Index good practices 6 Gordon – Shapiro formula 48–50, 107, 149 government bonds 18 Greeks 155–7, 172, 181 gross performance level and risk withdrawal 290–1 Gumbel’s law 366, 367 models for bonds 149 static structure of 130–2 internal audit vs. risk management 22–3 internal notation (IN) 4 intrinsic value of option 153 Itô formula (Ito lemma) 140, 169, 357 Itô process 112, 356 Heath, Jarrow and Morton model 138, 302 hedging formula 172 Hessian matrix 330 high leverage effect 257 Hill’s estimator 233 historical simulation 201, 224–34, 265 basic methodology 224–30 calculations 239 data 238–9 extreme value theory 230–4 hypotheses and limitations 235–7 installation and use 239–41 isolated asset case 224–5 portfolio case 225–6 risk factor case 224 synthesis 226–30 valuation models 237–8 historical volatility 155 histories 199 Ho and Lee model 138 homogeneity tests 361 Hull and White model 302, 303 hypothesis test 361–2 Jensen index 102–3 Johnson distributions 215 joint allocation 289 joint distribution function 342 IAS standards 10 IASB (International Accounting Standards Board) 9 IFAC (International Federation of Accountants) 9 immunisation of bonds 124–5 implied volatility 155 in the money 153, 154 independence tests 361 independent allocation 288 independent random variables 342–3 index funds 103 indifference curves 89 indifference, relation of 86 indirect costs 26 inequalities on calls and puts 159–60 inferential statistics 359–62 estimation 360–1 sampling 359–60 sampling distribution 359–60 instant term interest rate 131 integrated risk management 22, 24–5 interest rate curves 129 kappa see vega kurtosis coefficient 182, 189, 345–6 Lagrangian function 56, 57, 61, 63, 267, 331 for risk-free security model 76 for Sharpe’s simple index model 71 Lagrangian multipliers 57, 331 law of large numbers 223, 224, 344 law of probability 339 least square method 363 legal risk 11, 21, 23–4 Lego approach 316 leptokurtic distribution 41, 182, 183, 189, 218, 345 linear equation system 335–6 linear model 32, 33, 184 linearity condition 202, 203 Lipschitz’s condition 375–6 liquidity bed 316 liquidity crisis 17 liquidity preference 316 liquidity risk 12, 16, 18, 296–7 logarithmic return 37 logistic regression 309–10, 371 log-normal distribution 349–50 log-normal law with parameter 349 long (short) straddle 176 loss distribution approach 13 lottery bonds 116 MacLaurin development 275, 276 mapping cashflows 205–9 according to RiskMetricsT M 206–7 alternative 207–8 elementary 205–6 marginal utility 87 market efficiency 44–8 market model 91–3 market price of the risk 141 market risk 12 market straight line 94 Index market timing 104–7 Markowitz’s portfolio theory 30, 41, 43, 56–69, 93, 94, 182 first formulation 56–60 reformulating the problem 60–9 mathematic valuation models 199 matrix algebra 239 calculus 332–7 diagonal 333 n-order 332 operations 333–4 symmetrical 332–3, 334–5 maturity price of bond 115 maximum outflow 17–18 mean 343–4 mean variance 27, 265 for equities 149 measurement theory 344 media risk 12 Merton model 139, 141–2 minimum equity capital requirements 4 modern portfolio theory (MPT) 265 modified duration 121 money spread 177 monoperiodic models 30 Monte Carlo simulation 201, 216–23, 265, 303 calculations 239 data 238–9 estimation method 218–23 hypotheses and limitations 235–7 installation and use 239–41 probability theory and 216–18 synthesis 221–3 valuation models 237–8 multi-index models 221, 266 multi-normal distribution 349 multivariate random variables 342–3 mutual support 147–9 Nelson and Schaefer model 139 net present value (NPV) 298–9, 302–3 neutral risk 164, 174 New Agreement 4, 5 Newson–Raphson nonlinear iterative method 309, 379–80, 381 Newton’s binomial formula 111, 351 nominal rate of a bond 115, 116 nominal value of a bond 115 non-correlation 347 nonlinear equation systems 380–1 first-order methods 377–9 iterative methods 375–7 n-dimensional iteration 381 principal methods 381 393 solving 375–81 nonlinear Gauss-Seidel method 381 nonlinear models independent of time 33 nonlinear regression 234 non-quantifiable risks 12–13 normal distribution 41, 183, 188–90, 237, 254, 347–8 normal law 188 normal probability law 183 normality 202, 203, 252–4 observed distribution 254 operational risk 12–14 business continuity plan (BCP) and 16 definition 6 management 12–13 philosophy of 5–9 triptych 14 options complex 175–7 definition 149 on bonds 174 sensitivity parameters 155–7 simple 175 strategies on 175–7 uses 150–2 value of 153–60 order of convergence 376 Ornstein – Uhlenbeck process 142–5, 356 OTC derivatives market 18 out of the money 153, 154 outliers 241 Pareto distribution 189, 367 Parsen CAT 319 partial derivatives 329–31 payment and settlement systems 18 Pearson distribution system 183 perfect market 31, 44 performance evaluation 99–108 perpetual bond 123–4 Picard’s iteration 268, 271, 274, 280, 375, 376, 381 pip 247 pockets of inefficiency 47 Poisson distribution 350 Poisson process 354–5 Poisson’s law 351 portfolio beta 92 portfolio risk management investment strategy 258 method 257–64 risk framework 258–64 power of the test 362 precautionary surveillance 3, 4–5 preference, relation of 86 394 Index premium 149 price at issue 115 price-earning ratio 50–1 price of a bond 127 price variation risk 12 probability theory 216–18 process risk 24 product risk 23 pseudo-random numbers 217 put option 149, 152 quadratic form 334–7 qualitative approach 13 quantifiable risks 12, 13 quantile 188, 339–40 quantitative approach 13 Ramaswamy and Sundaresan model 139 random aspect of financial assets 30 random numbers 217 random variables 339–47 random walk 45, 111, 203, 355 statistical tests for 46 range forwards 177 rate fluctuation risk 120 rate mismatches 297–8 rate risk 12, 303–11 redemption price of bond 115 regression line 363 regressions 318, 362–4 multiple 363–4 nonlinear 364 simple 362–3 regular falsi method 378–9 relative fund risk 287–8 relative global risk 285–7 relative risks 43 replicating portfolios 302, 303, 311–21 with optimal value method 316–21 repos market 18 repricing schedules 301–11 residual risk 285 restricted Markowitz model 63–5 rho 157, 173, 183 Richard model 139 risk, attitude towards 87–9 risk aversion 87, 88 risk factors 31, 184 risk-free security 75–9 risk, generalising concept 184 risk indicators 8 risk management cost of 25–6 environment 7 function, purpose of 11 methodology 19–21 vs back office 22 risk mapping 8 risk measurement 8, 41 risk-neutral probability 162, 164 risk neutrality 87 risk of one equity 41 risk of realisation 120 risk of reinvestment 120 risk of reputation 21 risk per share 181–4 risk premium 88 risk return 26–7 risk transfer 14 risk typology 12–19 Risk$TM 224, 228 RiskMetricsTM 202, 203, 206–7, 235, 236, 238, 239–40 scenarios and stress testing 20 Schaefer and Schwartz model 139 Schwarz criterion 319 scope of competence 21 scorecards method 7, 13 security 63–5 security market line 107 self-assessment 7 semi-form of efficiency hypothesis 46 semi-parametric method 233 semi-variance 41 sensitivity coefficient 121 separation theorem 94–5, 106 series 328 Sharpe’s multi-index model 74–5 Sharpe’s simple index method 69–75, 100–1, 132, 191, 213, 265–9 adapting critical line algorithm to VaR 267–8 cf VaR 269 for equities 221 problem of minimisation 266–7 VaR in 266–9 short sale 59 short-term interest rate 130 sign test 46 simulation tests for technical analysis methods 46 simulations 300–1 skewed distribution 182 skewness coefficient 182, 345–6 specific risk 91, 285 speculation bubbles 47 spot 247 Index spot price 150 spot rate 129, 130 spreads 176–7 square root process 145 St Petersburg paradox 85 standard Brownian motion 33, 355 standard deviation 41, 344–5 standard maturity dates 205–9 standard normal law 348 static models 30 static spread 303–4 stationarity condition 202, 203, 236 stationary point 327, 330 stationary random model 33 stochastic bond dynamic models 138–48 stochastic differential 356–7 stochastic duration 121, 147–8 random evolution of rates 147 stochastic integral 356–7 stochastic models 109–13 stochastic process 33, 353–7 particular 354–6 path of 354 stock exchange indexes 39 stock picking 104, 275 stop criteria 376–7 stop loss 258–9 straddles 175, 176 strangles 175, 176 strategic risk 21 stress testing 20, 21, 223 strike 149 strike price 150 strong form of efficiency hypothesis 46–7 Student distribution 189, 235, 351–2 Student’s law 367 Supervisors, role of 8 survival period 17–18 systematic inefficiency 47 systematic risk 44, 91, 285 allocation of 288–9 tail parameter 231 taste for risk 87 Taylor development 33, 125, 214, 216, 275–6 Taylor formula 37, 126, 132, 327–8, 331 technical analysis 45 temporal aspect of financial assets 30 term interest rate 129, 130 theorem of expected utility 86 theoretical reasoning 218 theta 156, 173, 183 three-equity portfolio 54 395 time value of option 153, 154 total risk 43 tracking errors 103, 285–7 transaction risk 23–4 transition bonds 116 trend extrapolations 318 Treynor index 102 two-equity portfolio 51–4 unbiased estimator 360 underlying equity 149 uniform distribution 352 uniform random variable 217 utility function 85–7 utility of return 85 utility theory 85–90, 183 valuation models 30, 31–3, 160–75, 184 value at risk (VaR) 13, 20–1 based on density function 186 based on distribution function 185 bond portfolio case 250–2 breaking down 193–5 calculating 209–16 calculations 244–52 component 195 components of 195 definition 195–6 estimation 199–200 for a portfolio 190–7 for a portfolio of linear values 211–13 for a portfolio of nonlinear values 214–16 for an isolated asset 185–90 for equities 213–14 heading investment 196–7 incremental 195–7 individual 194 link to Sharp index 197 marginal 194–5 maximum, for portfolio 263–4 normal distribution 188–90 Treasury portfolio case 244–9 typology 200–2 value of basis point (VBP) 19–20, 21, 127, 245–7, 260–3 variable contracts 301 variable interest rates 300–1 variable rate bonds 115 variance 41, 344–5 variance of expected returns approach 183 variance – covariance matrix 336 Vasicek model 139, 142–4, 174 396 Index vega (kappa) 156, 173 volatility of option 154–5 yield curve 129 yield to maturity (YTM) 250 weak form of the efficiency hypothesis 46 Weibull’s law 366, 367 Wiener process 355 zero-coupon bond 115, 123, 129 zero-coupon rates, analysis of correlations on 305–7 Index compiled by Annette Musker


pages: 287 words: 81,970

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

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

DBC, with an expense ratio of 0.75 percent, pioneered making commodities investing available in ETFs and has grown to a recent market capitalization of more than $2.3 billion. The prospectus, which you should read before investing, is available at dbfunds.db.com. When Jim Rogers saw that we were entering a long-term secular bull market for commodities, he decided to start a commodities index fund. Just as the stock market has index funds that follow the S&P 500, the Dow Jones Industrial Average, or some other index, Rogers looked for a commodities index as the basis of his fund, one that was well thought out and representative of the dynamics of global economic change. What he found was disappointing. One index weighted oil and orange juice equally.


pages: 295 words: 87,204

The Capitalist Manifesto by Johan Norberg

AltaVista, anti-communist, barriers to entry, Berlin Wall, Bernie Sanders, Big Tech, Boris Johnson, business climate, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, Charles Babbage, computer age, coronavirus, COVID-19, creative destruction, crony capitalism, data is not the new oil, data is the new oil, David Graeber, DeepMind, degrowth, deindustrialization, Deng Xiaoping, digital map, disinformation, Donald Trump, Elon Musk, energy transition, Erik Brynjolfsson, export processing zone, failed state, Filter Bubble, gig economy, Gini coefficient, global supply chain, Google Glasses, Greta Thunberg, Gunnar Myrdal, Hans Rosling, Hernando de Soto, Howard Zinn, income inequality, independent contractor, index fund, Indoor air pollution, industrial robot, Intergovernmental Panel on Climate Change (IPCC), invention of the printing press, invisible hand, Jeff Bezos, Jeremy Corbyn, job automation, job satisfaction, Joseph Schumpeter, land reform, liberal capitalism, lockdown, low cost airline, low interest rates, low skilled workers, Lyft, manufacturing employment, Mark Zuckerberg, means of production, meta-analysis, Minecraft, multiplanetary species, Naomi Klein, Neal Stephenson, Nelson Mandela, Network effects, open economy, passive income, Paul Graham, Paul Samuelson, payday loans, planned obsolescence, precariat, profit motive, Ralph Nader, RAND corporation, rent control, rewilding, ride hailing / ride sharing, Ronald Coase, Rosa Parks, Salesforce, Sam Bankman-Fried, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, Snapchat, social distancing, social intelligence, South China Sea, Stephen Fry, Steve Jobs, tech billionaire, The Spirit Level, The Wealth of Nations by Adam Smith, TikTok, Tim Cook: Apple, total factor productivity, trade liberalization, transatlantic slave trade, Tyler Cowen, Uber and Lyft, uber lyft, ultimatum game, Virgin Galactic, Washington Consensus, working-age population, World Values Survey, X Prize, you are the product, zero-sum game

Therefore, they will leave the rest of us behind.11 That is strange because when other researchers look at Forbes’ list of 400 billionaires in 1982, they find that only sixty-nine of them or their heirs remain in 2014, and their conclusion is that ‘dynastic wealth accumulation is simply a myth.’12 Another researcher looked at the individuals who remained on the Forbes list between 1987 and 2014 and the 327 who left it, and calculated that their average annual wealth increase was a paltry 2.4 per cent. That is only a third of what they would have received if they had invested the money in a passive US index fund during the same period.13 Far from accumulating more and more, the richest are losing out in terms of overall wealth growth due to philanthropy and taxes, consumption, poor investment decisions and, for some of them, hefty fines (because a few really are crooks). What is striking when looking at the Forbes list is the absence of names such as Rockefeller, Carnegie, Morgan, Mellon, Hearst, Stanford and Vanderbilt – the super-rich families called ‘robber barons’ in the late nineteenth century.

It would increase the annual income of the poorest 4.6 billion by almost 60 per cent, but unfortunately only for a year, then the money would run out – at the cost of eliminating financial incentives for entrepreneurship, investment and innovation worldwide. Therefore, let’s say that instead we give the 4.6 billion people the return on capital so that they receive an annual income boost. We expropriate all billionaires’ money and invest it in an index fund, and then we assume, optimistically, an annual return with reinvested dividends that is adjusted for inflation following what we have had in the last twenty successful years in the United States. If all goes well, then each of the world’s 4.6 billion poorest will receive an extra 32 cents a day (before tax).


Trade Your Way to Financial Freedom by van K. Tharp

asset allocation, backtesting, book value, Bretton Woods, buy and hold, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, compound rate of return, computer age, distributed generation, diversification, dogs of the Dow, Elliott wave, high net worth, index fund, locking in a profit, margin call, market fundamentalism, Market Wizards by Jack D. Schwager, passive income, prediction markets, price stability, proprietary trading, random walk, Reminiscences of a Stock Operator, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, Sharpe ratio, short selling, Tax Reform Act of 1986, transaction costs

This means that 980 mutual funds disappeared in the first 30 months of the bear market. According to Gregory Baer and Gary Gensler in their book, The Great Mutual Fund Trap,13 most people are much better off in a passively managed index fund than they are in an actively managed mutual fund. Here’s why: • Actively managed mutual funds generally cannot outperform an index fund with no professional management. According to Baer and Gensler, the average annualized performance of actively managed mutual funds that had been around for at least five years trailed the S&P 500 Index by 1.9 percentage points per year.

One year the fund may make 40 percent, the next year it may lose 15 percent, the next year it might be up 35 percent, and the next year it might be down 30 percent. It might be the best overall performer, but it is doing so with a huge variance in its performance. You probably wouldn’t like that sort of performance, especially when you could do much better simply buying an index fund. • When a mutual fund sells a stock at a profit, it must pass on its tax gains to its shareholders. Thus, you could buy a mutual fund in November, watch it go down in value, and still have to pay taxes on the gains that the mutual fund incurred by selling stocks at a profit earlier in the year before you invested.


pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

Affordable Care Act / Obamacare, Airbus A320, airline deregulation, Alan Greenspan, anti-communist, asset allocation, banking crisis, Bear Stearns, Boeing 747, Bonfire of the Vanities, British Empire, business cycle, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Deng Xiaoping, desegregation, Double Irish / Dutch Sandwich, family office, financial engineering, Ford Model T, full employment, Glass-Steagall Act, global supply chain, Gordon Gekko, guest worker program, guns versus butter model, high-speed rail, hiring and firing, housing crisis, Howard Zinn, income inequality, independent contractor, index fund, industrial cluster, informal economy, invisible hand, John Bogle, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kitchen Debate, knowledge economy, knowledge worker, laissez-faire capitalism, Larry Ellison, late fees, Long Term Capital Management, low cost airline, low interest rates, manufacturing employment, market fundamentalism, Maui Hawaii, mega-rich, Michael Shellenberger, military-industrial complex, MITM: man-in-the-middle, mortgage debt, negative equity, new economy, Occupy movement, Own Your Own Home, Paul Samuelson, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Powell Memorandum, proprietary trading, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Solyndra, Steve Jobs, stock buybacks, tech worker, Ted Nordhaus, The Chicago School, The Spirit Level, too big to fail, transaction costs, transcontinental railway, union organizing, Unsafe at Any Speed, Vanguard fund, We are the 99%, women in the workforce, working poor, Y2K

And you capture about 46 percent of the return. Wall Street puts up none of the capital, takes none of the risk, and takes out 54 percent of the return.” That is why Bogle is a staunch advocate of stock index funds, a basket of diverse stocks combined in an index to represent the whole market. Index funds cost the customer much less, Bogle pointed out, because the index has a fixed portfolio and does not require a fund manager to trade in and out of stocks. “You can buy an index fund for one-tenth of 1 percent,” he said. “No turnover expense. No sales load or commission. You get 4.9 percent investment gain out of the 5 percent growth. You get $6.78 out of that $7.04 instead of seeing most of it go to the financial industry.”


Alpha Trader by Brent Donnelly

Abraham Wald, algorithmic trading, Asian financial crisis, Atul Gawande, autonomous vehicles, backtesting, barriers to entry, beat the dealer, behavioural economics, bitcoin, Boeing 747, buy low sell high, Checklist Manifesto, commodity trading advisor, coronavirus, correlation does not imply causation, COVID-19, crowdsourcing, cryptocurrency, currency manipulation / currency intervention, currency risk, deep learning, diversification, Edward Thorp, Elliott wave, Elon Musk, endowment effect, eurozone crisis, fail fast, financial engineering, fixed income, Flash crash, full employment, global macro, global pandemic, Gordon Gekko, hedonic treadmill, helicopter parent, high net worth, hindsight bias, implied volatility, impulse control, Inbox Zero, index fund, inflation targeting, information asymmetry, invisible hand, iterative process, junk bonds, Kaizen: continuous improvement, law of one price, loss aversion, low interest rates, margin call, market bubble, market microstructure, Market Wizards by Jack D. Schwager, McMansion, Monty Hall problem, Network effects, nowcasting, PalmPilot, paper trading, pattern recognition, Peter Thiel, prediction markets, price anchoring, price discovery process, price stability, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, reserve currency, risk tolerance, Robert Shiller, secular stagnation, Sharpe ratio, short selling, side project, Stanford marshmallow experiment, Stanford prison experiment, survivorship bias, tail risk, TED Talk, the scientific method, The Wisdom of Crowds, theory of mind, time dilation, too big to fail, transaction costs, value at risk, very high income, yield curve, you are the product, zero-sum game

We will talk much more about skill, luck, and variance in Chapter 11. For now, remember: If you want to gamble, go to a casino. A substantial portion of investor underperformance can be explained simply by the fact that investors are active when they should be doing nothing. This is proven again and again by the consistent and sizeable outperformance of index funds vs. active managers and by the poor returns in retail accounts. Most of the time you should be doing nothing! This is a simple concept but one that is extremely difficult to put into practice in real life. Your default mode should always be to do nothing. Flat is the most powerful position in trading.

In the case of “Sell in May and Go Away”, the explanation could be a pattern of human optimism where we start the year optimistic, eventually overshoot, pull back from that bit of irrational exuberance, then rally into year end. Similarly, there are micro patterns of seasonality and repetition that make sense and repeat for a reason. The first day of the month is a day when a big lump of automatic contributions go into US employee 401k retirement plans. A good proportion of these contributions end up in index funds and as such the first day of the month tends to be a bullish day for stocks. Same goes for the start of the year. There are other seasonal patterns like this in various markets and ideally when you spot a pattern, you want to be able to ascribe some sort of logic to it. If you can’t, assume it is random unless you are studying a large sample of data or have some other reason to think the streak is not just a product of chance.

JDSU is trading around $132 and everyone in the day trading office (around 50 traders) owns some. I’m nervous because when everyone knows something in markets, it’s usually wrong. The idea is to know something before everyone else, and then get out once everyone knows it. But I don’t want to miss the last push higher as every index fund in the world comes in to hoover JDSU. It’s 3:58 p.m. The stock rallies to $136.50. I tap a few buttons and I’m out. No way am I holding on until exactly 4 p.m. It’s way too dangerous. Sometimes with these index adds, too many people are positioned in advance and the buying from indexers isn’t big enough to offset all the day traders trying to take profit so the price crashes right at 4 o’clock.


pages: 505 words: 161,581

The Founders: The Story of Paypal and the Entrepreneurs Who Shaped Silicon Valley by Jimmy Soni

activist fund / activist shareholder / activist investor, Ada Lovelace, AltaVista, Apple Newton, barriers to entry, Big Tech, bitcoin, Blitzscaling, book value, business logic, butterfly effect, call centre, Carl Icahn, Claude Shannon: information theory, cloud computing, Colonization of Mars, Computing Machinery and Intelligence, corporate governance, COVID-19, crack epidemic, cryptocurrency, currency manipulation / currency intervention, digital map, disinformation, disintermediation, drop ship, dumpster diving, Elon Musk, Fairchild Semiconductor, fear of failure, fixed income, General Magic , general-purpose programming language, Glass-Steagall Act, global macro, global pandemic, income inequality, index card, index fund, information security, intangible asset, Internet Archive, iterative process, Jeff Bezos, Jeff Hawkins, John Markoff, Kwajalein Atoll, Lyft, Marc Andreessen, Mark Zuckerberg, Mary Meeker, Max Levchin, Menlo Park, Metcalfe’s law, mobile money, money market fund, multilevel marketing, mutually assured destruction, natural language processing, Network effects, off-the-grid, optical character recognition, PalmPilot, pattern recognition, paypal mafia, Peter Thiel, pets.com, Potemkin village, public intellectual, publish or perish, Richard Feynman, road to serfdom, Robert Metcalfe, Robert X Cringely, rolodex, Sand Hill Road, Satoshi Nakamoto, seigniorage, shareholder value, side hustle, Silicon Valley, Silicon Valley startup, slashdot, SoftBank, software as a service, Startup school, Steve Ballmer, Steve Jobs, Steve Jurvetson, Steve Wozniak, technoutopianism, the payments system, transaction costs, Turing test, uber lyft, Vanguard fund, winner-take-all economy, Y Combinator, Y2K

And if there was frustration… it was that I wanted to get something built, regulated, and productized,” Fricker said. “The more we described what we were going to build, the more difficult the project became to do that.” Fricker tried to narrow the company’s scope. In his conception, X.com would succeed by focusing on two specific services: marrying traditional banking offerings to index funds and providing financial advice. Needless to say, Musk was less than receptive. From his point of view, that strategy clipped X.com’s wings unnecessarily. Financial advisory also added a cost- and labor-intensive human element to what Musk saw as a primarily digital company. Fricker and Payne had run models about X.com’s growth and revenue, but the numbers on the financial superstore model didn’t seem to add up.

In his memoir, Eric Jackson, a member of Confinity’s marketing team, recalled Luke Nosek, his manager, soothing his concerns about the integration: Look, this isn’t a bad deal for us. For one thing, [X.com] actually [has] almost two hundred thousand users, about as many as we do!… Also with all the financial services like money markets, index funds, and debit cards that they offer, each of their accounts is probably worth a lot more than ours.… And since we were beginning to burn through cash pretty quickly and will have to do some more financing soon, merging with our top competitor will help us raise a lot more funds. X.com employees, on the other hand, were sold an opposing narrative: that they were “bailing out” Confinity—that Confinity had grown faster on eBay but blown through its cash as a result.

weak on the technology side: “Zip2 Founder Launches 2nd Firm: Readies Financial Supersite,” Computer Business Review, August 29, 1999, https://techmonitor.ai/techonology/zip2_founder_launches_2nd_firm_readies_financial_supersite. “We will not be undercut”: John Hechinger and Pui-Wing Tam, “Vanguard’s Index Funds Attract Many Imitators,” Wall Street Journal, November 12, 1999, https://www.wsj.com/articles/SB942358046539516245?st=jjzy7eh1f8w5jwp&reflink=mobilewebshare_permalink. “poised to become”: Mark Gimein, “Fast Track,” Salon.com, August 17, 1999, https://www.salon.com/1999/08/17/elon_musk/. “Elon was ready”: Author interview with Colin Catlan, April 5, 2019.


pages: 317 words: 100,414

Superforecasting: The Art and Science of Prediction by Philip Tetlock, Dan Gardner

Affordable Care Act / Obamacare, Any sufficiently advanced technology is indistinguishable from magic, availability heuristic, behavioural economics, Black Swan, butterfly effect, buy and hold, cloud computing, cognitive load, cuban missile crisis, Daniel Kahneman / Amos Tversky, data science, desegregation, drone strike, Edward Lorenz: Chaos theory, forward guidance, Freestyle chess, fundamental attribution error, germ theory of disease, hindsight bias, How many piano tuners are there in Chicago?, index fund, Jane Jacobs, Jeff Bezos, Kenneth Arrow, Laplace demon, longitudinal study, Mikhail Gorbachev, Mohammed Bouazizi, Nash equilibrium, Nate Silver, Nelson Mandela, obamacare, operational security, pattern recognition, performance metric, Pierre-Simon Laplace, place-making, placebo effect, precautionary principle, prediction markets, quantitative easing, random walk, randomized controlled trial, Richard Feynman, Richard Thaler, Robert Shiller, Ronald Reagan, Saturday Night Live, scientific worldview, Silicon Valley, Skype, statistical model, stem cell, Steve Ballmer, Steve Jobs, Steven Pinker, tacit knowledge, tail risk, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Watson beat the top human players on Jeopardy!

But as the business professor Phil Rosenzweig noted, if Collins and Porras were right, we should, at a minimum, expect that the eighteen exemplary companies would continue to do well. Collins and Porras ended their study in 1990, so Rosenzweig checked how the companies did over the next ten years: “You would have been better off investing in an index fund than putting your money on Collins’ and Porras’ visionary companies.” See Philip Rosenzweig, The Halo Effect … and the Eight Other Business Delusions That Deceive Managers (New York: Free Press, 2014), p. 98. The dart-throwing chimp strikes again. 14. The size of the father-son correlation determines how much you should move your prediction of the son’s height toward the population average of five feet eight inches.

So this gauge is telling us that practice really does make forecasters better. 10. Reading this footnote could save you exponentially more money than the cost of this book. Overconfidence can be expensive. Imagine two people deciding whether to invest $100,000 in retirement savings in either a stock market index fund that yields the base-rate return (the S&P 500 average) or Firm Alpha, an expert-guided actively managed fund that claims to beat market averages. Starting from the stylized facts that there is no consistency in which active funds beat passive funds each year, and that Firm Alpha charges 1% per year to manage funds and the passive fund charges 0.1%, we can compute the cumulative cost, over thirty years, of overestimating one’s skill at picking winners.


pages: 831 words: 98,409

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Anthropocene, assortative mating, bank run, barriers to entry, Bear Stearns, Bernie Sanders, Black Swan, Blythe Masters, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, digital divide, diversification, Dunbar number, East Village, eat what you kill, Elon Musk, eurozone crisis, fake it until you make it, family office, financial engineering, financial repression, Gini coefficient, glass ceiling, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, Jim Simons, John Meriwether, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Roose, knowledge economy, London Whale, Long Term Capital Management, longitudinal study, Mark Zuckerberg, mass immigration, McMansion, mittelstand, Money creation, money market fund, Myron Scholes, NetJets, Network effects, no-fly zone, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, plutocrats, Ponzi scheme, power law, public intellectual, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, rolodex, Satyajit Das, search costs, shareholder value, Sheryl Sandberg, Silicon Valley, social intelligence, sovereign wealth fund, Stephen Hawking, Steve Jobs, subprime mortgage crisis, systems thinking, tech billionaire, The Future of Employment, The Predators' Ball, The Rise and Fall of American Growth, too big to fail, Tyler Cowen, women in the workforce, young professional

The financial crisis cost Krawcheck her last two jobs, and after being let go from Bank of America she purchased the women’s network 85 Broads, which had been founded by a female Goldman Sachs partner as a platform for female senior executives. In 2014, Krawcheck gave it the clever moniker Ellevate and launched the Pax Ellevate Global Women’s Index Fund, which invests in companies highly rated in terms of advancing female leadership. The verdict on the Ellevate network’s effectiveness is still out, but it is a promising start. THE NETWORKING GAP: SCHMOOZE OR LOSE The comparative weakness of female networks also results from women’s dispositions.

., 42, 88 Paulson, Hank AIG and, 183 Alan Greenspan and, 36 as U.S. treasury secretary, 36, 167 background on, 172 at Bilderberg conference, 121 networking by, 172–173, 182 personal relationships, 11 in public and private sectors, 165 revolving door phenomenon and, 165 Robert Rubin and, 167 Paulson, John, xxvii, 7, 82, 88, 129 Pax Ellevate Global Women’s Index Fund, 151 Peer-to-peer networking at Davos, 5, 9 by women, 151 P=EFT formula, 63–64, 192 Pelosi, Nancy, 27, 173 Peltz, Nelson, 154 People’s Bank of China, 209 Pepsi, 157 Perfectionism, 137 Performance-based assessments, 152 Performance-based compensation, 86 “Perma-bears,” 48 Perry, Richard, 170 Perry Capital, 170 Personal connections access and, 52 benefits of, 45–46 description of, 7–8, 10–12 in financial crisis of 2007–2008 resolution, 172–173 influence of, 41–42 information from, 41–42 leveraging of, 175 need for, 98 networking to create, 100–101 technology’s role in, 99–100 value of, 175 Peterson, Pete, 27, 30, 53, 61, 79, 124 Peterson Institute, 107 Petraeus, General David, 121 Petro Saudi, 170 “Philanthrocapitalism,” 128 Philanthropy, 17, 70, 75–76, 128, 129, 169, 171, 192, 199 Philippe, King of Belgium, 114 Picasso, Pablo, 124–125 Piketty, Thomas, 49 PIMCO, 42, 44, 53, 66–67, 69 Pinchuk, Victor, 195 Place Vendôme, 132 Plato, 79 Plaza Hotel, 158 Point72 Asset Management, 88 Policy makers, 85 Political capital, 169 Political protection, 175–176 Politics, finance and, 163 Ponzi schemes, 196, 201–202 Pool Room, 124 Pope, 220 Portugal, 177 “Positive linking,” 100 Potential versus performance, 152–153 Poverty, 213 Power network.


pages: 347 words: 97,721

Only Humans Need Apply: Winners and Losers in the Age of Smart Machines by Thomas H. Davenport, Julia Kirby

"World Economic Forum" Davos, AI winter, Amazon Robotics, Andy Kessler, Apollo Guidance Computer, artificial general intelligence, asset allocation, Automated Insights, autonomous vehicles, basic income, Baxter: Rethink Robotics, behavioural economics, business intelligence, business process, call centre, carbon-based life, Clayton Christensen, clockwork universe, commoditize, conceptual framework, content marketing, dark matter, data science, David Brooks, deep learning, deliberate practice, deskilling, digital map, disruptive innovation, Douglas Engelbart, driverless car, Edward Lloyd's coffeehouse, Elon Musk, Erik Brynjolfsson, estate planning, financial engineering, fixed income, flying shuttle, follow your passion, Frank Levy and Richard Murnane: The New Division of Labor, Freestyle chess, game design, general-purpose programming language, global pandemic, Google Glasses, Hans Lippershey, haute cuisine, income inequality, independent contractor, index fund, industrial robot, information retrieval, intermodal, Internet of things, inventory management, Isaac Newton, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joi Ito, Khan Academy, Kiva Systems, knowledge worker, labor-force participation, lifelogging, longitudinal study, loss aversion, machine translation, Mark Zuckerberg, Narrative Science, natural language processing, Nick Bostrom, Norbert Wiener, nuclear winter, off-the-grid, pattern recognition, performance metric, Peter Thiel, precariat, quantitative trading / quantitative finance, Ray Kurzweil, Richard Feynman, risk tolerance, Robert Shiller, robo advisor, robotic process automation, Rodney Brooks, Second Machine Age, self-driving car, Silicon Valley, six sigma, Skype, social intelligence, speech recognition, spinning jenny, statistical model, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, superintelligent machines, supply-chain management, tacit knowledge, tech worker, TED Talk, the long tail, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Watson beat the top human players on Jeopardy!, Works Progress Administration, Zipcar

Those who have stepped up in the financial investments industry perhaps noticed, for example, that members of the millennial generation are, as investors, very comfortable with technology and rather uncomfortable with coming into an office and discussing their financial situations. At the same time, someone taking a broad view of the investment landscape might have noticed the shift away from stock and bond picking by experts, to index funds that invest in major segments of markets. From such observations, the idea might occur quite readily to create a “robo-advisor” capable of proposing portfolios of these types of investments. For that matter, the rise of cognitive technologies is a big-picture idea in itself. It’s not surprising that these types of systems would take off, given macro trends relating to the power of computers, the intensity of global competition, and the shift from goods to services by mature economies.

We’ll illustrate the process of planning and developing an augmented solution with a variety of examples, but for each step in the process we describe for you, we’ll also point you to one particularly instructive example—Vanguard Group’s initiative to support its financial advisors with an intelligent system capable of formulating fast, accurate responses to clients’ asset management questions. Vanguard is known for looking out for investors with low costs and index funds, but here it also did a good job of combining smart people and smart machines. Step 1: Know Your Highest-Impact Decisions and Knowledge Bottlenecks Unfortunately, it is possible to spend a lot of time implementing intelligent technologies that aren’t actually a fit for your business or don’t solve a very important problem.


Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us About Economics and Life by Alan B. Krueger

"Friedman doctrine" OR "shareholder theory", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, autonomous vehicles, bank run, behavioural economics, Berlin Wall, bitcoin, Bob Geldof, butterfly effect, buy and hold, congestion pricing, creative destruction, crowdsourcing, digital rights, disintermediation, diversified portfolio, Donald Trump, endogenous growth, Gary Kildall, George Akerlof, gig economy, income inequality, independent contractor, index fund, invisible hand, Jeff Bezos, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kickstarter, Larry Ellison, Live Aid, Mark Zuckerberg, Moneyball by Michael Lewis explains big data, moral hazard, Multics, Network effects, obamacare, offshore financial centre, opioid epidemic / opioid crisis, Paul Samuelson, personalized medicine, power law, pre–internet, price discrimination, profit maximization, random walk, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, Saturday Night Live, Skype, Steve Jobs, the long tail, The Wealth of Nations by Adam Smith, TikTok, too big to fail, transaction costs, traumatic brain injury, Tyler Cowen, ultimatum game, winner-take-all economy, women in the workforce, Y Combinator, zero-sum game

In 2016, for example, two-thirds of actively managed large-capitalization stock funds underperformed the S&P 500 large-cap index.29 And even when an actively managed fund does beat the overall market index in one year, the odds of it doing so again the next year are not very good. What’s more, actively managed funds tend to charge higher fees for the privilege of earning unimpressive returns. Unless you’re as savvy an investor as Warren Buffett, the best advice economists can give is to invest your savings in a well-diversified, low-cost passive index fund. Although we cannot control luck, we can seek a balance between risk and reward. If, for example, you have a job that is tied to the ups and downs of Wall Street, it would behoove you to consider investing in safe assets, such as CDs (certificates of deposit, not compact discs) or Treasury bonds, to reduce your risk.

Krueger, “Rent Sharing Within Firms,” draft working paper, 2018. 27. This draws from an interview with Cliff Burnstein on Jul. 27, 2018, in New York City. 28. Burton Malkiel, A Random Walk down Wall Street: Including a Life-Cycle Guide to Personal Investing (New York: W. W. Norton, 1999). 29. Burton Malkiel, “Index Funds Still Beat ‘Active’ Portfolio Management,” Wall Street Journal, Jun. 5, 2017. 30. Chana Schoenberger, “Peter Lynch, 25 Years Later: It’s Not Just ‘Invest in What You Know,’ ” MarketWatch, Dec. 28, 2015. 31. Joan Goodman, “Playboy Interview with Paul and Linda McCartney,” Playboy, Dec. 1984. 32.


pages: 330 words: 99,044

Reimagining Capitalism in a World on Fire by Rebecca Henderson

"Friedman doctrine" OR "shareholder theory", Airbnb, asset allocation, behavioural economics, benefit corporation, Berlin Wall, Bernie Sanders, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, circular economy, collaborative economy, collective bargaining, commoditize, corporate governance, corporate social responsibility, crony capitalism, dark matter, decarbonisation, disruptive innovation, double entry bookkeeping, Elon Musk, Erik Brynjolfsson, export processing zone, Exxon Valdez, Fall of the Berlin Wall, family office, fixed income, George Akerlof, Gini coefficient, global supply chain, greed is good, Greta Thunberg, growth hacking, Hans Rosling, Howard Zinn, Hyman Minsky, impact investing, income inequality, independent contractor, index fund, Intergovernmental Panel on Climate Change (IPCC), joint-stock company, Kickstarter, Lyft, Marc Benioff, Mark Zuckerberg, Max Levchin, means of production, meta-analysis, microcredit, middle-income trap, Minsky moment, mittelstand, Mont Pelerin Society, Neil Armstrong, Nelson Mandela, opioid epidemic / opioid crisis, Paris climate accords, passive investing, Paul Samuelson, Philip Mirowski, plant based meat, profit maximization, race to the bottom, ride hailing / ride sharing, Ronald Reagan, Rosa Parks, Salesforce, scientific management, 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, WeWork, working-age population, Zipcar

For example, in 2016, institutional investors held 63 percent of the outstanding public corporate equity.3 The retirement assets of most pensioners are managed by pension funds, which in turn rely on professional asset managers to invest on their behalf. Most individual investors invest in mutual or index funds, where their assets are managed by professional asset managers—who also vote their shares. This means that the interests of the asset owners are not necessarily reflected in the behavior of those who actually manage the assets: while many asset owners might like to drive performance over the long term, many investment managers might well prefer short-term returns, particularly if their compensation or the size of their portfolio is shaped by their ability to deliver immediate returns.4 When in October 2015, Doug McMillon, the CEO of Walmart, announced that Walmart’s sales would be flat for the year and that earnings per share would fall 6–12 percent, the value of Walmart’s stock sank by nearly 10 percent, taking with it roughly $20 billion in market value.5 McMillon had attempted to explain that the decline in earnings reflected a $2 billion investment in e-commerce and a nearly $3 billion investment in paying hourly employees more—both moves that he believed were essential for the health of the business—but Wall Street was not impressed.

They include BlackRock, which currently manages just under $7.0 trillion; the Vanguard Group, which controls $4.5 trillion; and State Street, which has $2.5 trillion under management.70 A very high proportion of this money, as we saw earlier in the chapter on rewiring finance, is in passive investments. In the United States, for example, 65–70 percent of all equities are held by index and quasi-index funds.71 These investments are completely exposed to system-wide risk. Their owners cannot diversify away from the risks that accelerating rates of environmental degradation and inequality present to the entire economy. The best way to improve their performance is to improve the performance of the economy as a whole.


pages: 289 words: 95,046

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis by Scott Patterson

"World Economic Forum" Davos, 2021 United States Capitol attack, 4chan, Alan Greenspan, Albert Einstein, asset allocation, backtesting, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, bitcoin, Bitcoin "FTX", Black Lives Matter, Black Monday: stock market crash in 1987, Black Swan, Black Swan Protection Protocol, Black-Scholes formula, blockchain, Bob Litterman, Boris Johnson, Brownian motion, butterfly effect, carbon footprint, carbon tax, Carl Icahn, centre right, clean tech, clean water, collapse of Lehman Brothers, Colonization of Mars, commodity super cycle, complexity theory, contact tracing, coronavirus, correlation does not imply causation, COVID-19, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, decarbonisation, disinformation, diversification, Donald Trump, Doomsday Clock, Edward Lloyd's coffeehouse, effective altruism, Elliott wave, Elon Musk, energy transition, Eugene Fama: efficient market hypothesis, Extinction Rebellion, fear index, financial engineering, fixed income, Flash crash, Gail Bradbrook, George Floyd, global pandemic, global supply chain, Gordon Gekko, Greenspan put, Greta Thunberg, hindsight bias, index fund, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, Jeffrey Epstein, Joan Didion, John von Neumann, junk bonds, Just-in-time delivery, lockdown, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, Mark Spitznagel, Mark Zuckerberg, market fundamentalism, mass immigration, megacity, Mikhail Gorbachev, Mohammed Bouazizi, money market fund, moral hazard, Murray Gell-Mann, Nick Bostrom, off-the-grid, panic early, Pershing Square Capital Management, Peter Singer: altruism, Ponzi scheme, power law, precautionary principle, prediction markets, proprietary trading, public intellectual, QAnon, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Nader, Ralph Nelson Elliott, random walk, Renaissance Technologies, rewilding, Richard Thaler, risk/return, road to serfdom, Ronald Reagan, Ronald Reagan: Tear down this wall, Rory Sutherland, Rupert Read, Sam Bankman-Fried, Silicon Valley, six sigma, smart contracts, social distancing, sovereign wealth fund, statistical arbitrage, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, systematic trading, tail risk, technoutopianism, The Chicago School, The Great Moderation, the scientific method, too big to fail, transaction costs, University of East Anglia, value at risk, Vanguard fund, We are as Gods, Whole Earth Catalog

Inside CalPERS, some fund managers had begun questioning the fundamental assumptions behind their strategy, the don’t-put-all-your-eggs-in-one-basket diversification approach that was the bedrock of Modern Portfolio Theory. CalPERS was underperforming the standard benchmark, the S&P 500, by some 2 percent a year, because a big chunk of its assets was in poor-performing Treasury bonds. If CalPERS had simply put all its cash in a low-cost S&P 500 index fund, it would have done much better. And while 2 percentage points a year might not seem like much, it had a devastating effect on the pension fund’s long-run returns from a compounding perspective. Things had to change. Perhaps tail-hedging could help. Eliopoulos told his number two, Eric Baggesen, to check it out.

Even more damning, none of the other strategies, besides Universa’s, performed better than the S&P 500 itself. It was yet another lesson in Wall Street’s colossal failure. How much money, brain power, PowerPoint razzle-dazzle, and endless hours spent on conference calls and meetings had been dedicated to strategies that couldn’t beat Grandma putting all her dough in an S&P 500 index fund? In the end, Universa’s story showed not so much how great Universa was, but rather that Wall Street’s legions of investment advisers—its “helpers,” as Warren Buffett disparagingly called them—were nothing more than a carnival show meant to separate investors from their money. Among the assets the carnival barkers managed was $35 trillion of retiree cash stashed in U.S. pension funds.


pages: 318 words: 99,524

Why Aren't They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis by Kevin Rodgers

Alan Greenspan, algorithmic trading, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black-Scholes formula, buy and hold, buy low sell high, call centre, capital asset pricing model, collapse of Lehman Brothers, Credit Default Swap, currency peg, currency risk, diversification, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, fixed income, Flash crash, Francis Fukuyama: the end of history, Glass-Steagall Act, Hyman Minsky, implied volatility, index fund, interest rate derivative, interest rate swap, invisible hand, John Meriwether, latency arbitrage, law of one price, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, Minsky moment, money market fund, Myron Scholes, Northern Rock, Panopticon Jeremy Bentham, Ponzi scheme, prisoner's dilemma, proprietary trading, quantitative easing, race to the bottom, risk tolerance, risk-adjusted returns, Silicon Valley, systems thinking, technology bubble, The Myth of the Rational Market, The Wisdom of Crowds, Tobin tax, too big to fail, value at risk, vertical integration, Y2K, zero-coupon bond, zero-sum game

file=b_sector/interest_rates_98_e.htm&pid=procstavnew&sid=svodProcStav 21‘An Historical Document: Long-Term Capital Management CEO John Meriwether Asks for Money’, Grasping Reality with the Invisible Hand, http://delong.typepad.com/sdj/2005/06/an_historical_d.html 22 ‘Long-Term Capital Management, Report to Congressional Requesters’, United States General Accounting Office, October 1999, http://www.gao.gov/assets/230/228446.pdf Chapter 6 1 ‘Weather risk market remains buoyant, claims Clemmons’, Paul Lyon, Risk.net, 24 October 2002, http://m.risk.net/risk-magazine/news/1503229/weather-risk-market-remains-buoyant-claims-clemmons 2 Presentation to Merrill Lynch European Banking & Insurance Conference London, Anshu Jain, 8 October 2002, https://www.db.com/ir/en/download/1382.pdf 3 Stern Business School, NYU, datasets, http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html 4 US Treasury data, http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx 5 2015 Investor Company Handbook, Investment Company Institute, May 2015, Chapter 2, http://www.icifactbook.org/fb_ch2.html#popularity 6 ‘Studies on Stock and Bond Picking Performance’, Mark Hebner, Index Fund Advisors, May 2013, https://www.ifa.com/articles/studies_on_stock_picking_performance/ 7 ‘Speculators Have Discovered Palladium and Sugar’, William Baldwin, Forbes, March 2011, http://www.forbes.com/forbes/2011/0411/investing-william-baldwin-investment-strategies-palladium-sugar.html 8 Presentation to Merrill Lynch European Banking & Insurance Conference London, Anshu Jain, 8 October 2002, Slide 17, https://www.db.com/ir/en/download/1382.pdf 9 Ibid., Slide 14. 10 Market Surveys Data, 1987–2010, ISDA, 2010, http://www.isda.org/statistics/pdf/ISDA-Market-Survey-annual-data.pdf 11 ‘Introducing CCOs’, Credit magazine, February 2005, http://www.risk.net/credit/feature/1510254/introducing-ccos 12 ‘CDO Evaluator Applies Correlation and Monte Carlo Simulation to the Art of Determining Portfolio Quality’, Sten Bergman, Standard and Poor’s, 12 November 2001, http://www.globalriskguard.com/resources/crderiv/sp_portf_qual.pdf 13 ‘“The Formula That Killed Wall Street”?

.’, Lincoln Institute of Land Policy, www.lincolninst.edu 31 ‘Bank Size and Systemic Risk’, Luc Laeven, Lev Ratnovski and Hui Tong, IMF Staff Discussion Note, May 2014, http://www.imf.org/external/pubs/ft/sdn/2014/sdn1404.pdf 32 ‘Jamie Dimon memo outlines simplified JPMorgan structure’, Tom Braithwaite and Kara Scannell, Financial Times, 17 September 2013, http://www.ft.com/cms/s/0/1b6961c2-1f9e-11e3-aa36-00144feab7de.html#axzz3kHdXjDG1 33 ‘HSBC: Shrink and simplify’, Martin Arnold and Patrick Jenkins, Financial Times, 22 April 2015, http://www.ft.com/cms/s/0/55cc51ac-e82f-11e4-894a-00144feab7de.html#axzz3kHdXjDG1 34 ‘Deutsche Bank quits commodities, but keeps index funds’, Barani Krishnan, Reuters, 5 December 2013, http://www.reuters.com/article/2013/12/05/us-deutsche-commodities-idUSBRE9B40P820131205 35 ‘Can America’s Big Banks Get Less Complex?’, Yalman Onaran, Bloomberg, 6 July 2015, http://www.bloomberg.com/news/articles/2015-07-06/u-s-banks-keep-thousands-of-units-after-push-to-simplify-them 36 ‘Deutsche’s former FX head says the transformation is coming’, Kevin Rodgers, Euromoney, May 2015, http://www.euromoney.com/Article/3456242/Deutsches-former-FX-head-says-the-transformation-is-coming.html 37 ‘Atom Bank approved as UK’s first digital-only lender’, Emma Dunkley, Financial Times, 24 June 2015, http://www.ft.com/cms/s/0/d44266e4-1a60-11e5-a130-2e7db721f996.html#axzz3kZKcH71i 38 ‘Banks Face Powerful Competitors In The Payments Business’, Tom Groenfeldt, Forbes, 14 October 2014, http://www.forbes.com/sites/tomgroenfeldt/2014/10/14/banks-face-powerful-competitors-in-the-payments-business/ 39 ‘Bank inquiry: Regulator says IT systems “antiquated”’, John Campbell, BBC, 8 January 2014, http://www.bbc.co.uk/news/uk-northern-ireland-25661105 Glossary agency business Services provided by a bank that do not require it to take risk and are performed in return for a fee.


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

"World Economic Forum" Davos, accounting loophole / creative accounting, Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bear Stearns, behavioural economics, Bernie Madoff, Bretton Woods, business climate, business cycle, carbon tax, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency risk, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, Glass-Steagall Act, global supply chain, Goldman Sachs: Vampire Squid, Greenspan put, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kaizen: continuous improvement, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, longitudinal study, low interest rates, machine readable, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, Phillips curve, price stability, profit motive, proprietary trading, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Savings and loan crisis, school vouchers, seminal paper, short selling, sovereign wealth fund, tail risk, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

The lay investor’s version of such benchmarking is to compare the manager’s return with a return on a benchmark portfolio consisting of similar securities: for example, the returns generated by a fund manager investing in large U.S. firms will be compared with the return on the S&P 500 index of large U.S. stocks. Such benchmarking is logical, because the investor can easily achieve the returns on the S&P 500 index by buying a low-cost index fund, and a manager should not earn anything for merely matching this return. Instead, investors will reward a manager handsomely only if the manager consistently generates excess returns, that is, returns exceeding those of the risk-appropriate benchmark. In the jargon, such excess returns are known as “alpha.”

Financial innovation nowadays seems to be synonymous with credit-default swaps and collateralized debt obligations, derivative securities that few outside Wall Street now think should have been invented. But innovation also gave us the money-market account, the credit card, interest-rate swaps, indexed funds, and exchange-traded funds, all of which have proved very useful. So, as with many things, financial innovations span the range from the good to the positively dangerous. Some have proposed a total ban on offering a financial product unless it has been vetted, much as the Food and Drug Administration vets new drugs.


pages: 401 words: 109,892

The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon

airline deregulation, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, barriers to entry, Big Tech, bitcoin, blockchain, book value, business cycle, business process, buy and hold, Cambridge Analytica, carbon tax, Carmen Reinhart, carried interest, central bank independence, commoditize, crack epidemic, cross-subsidies, disruptive innovation, Donald Trump, driverless car, Erik Brynjolfsson, eurozone crisis, financial deregulation, financial innovation, financial intermediation, flag carrier, Ford Model T, gig economy, Glass-Steagall Act, income inequality, income per capita, index fund, intangible asset, inventory management, Jean Tirole, Jeff Bezos, Kenneth Rogoff, labor-force participation, law of one price, liquidity trap, low cost airline, manufacturing employment, Mark Zuckerberg, market bubble, minimum wage unemployment, money market fund, moral hazard, natural language processing, Network effects, new economy, offshore financial centre, opioid epidemic / opioid crisis, Pareto efficiency, patent troll, Paul Samuelson, price discrimination, profit maximization, purchasing power parity, QWERTY keyboard, rent-seeking, ride hailing / ride sharing, risk-adjusted returns, Robert Bork, Robert Gordon, robo advisor, Ronald Reagan, search costs, Second Machine Age, self-driving car, Silicon Valley, Snapchat, spinning jenny, statistical model, Steve Jobs, stock buybacks, supply-chain management, Telecommunications Act of 1996, The Chicago School, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, Travis Kalanick, vertical integration, Vilfredo Pareto, warehouse automation, zero-sum game

This was clear during the GDPR debate and during the revision of the Payment System Directive (PSD2). We will return to the GDPR and the issue of privacy more broadly when we discuss Facebook and Google in Chapters 13 and 14. The third pitfall is that asset management can become too concentrated. Index funds and exchange-traded funds (ETFs) are great inventions. They are cheap, they are simple, and they are certainly better for 95 percent of investors than actively managed funds. They have also expanded rapidly. The share of listed equity value owned by institutional investors has increased since 2000—primarily driven by the growth of quasi-indexer institutions.

., 281 heroin, 235–236 Highway 31, 198–199 Hilt, Eric, 159 Hirshleifer, Jack, 216 Hogan, Robert E., 195 Hojnacki, Marie, 157 Holburn, Guy, 170 Hortaçsu, Ali, 34 Hosken, Daniel, 91 housing, government involvement in, 237–238 Huckshorn, Robert J., 195 Hulten, Charles, 73–74 IBM, 249, 251, 252 incentives, 17–18 income comparisons, 114–122 index funds, 222 indirect network externalities, 265–267 industrial organization, 86–87, 91 Industrial Revolution, 13 inequality, ix; in economic debates, 13; growth and, 16–18; competition and, 20–22; and rise of club economy, 283–284 infant mortality, 224–225 inflation, 41 information technologies, 214, 217–218 initial public offerings (IPOs), 82 innovation, ix–x; and US per-capita economic growth rate, 15–16; competition’s impact on, 19–20 Intangible Assets hypothesis, 49, 51, 53, 75, 97 intangible investment, 72–75 intellectual property products (IPP) stock, 74–75 International Comparisons Program (ICP), 117 international trade, 24 internet giants, 240–242, 259–260; business models of, 242–244, 277; compared to giants of previous decades, 245–249; profit margins of, 249–252; market value of, 252; footprints of, 252–254, 276–277; MV / Emp ratios of, 254–256; and US economic growth, 256–258, 277; lobbying by, 260–262; taxes paid by, 262–264; concentration and network effects of, 265–268; and importance of free entry, 268–271; and privacy and data protection issues, 271–273, 277–278; antitrust enforcement for, 273–276; catch-22s with, 276–278.


pages: 407 words: 104,622

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Andrew Wiles, automated trading system, backtesting, Bayesian statistics, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, blockchain, book value, Brownian motion, butter production in bangladesh, buy and hold, buy low sell high, Cambridge Analytica, Carl Icahn, Claude Shannon: information theory, computer age, computerized trading, Credit Default Swap, Daniel Kahneman / Amos Tversky, data science, diversified portfolio, Donald Trump, Edward Thorp, Elon Musk, Emanuel Derman, endowment effect, financial engineering, Flash crash, George Gilder, Gordon Gekko, illegal immigration, index card, index fund, Isaac Newton, Jim Simons, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Loma Prieta earthquake, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, Mark Zuckerberg, Michael Milken, Monty Hall problem, More Guns, Less Crime, Myron Scholes, Naomi Klein, natural language processing, Neil Armstrong, obamacare, off-the-grid, p-value, pattern recognition, Peter Thiel, Ponzi scheme, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, Robert Mercer, Ronald Reagan, self-driving car, Sharpe ratio, Silicon Valley, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, Steve Bannon, Steve Jobs, stochastic process, the scientific method, Thomas Bayes, transaction costs, Turing machine, Two Sigma

Patterson thought his natural skepticism could prove valuable discerning true signals from random market fluctuations. He also knew his programming skills would come in handy. And, unlike many of Renaissance’s dozen or so employees, Patterson actually read the business pages, at least occasionally, and knew a bit about finance. “I thought I was pretty cutting-edge because I owned an index fund,” he says. Patterson saw the world “becoming extremely mathematical” and knew computer firepower was expanding exponentially. He sensed Simons had an opportunity to revolutionize investing by applying high-level math and statistics. “Fifty years earlier, we couldn’t have done anything, but this was the perfect time,” he says.

Years of poor performance had investors fleeing actively managed stock-mutual funds, or those professing an ability to beat the market’s returns. At that point, these funds, most of which embrace traditional approaches to investing, controlled just half of the money entrusted by clients in stock-mutual funds, down from 75 percent a decade earlier. The other half of the money was in index funds and other so-called passive vehicles, which simply aim to match the market’s returns, acknowledging how challenging it is to top the market.1 Increasingly, it seemed, once-dependable investing tactics, such as grilling corporate managers, scrutinizing balance sheets, and using instinct and intuition to bet on major global economic shifts, amounted to too little.


pages: 367 words: 110,161

The Bond King: How One Man Made a Market, Built an Empire, and Lost It All by Mary Childs

Alan Greenspan, asset allocation, asset-backed security, bank run, Bear Stearns, beat the dealer, break the buck, buy and hold, Carl Icahn, collateralized debt obligation, commodity trading advisor, coronavirus, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, diversification, diversified portfolio, Edward Thorp, financial innovation, fixed income, global macro, high net worth, hiring and firing, housing crisis, Hyman Minsky, index card, index fund, interest rate swap, junk bonds, Kevin Roose, low interest rates, Marc Andreessen, Minsky moment, money market fund, mortgage debt, Myron Scholes, NetJets, Northern Rock, off-the-grid, pneumatic tube, Ponzi scheme, price mechanism, quantitative easing, Robert Shiller, Savings and loan crisis, skunkworks, sovereign wealth fund, stem cell, Steve Jobs, stocks for the long run, The Great Moderation, too big to fail, Vanguard fund, yield curve

In his 1997 book, Everything You’ve Heard About Investing Is Wrong!, he emphasizes the importance of avoiding hefty fees. Firms “charge exorbitant fees for very little, if any, value added,” he wrote. If the reader discovered their manager was charging too much, they should “think seriously about a replacement.” He went so far as to recommend low-fee index fund provider Vanguard, to the horror of Pimco employees. Where normally a company’s salespeople avidly push a founder’s book, Pimco salespeople refused to sell clients Gross’s. In the old days, investors could buy a Treasury bond yielding more than 10 percent; now, post–financial crisis, that was about 2 percent.

But by buying all the stuff like private equity and real estate, Gross said, Pimco was becoming passive—dependent on leverage for returns and along for whatever ride those markets took it on. He was doubling down. His language was mystifying, disorienting. “Passive” has a clear meaning in investing, which is close to the opposite of how he used it. Passive is an index fund that buys every stock to get the average performance of the market. Ivascyn’s private investing business was at what’s understood to be the opposite, “very active” end of the spectrum, making large concentrated bets on a few carefully chosen private companies or buying those distressed mall loans.


pages: 374 words: 114,600

The Quants by Scott Patterson

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, automated trading system, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, book value, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Carl Icahn, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Dr. Strangelove, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, Financial Modelers Manifesto, fixed income, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, Jim Simons, job automation, John Meriwether, John Nash: game theory, junk bonds, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, Mark Spitznagel, merger arbitrage, Michael Milken, military-industrial complex, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, short squeeze, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

At bottom, EMH was based on the idea, as Bachelier had argued, that the market moves in a random fashion and that current prices reflect all known information about the market. That being the case, it’s impossible to know whether the market, or an individual stock, currency, bond, or commodity, will rise or fall in the future—the future is random, a coin flip. It’s a fancy way of saying there’s no free lunch. This idea eventually spawned the megabillion-dollar index fund industry, based on the notion that if active managers can’t consistently put up better returns than the rest of the market, why not simply invest in the entire market itself, such as the S&P 500, for a much lower fee? While Thorp fully understood the notion of random walks, which he’d used to price warrants, he thought EMH was academic hot air, the stuff of cloistered professors spinning airy fantasies of high-order math and fuzzy logic.

AQR’s losses were especially severe in late 2008 after Lehman Brothers collapsed, sending markets around the globe into turmoil. Its Absolute Return Fund fell about 46 percent in 2008, compared with a 48 percent drop by the Standard & Poor’s 500-stock index. In other words, investors in plain-vanilla index funds had done just about as well (or poorly) as investors who’d placed their money in the hands of one of the most sophisticated asset managers in the business. It was the toughest year on record for hedge funds, which lost 19 percent in 2008, according to Hedge Fund Research, a Chicago research group, only the second year since 1990 that the industry lost money as a whole.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Berlin Wall, biodiversity loss, Black Swan, Bretton Woods, business cycle, capital controls, carbon credits, carbon tax, Cass Sunstein, central bank independence, classic study, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial engineering, financial innovation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, global macro, global reserve currency, global village, high net worth, high-speed rail, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inverted yield curve, invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, low interest rates, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, military-industrial complex, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, precautionary principle, price stability, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Ronald Reagan, Savings and loan crisis, sovereign wealth fund, special drawing rights, subprime mortgage crisis, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Tragedy of the Commons, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

The deleveraging that took place in the second half of 2008 reduced this amount to about 1.7 billion barrels. Over-the-counter crude oil contracts exacerbated this speculative spike, adding a full 120 percent to the peak figure as opposed to a fraction (on the order of 80 percent) before and after the spring 2008 episode. Similarly, passive investment into index funds also rose and fell spectacularly, from about $75 billion in 2006 to $280 billion by mid-summer 2008, and back to the 2006 level six months later.40 The Goldman Sachs–fed allure of $200-per-barrel oil has faded, and it is unlikely that the next couple of years will see an episode of exuberant investing comparable to the year 2008 that is still remembered for oil at $147 per barrel.

EUROZONE: A group of European countries that uses the euro as a common currency. EXCESS RESERVES: The amount of reserves that are held by a bank or financial institution above the reserve requirement. EXCHANGE-TRADED FUND: A financial security that tracks an index, a commodity, or a basket of assets much like an index fund does; however, it trades on an exchange and experiences price changes throughout the trading day. EXCISE TAX: Taxes paid on purchases of goods or activities. They are often incorporated into the price of the product or activity. EXPATRIATE: A person who withdraws oneself from one’s country, either temporarily or permanently, in allegiance and/or residence.


pages: 422 words: 113,830

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

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

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

bailouts of 2008 and “Houses That Saved the World, The” (Economist) housing in CPI debt and GDP and mortgage crisis and opacity and recession and risk and securitization and subprime crisis and HSBC Huckabee, Mike Hu Jintao Hunt, Lacy Hussein, Saddam Husseini, Sadad al- “If We Are Rome, Wall Street’s Our Coliseum” (Farrell) Indebted Society (Medoff and Harless) index funds India “India, China, and the Asian Axis of Oil” (Varadarajan) Indonesia Industrial and Commercial Bank of China Industrial Revolution inflation Federal Reserve and see also price revolutions Inhofe, James Institute of International Bankers Internal Revenue Service International Energy Agency (IEA) International Monetary Fund (IMF) Investment Outlook InvestTech Research Iolanthe (Gilbert and Sullivan) Iran hostage crisis Iraq Anglo-American oil interests in U.S. invasion of Ireland Islam Islamic banking Islamic finance market Islamic Financial Services Board Israel Israel, Jonathan Italy Jackson, Andrew Japan as economical rival Jefferson, Thomas Johnson, Lyndon B.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, junk bonds, liquidity trap, London Whale, Long Term Capital Management, low interest rates, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, Navinder Sarao, negative equity, new economy, Northern Rock, obamacare, Phillips curve, price stability, proprietary trading, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, stock buybacks, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

Though they might not be able to name the Fed as the party rigging the game, their instincts remind them about the old adage: Fool me once, shame on you. Fool me twice, shame on me. As for those mom-and-pop investors who remain in the market, they have little chance of escaping Fed policy because their assets are tied up in expensive and rigid 401(k) plans that emphasize index funds. The Fed’s artificially low interest-rate level has distorted the relationship between stocks and bonds. Rather than one providing cover when the other is in distress, asset classes have increasingly moved in concert. And though portfolio advisers make it sound safe, index investing will prove disastrous when markets finally correct.

But the move to government service saved him as much as $50 million thanks to a clause in tax law passed in 1989, a substantial perk of public office. Section 1043 of the Internal Revenue Code provides that individuals in the Executive Branch forced to sell stock to comply with federal conflict-of-interest rules can defer paying capital gains tax, provided that the proceeds are then reinvested in government securities, diversified index funds, or similar investments. The rule is intended to “minimize the burden of public service.” Thus Paulson would avoid a huge tax bill on the capital gains of his Goldman stock, which had more than doubled in value since the firm went public in May 1999. A pretty big incentive to spend a few years in Washington.


pages: 370 words: 112,809

The Equality Machine: Harnessing Digital Technology for a Brighter, More Inclusive Future by Orly Lobel

2021 United States Capitol attack, 23andMe, Ada Lovelace, affirmative action, Airbnb, airport security, Albert Einstein, algorithmic bias, Amazon Mechanical Turk, augmented reality, barriers to entry, basic income, Big Tech, bioinformatics, Black Lives Matter, Boston Dynamics, Charles Babbage, choice architecture, computer vision, Computing Machinery and Intelligence, contact tracing, coronavirus, corporate social responsibility, correlation does not imply causation, COVID-19, crowdsourcing, data science, David Attenborough, David Heinemeier Hansson, deep learning, deepfake, digital divide, digital map, Elon Musk, emotional labour, equal pay for equal work, feminist movement, Filter Bubble, game design, gender pay gap, George Floyd, gig economy, glass ceiling, global pandemic, Google Chrome, Grace Hopper, income inequality, index fund, information asymmetry, Internet of things, invisible hand, it's over 9,000, iterative process, job automation, Lao Tzu, large language model, lockdown, machine readable, machine translation, Mark Zuckerberg, market bubble, microaggression, Moneyball by Michael Lewis explains big data, natural language processing, Netflix Prize, Network effects, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, occupational segregation, old-boy network, OpenAI, openstreetmap, paperclip maximiser, pattern recognition, performance metric, personalized medicine, price discrimination, publish or perish, QR code, randomized controlled trial, remote working, risk tolerance, robot derives from the Czech word robota Czech, meaning slave, Ronald Coase, Salesforce, self-driving car, sharing economy, Sheryl Sandberg, Silicon Valley, social distancing, social intelligence, speech recognition, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steve Wozniak, surveillance capitalism, tech worker, TechCrunch disrupt, The Future of Employment, TikTok, Turing test, universal basic income, Wall-E, warehouse automation, women in the workforce, work culture , you are the product

A girl standing four feet high, exuding fearlessness and confidence—her hands on her hips, chest forward, and chin up—was commissioned to celebrate International Women’s Day and to publicize a new index fund, which includes solely companies with high representation of women in executive leadership and on their boards. The plaque that originally appeared below the statue read: “Know the power of women in leadership. SHE makes a difference.” The index fund’s NASDAQ symbol is $SHE. Powerful though the statue was, it garnered the most attention for its placement—directly facing the historic Charging Bull statue, erected in 1989 as a symbol of the strength of American financial markets.


pages: 415 words: 125,089

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

Alan Greenspan, Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, behavioural economics, 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 engineering, financial innovation, full employment, Great Leap Forward, 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, Post-Keynesian economics, probability theory / Blaise Pascal / Pierre de Fermat, prudent man rule, random walk, Richard Thaler, Robert Shiller, Robert Solow, 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

Even the most successful investors, people like Benjamin Graham and Warren Buffett, have had long periods of underperformance that would make any manager wince. Others zoom to fame on one or two brilliant calls, only to fall flat when their public following grows large. No one knows when their next takeoff will come, if ever. The fine performance record of unmanaged index funds is vulnerable to the same kinds of criticism, because the guidance provided by past performance is no more reliable here than it is for active managements. Indeed, more dramatically than any other portfolio, the indexes reflect all the fads and nonrational behavior that is going on in the market.

Yet a portfolio designed to track one of the major indexes, like the S&P 500, still has clear advantages over actively managed portfolios. Since turnover occurs only when a change is made in the index, transaction costs and capital-gains taxes can be held to a minimum. Furthermore, the fees charged by managers of index funds run about 0.10% of assets; active managers charge many times that, often exceeding 1% of assets. These built-in advantages are due neither to luck nor are they sensitive to some particular time period; they are working for the investor all the time. The second problem in relying on evidence of superior management skills is that winning strategies tend to have a brief half-life.


pages: 684 words: 212,486

Hunger: The Oldest Problem by Martin Caparros

"World Economic Forum" Davos, Berlin Wall, Bob Geldof, carbon credits, carbon footprint, classic study, commoditize, David Graeber, disinformation, European colonialism, Fall of the Berlin Wall, Food sovereignty, Gini coefficient, Great Leap Forward, income inequality, index fund, invention of agriculture, Jeff Bezos, Live Aid, Louis Pasteur, Mahatma Gandhi, Mohammed Bouazizi, Nelson Mandela, New Journalism, plutocrats, profit maximization, Slavoj Žižek, The Fortune at the Bottom of the Pyramid, the market place, Tobin tax, trade liberalization, trickle-down economics, Upton Sinclair, Washington Consensus, We are the 99%

And as more people sank money into Goldman’s food index, other bankers took note and created their own food indexes for their own clients. Investors were delighted to see the value of their venture increase, but the rising price of breakfast, lunch, and dinner did not align with the interests of those of us who eat. And so, the commodity index funds began to cause problems. Food became financialized. Food became an investment like oil, gold, silver, or any stock…And those who can’t pay the price, pay with hunger.1 Leslie kept his promise to explain how the market worked until I understood. And I was beginning to understand, but perhaps not in the way he intended.

Big banks suffered what many called “the perfect storm”—a crisis that affected stocks, loans, and international trade all at the same time. Everything collapsed; money was out in the harshest weather, and there was no shelter to invest it in. And then they found a cave: the Chicago Mercantile Exchange, or more specifically, food. In 2003 investments in food commodity index funds amounted to about $13 billion; in 2008 that number reached $317 billion. Around the same time, the United States had one of its best ever wheat harvests in its history. So much of it was reaped, nearly 55 million tons, that, after-market sales, the US Department of Agriculture announced that there was still nearly 18 million tons of grain in reserve.

At a conference in 2008, then World Bank president Robert Zoellick said that such protectionism was the cause of the price increases and “more freedom in the markets” was needed.7 Zoellick had held important economic positions in the Reagan and both Bush administrations, and had been the managing director of Goldman Sachs. But a report issued soon after from Zoellick’s former employer Goldman Sachs—the inventors of the commodities index fund—negated Zoellick’s claim by stating “without a doubt, the increase of funds invested in food commodities drove up prices.” The price of food rose everywhere, yet the increases did not affect everybody equally. When the price of wheat doubles in the United States, the price of bread increases between 5 and 10 percent.


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

The idiosyncratic risk can be positive or negative, is zero on average, and is independent of market moves. Knowing a strategy’s beta is useful for many reasons. For instance, if you mix a hedge fund with other investments, the beta risk is not diversified away, while idiosyncratic risk largely is. Furthermore, market exposure (“beta risk”) is easy to obtain at very low fees, for example, by buying index funds, exchange traded funds (ETFs), or futures contracts. Hence, you should not be paying high fees for market exposure. Many hedge funds are (or claim to be) market neutral. This important concept means that the hedge fund’s performance does not depend on whether the stock market is moving up or down.

See also backtests of strategies; investment styles; specific strategies hedge ratio (delta, Δ): in binomial option pricing model, 237; in convertible bond arbitrage, 275, 275f, 283; to make a strategy market neutral, 28; in slope trade, 251 hedging: as benefit of short-selling, 123; of convertible bonds versus straight bonds, 270; defined, 19; dynamic, 234, 235, 237–38, 240; in fixed-income arbitrage, 241; Scholes on broker-dealers and, 267; tail hedging, 59, 228 Heisenberg uncertainty principle of finance, 135 herding, 209, 210, 211–12 high-conviction trades: going for the jugular with, 12, 321; portfolio construction and, 55, 57 high-frequency trading (HFT), 10, 134, 134t, 135, 153–57; flash crash of 2010 and, 156–57; as market making, 44–45, 153–55 high-minus-low (HML) factor, 29, 137, 137n high-moneyness convertible bonds, 282, 282f, 284, 284f high water mark (HWM), 21–22, 35, 36f holding periods, 105–6; at Maverick Capital, 111–12 hurdle rate, 21 Huygens, Christiaan, 81 hybrid convertible bonds, 282, 282f idiosyncratic risk, 27–28; in information ratio, 30; washed out in quant investing, 144 illiquid assets, in asset allocation, 168, 170 illiquidity premium, 43 illiquid securities, defined, 63 IMA (investment management agreement), 25 immunization, 246, 251 implementation costs, 63–64. See also funding costs; transaction costs implementation shortfall (IS), 70–72, 73f implied cost of capital, 93 implied expected returns, 93 implied volatility, 239, 262 index arbitrage, 153 index funds, 28 index options: demand pressure for, 46; implied volatilities of, 239 index weightings, Maverick’s indifference to, 111 industry-neutral portfolio construction, 144; quant event of 2007 and, 146 industry rotation, 98 inefficient markets: Asness on successful strategies and, 164; defined, vii.


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, Bear Stearns, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business logic, business process, buy and hold, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, commoditize, complexity theory, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, currency risk, disinformation, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial engineering, financial innovation, fixed income, Glass-Steagall Act, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Bogle, John Meriwether, junk bonds, locking in a profit, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, mega-rich, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mutually assured destruction, Myron Scholes, new economy, New Journalism, Nick Leeson, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk free rate, risk-adjusted returns, risk/return, Salesforce, Satyajit Das, shareholder value, short selling, short squeeze, South Sea Bubble, statistical model, technology bubble, the medium is the message, the new new thing, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

There is the unknown unknown – pure uncertainty, things that never happened before. 4 Risk/reward – William Sharpe, John Lintner and Jack Treynor showed, using the CAPM (capital asset price model), that risk and return were related. If you took more risk then you needed higher returns. Old time investors wept with joy. They had been doing CAPM without knowing it. Fund managers had their own papal fashions, known as investment styles: see Table 3.1. Table 3.1 N Investment styles Style What is it? What does it mean? Index funds The fund manager invests to match some index like the S & P 500. The fund manager tries to pick stocks that will do better than the market. The fund manager chases whatever is going up. The fund manager has given up trying to beat the market. Active management Momentum investing Value investing L The fund manager invests in undervalued gems that he has uncovered through research.

Originally, the funds got their money from the rich, as the minimum investment was $1 million. Now, most of the money comes from traditional investors – insurance companies, fund managers and private banks. Investors gave up trying to beat the market. Weary of underperformance they switched to index funds, just buying the entire market. These days some fund managers invest about 90% in indexes to match the market (their beta). They give the remaining 10% to hedge funds to try to beat the market (the elusive alpha). Disgruntled fund managers and traders from dealers, especially derivative specialists, set up hedge funds.


Apocalypse Never: Why Environmental Alarmism Hurts Us All by Michael Shellenberger

"World Economic Forum" Davos, Albert Einstein, An Inconvenient Truth, Anthropocene, Asperger Syndrome, Bernie Sanders, Bob Geldof, Boeing 747, carbon footprint, carbon tax, Cesare Marchetti: Marchetti’s constant, clean tech, clean water, climate anxiety, Corn Laws, coronavirus, corporate social responsibility, correlation does not imply causation, cuban missile crisis, decarbonisation, deindustrialization, disinformation, Dissolution of the Soviet Union, Donald Trump, Dr. Strangelove, Elon Musk, energy transition, Extinction Rebellion, failed state, Garrett Hardin, Gary Taubes, gentleman farmer, global value chain, Google Earth, green new deal, Greta Thunberg, hydraulic fracturing, index fund, Indoor air pollution, indoor plumbing, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, land tenure, Live Aid, LNG terminal, long peace, manufacturing employment, mass immigration, meta-analysis, Michael Shellenberger, microplastics / micro fibres, Murray Bookchin, ocean acidification, off grid, oil shale / tar sands, Potemkin village, precautionary principle, purchasing power parity, Ralph Nader, renewable energy transition, Rupert Read, School Strike for Climate, Solyndra, Stephen Fry, Steven Pinker, supervolcano, Ted Nordhaus, TED Talk, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade route, Tragedy of the Commons, union organizing, WikiLeaks, Y2K

Barclays’s renewable energy investment banking chief, a director and assistant general counsel for SolarCity, the founder and CEO of Sun Run, the CEO of Solaria, and others have all served on Sierra Club Foundation’s board of directors.26 EDF’s board of trustees and advisory trustees have also included investors and executives from oil, gas, and renewable energy companies, including Halliburton, Sunrun, Northwest Energy, and many others.27 NRDC helped create and put $66 million in a Black Rock “Ex-Fossil Fuels Index Fund” stock fund that—in fact—invests heavily in natural gas companies. And in a 2014 financial report, NRDC disclosed that it had nearly $8 million invested in four separate renewable energy private equity funds.28 “If an environmentalist were to take a gander at [NRDC’s] holdings,” a reporter for an environmental website wrote in 2015, “she might raise a quizzical eyebrow: 1,200 shares of Halliburton, 500 of Transocean, 700 of Valero.

See Climate alarmism Albatrosses, 58, 121 Albertine Rift, 68, 73–74, 76, 77, 82, 276 Albert I of Belgium, 73 Aliso Canyon gas leak, 215 Al Jazeera, 214 Allen, Myles, 10–11 Al-Shabaab, 7 Altamont Pass Wind Farm, 194–95 Amazon fires, 5, 27–28, 30–31 Amazon rainforest after alarmism, 42–44 author’s work in, 29–30, 33–35 deforestation of, 28–32, 34, 35, 38–42, 303n economic development needs, 31, 32, 38–41, 42–43 environmental efforts, 27, 31–32, 38–39, 40 myth of supplying world’s oxygen, 27, 30, 43–44 American Association for the Advancement of Science, 243 American Association of Petroleum Geologists, 124 American Bird Conservancy, 197–98 American Enterprise Institute, 206 American Heart Association, 132 American Meteorological Society, 259 American Museum of Natural History (New York City), 65, 73 American Psychological Association, 22 Americans for Nuclear Responsibility, 217 Amnesty International, 29 Anderson, Kevin, 11–12 Anderson, Robert, 205 Animal rights, 135–36, 138 Antarctica glaciers, 2 Anti-nuclear movement, 161–68, 204–5, 209–13, 215–17, 220–21 Anxiety and climate alarmism, 22, 265, 269 Apex Clean Energy, 194 Apocalypse angst, 265–69 Apocalyptic environmentalism, 24–25, 263–65, 266–67, 270–71, 274–75, 285 Appeal-to-nature fallacy, 199, 261–62 AquaBounty Technologies, 120–22 Aquaculture, 120–22 AquAdvantage salmon, 120–22 Arctic sea ice decline, 250, 253 Argentina cattle ranching, 42, 142 GDP, 104 Aristotle, 265 Arizona Proposition 127, 220 Arms race, 161, 172–73 Asia Pulp and Paper (APP), 86 Asteroids, 25 Asthma, 211 Atlantic, The, 27 Atlantic Forest, 43 Atlantic Richfield, 205 Atomic bomb, 157–60, 171–72 Atomic bombings of Hiroshima and Nagasaki, 168, 174, 242 Atoms for Peace Speech, 159–60, 278 Augustine, Saint, 37–38 Australia fires, 3, 21, 37 Ausubel, Jesse, 122–24, 252, 256 Autism, 136 Avian bird flu, 89 Baboons, 17–18, 74–75, 281 Background extinction rate, 65–67 Bacon, Francis, 265, 275 Bald and Golden Eagle Protection Act, 194 Bald eagles, 183, 193, 194, 196 Baleen, 110, 111–12 Ballinger, Jeff, 88 Bangladesh infrastructure and poverty reduction, 225–26 sea level rise, 5, 16 Banqiao Dam accident, 150 Barbie, 86, 88–89, 92–93 Barnett, Emma, 9–11, 271 Bats, 181, 182, 194, 198, 364n Becker, Ernest, 268–69, 279 Beckham, Victoria, 85 Beef cattle, 28–29, 31–32, 37, 41–43, 91, 130–31, 136–37, 142 Beef consumption, 126–29, 134, 135, 137–38 Belgian Congo, 276 Bengali famine of 1942, 233 Berthélemy, Michel, 169–71 Big Fat Surprise, The (Teicholz), 132–33 Billiard balls, 53–54 “Billions will die” claim, 3, 6, 10–12, 15, 23 Biofuels, 61, 192–93, 227 Bioplastics, 60–61 Bird deaths plastic waste and, 47–48 wind turbines and, 182–83, 193–95, 196–98 Black Death, 260, 279 Black Rock “Ex-Fossil Fuels Index Fund,” 205 Bloom, Orlando, 222 Bloomberg, Michael, 209, 219, 220 Bodega Bay Nuclear Power Plant, 161, 162 Bohr, Niels, 172 Bolsonaro, Jair, 27–28, 30, 35, 40, 42 Bookchin, Murray, 187 Boserup, Ester, 240–41 Brazil. See also Amazon rainforest after Amazon alarmism, 42–44 author’s work in, 29–30, 33–35 deforestation in, 28–32, 34, 35, 38–42, 303n economic development, 32–33, 34–35, 38–41, 42–43, 226, 227 “greening” of, 32–33 land use, 42–43, 130, 306n sea turtle deaths, 47, 58 sugarcane ethanol, 193 Brazil Forest Code, 38–39, 40 Briscoe, John, 225–26, 228, 229, 244–45 British Medical Journal, 140 British Petroleum, 82 Brower, David, 165, 205, 237 Brown, Edmund “Pat,” 211–12 Brown, Jerry, 209–13, 215–17 Brown, Kathleen, 212, 215 Browne, Jackson, 209 Bruckner, Pascal, 266 Brundtland, Gro Harlem, 227 Brune, Michael, 202, 207–9, 220, 368n Buffett, Howard, 70, 71, 83 Buffett, Warren, 70 Bündchen, Gisele, 31–32, 33, 37, 38 Burger King, 28–29, 87 Bushmeat, 141–42 Bustamante, Carlos, 212–13 Buttigieg, Pete, 201–2 Bwindi Impenetrable National Park, 73, 74 Byrd, Robert, 123 Caldeira, Ken, 4 California Brown’s dirty war, 209–13, 215–17 nuclear energy opposition, 161–62, 209–13, 217, 219, 241–42, 284 plastic bag ban, 60 renewable energy, 179–80, 184, 188, 189, 195, 197 California Air Resources Board, 210, 212 California Energy Commission, 210, 212, 217 California Public Utilities Commission (CPUC), 215–17 California wildfires, 2, 5, 19–20, 21, 37 Calvinism, 270 Cameroon, 75, 79 Cancer, 117, 133, 148, 250, 251 Cap-and-trade, 205, 219, 258, 259 Carbon emissions, 2, 4, 5–6, 26, 30, 33, 60, 119, 154, 198, 254 bioenergy and, 192–93, 197 energy density and, 99, 101–2 food and, 120, 128, 130 France vs.


pages: 460 words: 130,820

The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion by Eliot Brown, Maureen Farrell

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Adam Neumann (WeWork), Airbnb, AOL-Time Warner, asset light, Bear Stearns, Bernie Madoff, Burning Man, business logic, cloud computing, coronavirus, corporate governance, COVID-19, Didi Chuxing, do what you love, don't be evil, Donald Trump, driverless car, East Village, Elon Musk, financial engineering, Ford Model T, future of work, gender pay gap, global pandemic, global supply chain, Google Earth, Gordon Gekko, greed is good, Greensill Capital, hockey-stick growth, housing crisis, index fund, Internet Archive, Internet of things, Jeff Bezos, John Zimmer (Lyft cofounder), Larry Ellison, low interest rates, Lyft, Marc Benioff, Mark Zuckerberg, Masayoshi Son, Maui Hawaii, Network effects, new economy, PalmPilot, Peter Thiel, pets.com, plant based meat, post-oil, railway mania, ride hailing / ride sharing, Robinhood: mobile stock trading app, rolodex, Salesforce, San Francisco homelessness, Sand Hill Road, self-driving car, sharing economy, Sheryl Sandberg, side hustle, side project, Silicon Valley, Silicon Valley startup, smart cities, Snapchat, SoftBank, software as a service, sovereign wealth fund, starchitect, Steve Jobs, subprime mortgage crisis, super pumped, supply chain finance, Tim Cook: Apple, Travis Kalanick, Uber and Lyft, Uber for X, uber lyft, vertical integration, Vision Fund, WeWork, women in the workforce, work culture , Y Combinator, Zenefits, Zipcar

For decades, these virtuosos were custodians of Americans’ wealth as households entrusted their retirement savings and extra cash to mutual fund managers like Fidelity, T. Rowe Price, and Vanguard. But by the 1990s, mutual fund managers were regularly outperformed by broader stock market indexes like the S&P 500 and the Nasdaq. Championed by Vanguard’s founder, Jack Bogle, index funds made many question the supposed genius of mutual fund stock pickers. Rather than pay modestly higher fees to the mutual funds, investors were becoming inclined to pay tiny fees for baskets of stocks that simply tracked an index of publicly traded companies. “Active managers” like Baker and Ellenbogen were losing ground—and assets under management—to these passive funds.

With Facebook, the beneficiaries of this early success were the private market investors, because the public market investors had less room for growth, given its already hulking size by the time it listed on the Nasdaq. The mutual funds were tired of missing out. They had spent years losing dollars to index funds. One good way to beat the stock market, they reasoned, was to buy companies that aren’t on the stock market. The private investment market, after all, wasn’t just about buying and selling through a broker. It was governed by relationships, and CEOs could pick and choose which investors they wanted.


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

accelerated depreciation, activist fund / activist shareholder / activist investor, air freight, ASML, barriers to entry, Basel III, Black Monday: stock market crash in 1987, book value, 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, currency risk, discounted cash flows, distributed generation, diversified portfolio, Dutch auction, energy security, equity premium, equity risk premium, financial engineering, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, low interest rates, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, proprietary trading, purchasing power parity, quantitative easing, risk free rate, risk/return, Robert Shiller, Savings and loan crisis, 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, two and twenty, value at risk, yield curve, zero-coupon bond

We call them nonfundamental, because their strategies might be rational and sophisticated even though not based on fundamentals. 4 Our two investor groups are quite similar to feedback traders and smart-money investors, as in W. N. Goetzmann and M. Massa, “Daily Momentum and Contrarian Behavior of Index Fund Investors,” Journal of Financial and Quantitative Analysis 37, no. 3 (September 2002): 375–389. MARKETS AND FUNDAMENTALS: A MODEL 67 EXHIBIT 5.1 Model of Share Price Trading Boundaries Time = T 100 90 Upper trading boundary 80 Upper intrinsic value Share price Price 70 60 Lower intrinsic value Lower trading boundary 50 40 30 20 Time noise traders act not only on price movements but also on random, insignificant events, there will also be price oscillations within the band.

Singal, “The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation,” Journal of Finance 59, no. 4 (August 2004): 1901–1929. 31 See also, for example, L. Harris and E. Gurel, “Price and Volume Effects Associated with Changes in the S&P 500: New Evidence for the Existence of Price Pressures,” Journal of Finance 41 (1986): 815–830; and R. A. Brealey, “Stock Prices, Stock Indexes, and Index Funds,” Bank of England Quarterly Bulletin (2000): 61–68. 32 For further details, see M. Goedhart and R. Huc, “What Is Stock Membership Worth?” McKinsey on Finance, no. 10 (Winter 2004): 14–16. MARKET MECHANICS DON’T MATTER 87 EXHIBIT 5.14 Delisting from U.S./UK Exchanges: No Value Impact on Companies from Developed Markets 5 4 Average return Cumulative returns,¹ % 3 2 Average abnormal return 1 0 –25 2 –20 –15 –10 –5 0 5 10 15 20 25 –1 –2 –3 –4 –5 Day relative to date of announcement 1 Sample of 229 delistings from New York Stock Exchange, NASDAQ, or London International Main Market.

WHICH INVESTORS MATTER? 687 matter greatly in the short term. However, they don’t take a view on companies’ long-term strategies and business performance. Mechanical investors control about 35 to 40 percent of institutional equity in the United States. They make decisions based on strict criteria or rules. Index funds are the prototypical mechanical investor, merely building their portfolios by matching the composition of an index such as the S&P 500. Another group of mechanical investors are the so-called quantitative investors, who use mathematical models to build their portfolios and make no qualitative judgments on a company’s intrinsic value.


pages: 309 words: 54,839

Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts by David Gerard

altcoin, Amazon Web Services, augmented reality, Bernie Madoff, bitcoin, Bitcoin Ponzi scheme, blockchain, Blythe Masters, Bretton Woods, Californian Ideology, clean water, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, distributed ledger, Dogecoin, Dr. Strangelove, drug harm reduction, Dunning–Kruger effect, Ethereum, ethereum blockchain, Extropian, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, functional programming, index fund, information security, initial coin offering, Internet Archive, Internet of things, Kickstarter, litecoin, M-Pesa, margin call, Neal Stephenson, Network effects, operational security, peer-to-peer, Peter Thiel, pets.com, Ponzi scheme, Potemkin village, prediction markets, quantitative easing, RAND corporation, ransomware, Ray Kurzweil, Ross Ulbricht, Ruby on Rails, Satoshi Nakamoto, short selling, Silicon Valley, Silicon Valley ideology, Singularitarianism, slashdot, smart contracts, South Sea Bubble, tulip mania, Turing complete, Turing machine, Vitalik Buterin, WikiLeaks

market in computing, like Amazon Web Services except you can only pay using their token;310 Gnosis offers semiautomatic prediction markets using their token;311 SingularDTV is a bizarre plan to fund a TV show about the Singularity in which a Caribbean island adopts Ethereum as its currency and Austrian economics works (this one gets its own section later in the book); Iconomi is an index fund of other ICOs.312 The token smart contracts are often incompetent in both intended functionality and programming ability.313 This turns out not to matter as long as they do the basic job: attract buyers and sell tokens. Status raised 300,000 ETH (then over $100 million) to … write an Ethereum phone app.


pages: 467 words: 154,960

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

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

Mark Abraham Quantitative Capital Management, L.P. 10 Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets “I often hear people swear they make money with technical analysis. Do they really? The answer, of course, is that they do. People make money using all sorts of strategies, including some involving tea leaves and sunspots. The real question is: Do they make more money than they would investing in a blind index fund that mimics the performance of the market as a whole? Most academic financial experts believe in some form of the random-walk theory and consider technical analysis almost indistinguishable from a pseudoscience whose predictions are either worthless or, at best, so barely discernibly better than chance as to be unexploitable because of transaction costs.”12 Markets aren’t chaotic, just as the seasons follow a series of predictable trends, so does price action.

Large positive returns are penalized, and thus the removal of the highest returns from the distribution can increase the Sharpe ratio: a case of reductio ad absurdum for Sharpe ratio as a universal measure of quality!” Other readers on my blog responded to Bhardwaj: “Of course Geetesh Bhardwaj’s affiliation is significant. Vanguard is famous for taking the position that actively managed funds are a waste of time. That is why the vast majority of their assets under management are in indexed funds. So is it surprising that their marketing department hired an economics major to write reports that show active management in a bad light? Don’t hold it against Geetesh. His previous job being a vice president of a disaster like AIG can’t look good on a resume. He’s probably lucky to be working at all.”


pages: 215 words: 59,188

Seriously Curious: The Facts and Figures That Turn Our World Upside Down by Tom Standage

"World Economic Forum" Davos, agricultural Revolution, augmented reality, autonomous vehicles, Big Tech, blood diamond, business logic, corporate governance, CRISPR, deep learning, Deng Xiaoping, Donald Trump, Dr. Strangelove, driverless car, Elon Musk, failed state, financial independence, gender pay gap, gig economy, Gini coefficient, high net worth, high-speed rail, income inequality, index fund, industrial robot, Internet of things, invisible hand, it's over 9,000, job-hopping, Julian Assange, life extension, Lyft, M-Pesa, Mahatma Gandhi, manufacturing employment, mega-rich, megacity, Minecraft, mobile money, natural language processing, Nelson Mandela, plutocrats, post-truth, price mechanism, private spaceflight, prosperity theology / prosperity gospel / gospel of success, purchasing power parity, ransomware, reshoring, ride hailing / ride sharing, Ronald Coase, self-driving car, Silicon Valley, Snapchat, South China Sea, speech recognition, stem cell, supply-chain management, transaction costs, Uber and Lyft, uber lyft, undersea cable, US Airways Flight 1549, WikiLeaks, zoonotic diseases

Yet in May 2013, the United States Congress declared St Louis the chess capital of the country. How did this happen? The rise of St Louis as a centre for chess dates back to 2008, when Rex Sinquefield chose the promotion of chess in his home town as a retirement project after making a fortune pioneering stockmarket index funds. (Mr Sinquefield is also politically active as a campaigner for the abolition of income tax and a sponsor of right-wing think-tanks.) In 2008 he founded the Chess Club and Scholastic Centre of St Louis, which has since become the headquarters of American chess. The 6,000-sq-ft centre includes a hall for tournaments, classrooms, a library and play areas.


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

algorithmic trading, asset allocation, automated trading system, backtesting, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, book value, Brownian motion, business continuity plan, buy and hold, classic study, compound rate of return, Edward Thorp, Elliott wave, endowment effect, financial engineering, fixed income, general-purpose programming language, index fund, Jim Simons, John Markoff, Long Term Capital Management, loss aversion, p-value, paper trading, price discovery process, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Ray Kurzweil, Renaissance Technologies, risk free rate, risk-adjusted returns, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, systematic trading, transaction costs

How Does It Compare with a Benchmark and How Consistent Are Its Returns? This point seems obvious when the strategy in question is a stocktrading strategy that buys (but not shorts) stocks. Everybody seems to know that if a long-only strategy returns 10 percent a year, it is not too fantastic because investing in an index fund will generate as much, if not better, return on average. However, if the strategy is a long-short dollar-neutral strategy (i.e., the portfolio holds long and short positions with equal capital), then 10 percent is quite a good return, because then the benchmark of comparison is not the market index, but a riskless asset such as the yield of the three-month U.S.


pages: 207 words: 63,071

My Start-Up Life: What A by Ben Casnocha, Marc Benioff

affirmative action, Albert Einstein, barriers to entry, Bonfire of the Vanities, business process, call centre, coherent worldview, creative destruction, David Brooks, David Sedaris, Do you want to sell sugared water for the rest of your life?, don't be evil, fear of failure, hiring and firing, independent contractor, index fund, informal economy, Jeff Bezos, Joan Didion, Lao Tzu, Larry Ellison, Marc Benioff, Menlo Park, open immigration, Paul Graham, place-making, public intellectual, Ralph Waldo Emerson, Salesforce, Sand Hill Road, side project, Silicon Valley, social intelligence, SoftBank, Steve Jobs, Steven Pinker, superconnector, technology bubble, traffic fines, Tyler Cowen, Year of Magical Thinking

Online: Find other nonbusiness books that will rock your world. Day 12. Research charities, give money, and then talk to your friends about why you did it. Tune your antenna to causes that excite you. Online: Find out about charities that are changing the world. Day 13. Build a smart “personal finance infrastructure.” Start saving money. Invest in index funds. Keep and track a budget. Get wealthy. Online: Personal finance 101. Day 14. Write a blog. Put yourself out there. Share your ideas. Disclose yourself. Become transparent. Online: How to start a blog and which blogs to read. Day 15. Pour your heart into it. Say what you mean and mean what you say.


pages: 199 words: 61,648

Having and Being Had by Eula Biss

Capital in the Twenty-First Century by Thomas Piketty, David Graeber, Donald Trump, Garrett Hardin, glass ceiling, Haight Ashbury, index fund, invisible hand, Jeff Bezos, Joan Didion, job satisfaction, Landlord’s Game, means of production, moral hazard, new economy, Norman Mailer, Occupy movement, precariat, Robert Shiller, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tragedy of the Commons, trickle-down economics, Upton Sinclair, wage slave, wages for housework

I don’t explain the difference between my job and theirs—the higher course load, the lower pay, the basement office, the glass ceiling. I just say, I’m not like them. Then you’re going to need to invest aggressively, he says. High risk, high return. He shows me a pie chart with stocks and bonds. He’s talking about various kinds of investment now, index funds and hedge funds and options and futures. I ask, halfheartedly, what futures are. His explanation doesn’t clarify much, but I didn’t expect it to. I can tell that he doesn’t entirely understand all the intricacies of this business himself. I wonder, silently, if I might actually be buying other people’s futures.


pages: 554 words: 168,114

Oil: Money, Politics, and Power in the 21st Century by Tom Bower

"World Economic Forum" Davos, addicted to oil, Alan Greenspan, An Inconvenient Truth, Ayatollah Khomeini, banking crisis, bonus culture, California energy crisis, corporate governance, credit crunch, energy security, Exxon Valdez, falling living standards, fear of failure, financial engineering, forensic accounting, Global Witness, index fund, interest rate swap, John Deuss, Korean Air Lines Flight 007, kremlinology, land bank, LNG terminal, Long Term Capital Management, margin call, megaproject, Meghnad Desai, Mikhail Gorbachev, millennium bug, MITM: man-in-the-middle, Nelson Mandela, new economy, North Sea oil, offshore financial centre, oil shale / tar sands, oil shock, Oscar Wyatt, passive investing, peak oil, Piper Alpha, price mechanism, price stability, Ronald Reagan, shareholder value, short selling, Silicon Valley, sovereign wealth fund, transaction costs, transfer pricing, zero-sum game, éminence grise

The hysteria drowned out those who maintained during the early summer of 2008 that there were ample supplies. Bowing to the mantra of irreversible shortages, speculators appeared to have grabbed control of oil from traditional traders. The number of contracts held by Nymex traders rose from 850,000 in 2003 to 2,700,000 in 2008. Like a herd, pension funds, index funds, hedge funds and investment bankers introduced an estimated additional $80 billion into oil trading. Even that statistic fueled further speculation. Everyone knew that the growth of the swaps was huge, but beyond that part of the OTC market regulated by Nymex, no one knew its size. The mystery in New York and London was the identity of the participants.

Data produced by Barclays bank in June suggested that sentiment rather than facts was influencing prices: only 2 percent of the “long” positions, reported Nymex, was owned by speculators without seeking ownership, so no physical oil was being held back from the market. Speculative bets, agreed the CFTC, had fallen by 48.5 percent. The regulators did not realize that index fund managers were compelled by internal rules to sell their future contracts as prices rose. Contrary to the politicians’ jargon, some speculators were actually dumping oil. Beyond the politicians’ understanding, more critical events were unfolding. Eager to lead the public outcry, British Prime Minister Gordon Brown joined Bush in accusing Saudi Arabia of manipulating prices by cutting production between March 2006 and April 2007 by about a million barrels a day.


pages: 598 words: 169,194

Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle by Diana B. Henriques

accounting loophole / creative accounting, airport security, Albert Einstein, AOL-Time Warner, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, break the buck, British Empire, buy and hold, centralized clearinghouse, collapse of Lehman Brothers, computerized trading, corporate raider, diversified portfolio, Donald Trump, dumpster diving, Edward Thorp, financial deregulation, financial engineering, financial thriller, fixed income, forensic accounting, Gordon Gekko, index fund, locking in a profit, low interest rates, mail merge, merger arbitrage, messenger bag, money market fund, payment for order flow, plutocrats, Ponzi scheme, Potemkin village, proprietary trading, random walk, Renaissance Technologies, riskless arbitrage, Ronald Reagan, Savings and loan crisis, short selling, short squeeze, Small Order Execution System, source of truth, sovereign wealth fund, too big to fail, transaction costs, traveling salesman

For most of his career, he was not registered with the SEC as an investment adviser, surely something a small pension plan trustee or IRA investor would have noticed. True, he paid relatively modest returns—roughly equal to an S&P 500 index mutual fund—but his results were far less volatile and, hence, much safer than an index fund. How was that possible? If he was a lot safer than an index fund, shouldn’t his returns have been a lot lower? As Madoff’s victims sought redress, the question of who should have known would split the world cleanly into two groups. One group looked at Madoff’s stature in the industry, his long track record with his investors, his obvious wealth, and his phoney but immensely convincing paper trail—voluminous account statements, simulated DTCC screens, bogus trading terminals for conducting fake trades—and asked, “How could his victims have ever figured it out?”


pages: 923 words: 163,556

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures by Frank J. Fabozzi

algorithmic trading, Benoit Mandelbrot, Black Monday: stock market crash in 1987, capital asset pricing model, collateralized debt obligation, correlation coefficient, distributed generation, diversified portfolio, financial engineering, fixed income, global macro, index fund, junk bonds, Louis Bachelier, Myron Scholes, p-value, power law, quantitative trading / quantitative finance, random walk, risk free rate, risk-adjusted returns, short selling, stochastic volatility, subprime mortgage crisis, Thomas Bayes, transaction costs, value at risk

TABLE 6.3 Data to Estimate the Characteristic Line of Two Large-Cap Mutual Funds Interpreting the results of the performance measure estimates a, we see that for fund A there is a negative performance relative to the market while for it appears that fund B outperformed the market. For the estimated betas (i.e., b) we obtain for fund A that with each expected unit return of the S&P 500 index, fund A yields, on average, a return of 84% of that unit. This is roughly equal for fund B where for each unit return to be expected for the index, fund B earns a return of 82% that of the index. So, both funds are, as expected, positively related to the performance of the market. The goodness-of-fit measure (R2) is 0.92 for the characteristic line for fund A and 0.86 for fund B.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-border payments, currency peg, currency risk, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Glass-Steagall Act, Herman Kahn, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Japanese asset price bubble, joint-stock company, junk bonds, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Mary Meeker, Michael Milken, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, Suez canal 1869, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

While many of the stocks in Japanese firms were owned by other firms in the same ‘Keiretsu’ (successors to the Zaibatsu), one-third of the stocks were owned by individuals. In effect each firm was a combination of an operating company and a mutual fund. As the market value of Japanese stocks increased, investors resident in the United States and Western Europe bought more Japanese stocks. Global stock index funds wanted to own more Japanese shares. The rates of return to non-Japanese investors on their purchases of shares in Japanese firms were high since these investors benefited from the combination of the increase in the price of the stocks and the increase in the foreign exchange value of the Japanese yen.

Many of the once-developing countries were re-labeled emerging-market countries in the early 1990s after the overhang of past-due bank loans were funded into long-term bonds under the Brady plan. Some bright investment banker came up with the very profitable idea that emerging market equities were a new ‘asset class’. Every pension fund and every mutual fund that was following an index fund approach toward developing a global portfolio believed it had to acquire stocks that were available in these countries; the sales spiel was that the rates of return would be higher than the rates of return on equities available in the industrial countries because their rates of economic growth were higher.


pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, Bear Stearns, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, Glass-Steagall Act, index fund, invisible hand, junk bonds, light touch regulation, margin call, Michael Milken, moral hazard, Nick Leeson, Northern Rock, proprietary trading, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail, two and twenty, zero-sum game

There is a major difference between short-term trading and “gambling”, as in the latter case an unearned return is sought based on chance, rather than work or effort. Hedge funds or investment banks trading distressed securities are likely to carry out at least as much research as long-only investment managers, and significantly more than index funds, given the high levels of risk they take; it is therefore difficult to equate this type of activity to gambling. This raises interesting questions about whether, for example, a professional poker player who bases their playing on an understanding of mathematical odds is therefore strictly a “gambler” (based on a narrow Recent Ethical Issues in Investment Banking 93 definition).


pages: 279 words: 71,542

Digital Minimalism: Choosing a Focused Life in a Noisy World by Cal Newport

Black Lives Matter, Burning Man, Cal Newport, data science, Donald Trump, Dunbar number, financial independence, game design, Hacker News, index fund, Jaron Lanier, Kevin Kelly, Kickstarter, lifelogging, longitudinal study, Mark Zuckerberg, Mr. Money Mustache, Pepto Bismol, pre–internet, price discrimination, race to the bottom, ride hailing / ride sharing, Silicon Valley, Skype, Snapchat, Steve Jobs, TED Talk

* For those who are interested, the central insight of the FI 2.0 movement is that if you can radically reduce your living expenses, you gain two advantages: (1) you can save money at a much faster pace (a 50 to 70 percent savings rate is common), and (2) you don’t have to save as much to become independent, as the expenses you need to meet are lower. If you need only $30,000 take-home pay to live comfortably, for example, then saving $750,000 in a low-cost index fund will likely cover these expenses (with inflation adjustments) for decades. Now imagine that you’re a young couple with two good salaries that generate $100,000 in take-home pay each year. Because you need only $30,000 to live on, you can save $70,000 a year. Assuming a 5 to 6 percent annual growth rate, you’d hit your target in eight to nine years.


pages: 242 words: 71,943

Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity by Charles L. Marohn, Jr.

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, A Pattern Language, American Society of Civil Engineers: Report Card, anti-fragile, bank run, big-box store, Black Swan, bread and circuses, Bretton Woods, British Empire, business cycle, call centre, cognitive dissonance, complexity theory, corporate governance, Detroit bankruptcy, Donald Trump, en.wikipedia.org, facts on the ground, Ferguson, Missouri, gentrification, global reserve currency, high-speed rail, housing crisis, index fund, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jane Jacobs, Jeff Bezos, low interest rates, low skilled workers, mass immigration, megaproject, Modern Monetary Theory, mortgage debt, Network effects, new economy, New Urbanism, paradox of thrift, Paul Samuelson, pensions crisis, Ponzi scheme, quantitative easing, reserve currency, restrictive zoning, Savings and loan crisis, the built environment, The Death and Life of Great American Cities, trickle-down economics, Upton Sinclair, urban planning, urban renewal, walkable city, white flight, women in the workforce, yield curve, zero-sum game

It’s grounded, yet with a little bit of embellishment. It feels right. Unfortunately, the medium investor is the sucker at the card table, the one unlikely to experience more than modest gains but to suffer disproportionately when things go poorly. They have little upside potential but lots of downside risk. They invest heavily in index funds to capture the long-term compounding of the market without understanding the decades-long gaps between market highs, corrections, and a return to the prior high. There is comfort in the crowd. Medium. Sophisticated investors protect themselves from loss while simultaneously exposing themselves to upside potential.


pages: 226 words: 65,516

Kings of Crypto: One Startup's Quest to Take Cryptocurrency Out of Silicon Valley and Onto Wall Street by Jeff John Roberts

4chan, Airbnb, Alan Greenspan, altcoin, Apple II, Bernie Sanders, Bertram Gilfoyle, Big Tech, bitcoin, blockchain, Blythe Masters, Bonfire of the Vanities, Burning Man, buttonwood tree, cloud computing, coronavirus, COVID-19, creative destruction, Credit Default Swap, cryptocurrency, democratizing finance, Dogecoin, Donald Trump, double helix, driverless car, Elliott wave, Elon Musk, Ethereum, ethereum blockchain, family office, financial engineering, Flash crash, forensic accounting, hacker house, Hacker News, hockey-stick growth, index fund, information security, initial coin offering, Jeff Bezos, John Gilmore, Joseph Schumpeter, litecoin, Marc Andreessen, Mark Zuckerberg, Masayoshi Son, Menlo Park, move fast and break things, Multics, Network effects, offshore financial centre, open borders, Paul Graham, Peter Thiel, Ponzi scheme, prediction markets, proprietary trading, radical decentralization, ransomware, regulatory arbitrage, reserve currency, ride hailing / ride sharing, Robert Shiller, rolodex, Ross Ulbricht, Sam Altman, Sand Hill Road, Satoshi Nakamoto, sharing economy, side hustle, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, smart contracts, SoftBank, software is eating the world, Startup school, Steve Ballmer, Steve Jobs, Steve Wozniak, transaction costs, Vitalik Buterin, WeWork, work culture , Y Combinator, zero-sum game

In addition to playing it safe because of regulators, a big reason Coinbase wasn’t offering more than four coins was because its engineering strategy was adrift. Instead of working to support new coins, Coinbase engineers were fiddling with ways to repackage existing offerings—creating bundles and index funds that offered the same boring coins. In another corner of the office, engineers were at work building something called Toshi. This was a tool to navigate dApps—short for decentralized applications—which Brian and others believed would be the future of crypto. A dApp can be anything from a word-processing tool to a prediction market, but what makes dApps distinct is the lack of a central company or manager.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Bernie Madoff, Black-Scholes formula, book value, British Empire, business cycle, buy and hold, buy the rumour, sell the news, Claude Shannon: information theory, clean tech, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, do what you love, Edward Thorp, family office, financial independence, fixed income, Flash crash, global macro, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, legacy carrier, Long Term Capital Management, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, Michael Milken, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Reminiscences of a Stock Operator, Right to Buy, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Savings and loan crisis, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

So if, for example, emerging markets are up an average of 10 percent per year, and he is up 6 percent per year, they are just looking at the fact that their investment is up. Besides marketing, what other reasons are there for investors choosing long-only emerging market funds over emerging market indexes? The other reason is that even index funds in emerging markets underperform the index because of high fees. Why would you buy a guaranteed loser? Marketing guys hold out the hope that maybe you will pick one of the funds that outperform the index. Why did you recently decide to give back about three-quarters of your investor assets? The type of trading around our core investment positions that I do to control risk in the portfolio is very time-consuming and burns a lot of heart muscle.

The problem, however, is that there is no correlation between those who did well in the past 3, 5, or 10 years and those who continue to do well in the future. Since investors can’t predict which 30 percent of the managers will do better than the market, the obvious conclusion is to simply go with an index fund, which has lower cost and is tax efficient. And that makes some sense. But it turns out that most popular indexes, such as the S&P 500 and Russell indexes, are very inefficient because they are market capitalization weighted. In a market capitalization weighted index, the higher the price of a stock, the larger the percentage of the index it will represent.


pages: 579 words: 183,063

Tribe of Mentors: Short Life Advice From the Best in the World by Timothy Ferriss

"World Economic Forum" Davos, 23andMe, A Pattern Language, agricultural Revolution, Airbnb, Albert Einstein, Alvin Toffler, Bayesian statistics, bitcoin, Black Lives Matter, Black Swan, blockchain, Brownian motion, Buckminster Fuller, Clayton Christensen, cloud computing, cognitive dissonance, Colonization of Mars, corporate social responsibility, cryptocurrency, David Heinemeier Hansson, decentralized internet, dematerialisation, do well by doing good, do what you love, don't be evil, double helix, driverless car, effective altruism, Elon Musk, Ethereum, ethereum blockchain, family office, fear of failure, Gary Taubes, Geoffrey West, Santa Fe Institute, global macro, Google Hangouts, Gödel, Escher, Bach, haute couture, helicopter parent, high net worth, In Cold Blood by Truman Capote, income inequality, index fund, information security, Jeff Bezos, job satisfaction, Johann Wolfgang von Goethe, Kevin Kelly, Lao Tzu, Larry Ellison, Law of Accelerating Returns, Lyft, Mahatma Gandhi, Marc Andreessen, Marc Benioff, Marshall McLuhan, Max Levchin, Mikhail Gorbachev, minimum viable product, move fast and break things, Mr. Money Mustache, Naomi Klein, Neal Stephenson, Nick Bostrom, non-fiction novel, Peter Thiel, power law, profit motive, public intellectual, Ralph Waldo Emerson, Ray Kurzweil, Salesforce, Saturday Night Live, Sheryl Sandberg, side project, Silicon Valley, Skype, smart cities, smart contracts, Snapchat, Snow Crash, Steve Jobs, Steve Jurvetson, Steven Pinker, Stewart Brand, sunk-cost fallacy, TaskRabbit, tech billionaire, TED Talk, Tesla Model S, too big to fail, Turing machine, uber lyft, Vitalik Buterin, W. E. B. Du Bois, web application, Whole Earth Catalog, Y Combinator

Pete and his wife live near Boulder, Colorado, with their now 11-year-old son, and they have not had real jobs since 2005. This begs the question of “How?” In essence, they accomplished this early retirement by optimizing all aspects of their lifestyle for maximal fun at minimal expense, and by using basic index-fund investing. Their average annual expenses total a mere $25,000 to $27,000, and they do not feel in want of anything. Since 2005, all three of them have explored a freeform life of interesting projects, side businesses, and adventures. In 2011, Pete started writing about his philosophy on the Mr.

It’s an assumption because it happens automatically if you follow the standard path: Spend 85 percent or more of your income and borrow freely if you ever want something that you don’t yet have the money for. You’ll spend most of your life with your head just above the financial water, if everything goes well. Instead, rewind that story and think of it in terms of freedom: You are free for life once you have 25 to 30 times your annual spending locked up and working for you in low-fee index funds or other relatively boring investments. If you save the standard 15 percent of your income, this freedom arrives roughly at age 65. If you can crank that up to 65 percent, you’re free just after your 30th birthday, and you often end up a lot happier in the process. Of course, there are other ways to solve the money problem: Own a profitable business, or find work that is joyful enough to do it for life.


pages: 251 words: 76,868

How to Run the World: Charting a Course to the Next Renaissance by Parag Khanna

"World Economic Forum" Davos, Albert Einstein, Asian financial crisis, back-to-the-land, bank run, blood diamond, Bob Geldof, borderless world, BRICs, British Empire, call centre, carbon footprint, carbon tax, charter city, clean tech, clean water, cloud computing, commoditize, congestion pricing, continuation of politics by other means, corporate governance, corporate social responsibility, Deng Xiaoping, Doha Development Round, don't be evil, double entry bookkeeping, energy security, European colonialism, export processing zone, facts on the ground, failed state, financial engineering, friendly fire, global village, Global Witness, Google Earth, high net worth, high-speed rail, index fund, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Kickstarter, Kiva Systems, laissez-faire capitalism, Live Aid, Masdar, mass immigration, megacity, Michael Shellenberger, microcredit, military-industrial complex, mutually assured destruction, Naomi Klein, Nelson Mandela, New Urbanism, no-fly zone, off grid, offshore financial centre, oil shock, One Laptop per Child (OLPC), open economy, out of africa, Parag Khanna, private military company, Productivity paradox, race to the bottom, RAND corporation, reserve currency, Salesforce, Silicon Valley, smart grid, South China Sea, sovereign wealth fund, special economic zone, sustainable-tourism, Ted Nordhaus, The Fortune at the Bottom of the Pyramid, The Wisdom of Crowds, too big to fail, trade liberalization, trickle-down economics, UNCLOS, uranium enrichment, Washington Consensus, X Prize

To set up stock exchanges and find brokers to handle the billions of dollars in investment capital that an ever-growing number of American pension and mutual funds want to invest outside America. The firm of Auerbach Grayson makes their markets liquid, and the rest can take care of itself. It has built formal ties with stock exchanges in 128 countries, many of which have delivered impressive returns on index funds in recent years. Even when the worst news is coming out of countries—the Israel-Hezbollah war of 2006, the Kenyan riots of 2008, Israel’s incursion into Palestinian Gaza in 2008, and the Sri Lankan military campaign against the Tamil Tigers in 2009—Auerbach sees arrows pointing upward. “Even when they’re bombing in Gaza, they’re trading in Ramallah,” he says.


The Handbook of Personal Wealth Management by Reuvid, Jonathan.

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

Real estate investment trusts (REITs) There are also one or two REITs with forestry exposure, the best known including Potlatch and Plum Creek Timber in the United States, which has about 70 per cent timber exposure according to market commentator George Nichols in June 2008.4 Exchange-traded funds (ETFs) Designed to track the performance of a benchmark like the FTSE 100 or S&P 500, ETFs combine the diversification of a fund with the flexibility of a share (live pricing, ease of access and continuous dealing). Examples are Claymore/Clear Global Timber Index ETF (‘CUTS’) and iShares S & P Global Timber & Forestry Index Fund (managed by Barclays Global Investment) (‘WOOD’). George Nichols has pointed out that, despite their labels, some of these may in fact have a limited exposure to organic growth.5 He mentions that one of the major holdings of the CUTS ETF is International Paper, which derived only about 2 per cent of its annual income from forestry/timber revenues in 2007.


pages: 273 words: 78,850

The Millionaire Next Door: The Surprising Secrets of America's Wealthy by Thomas Stanley, William Danko

affirmative action, cotton gin, estate planning, financial independence, high net worth, index fund, money market fund, mortgage tax deduction, the market place, very high income, Yogi Berra

They never considered how much it cost to purchase cigarettes. They viewed such purchases as small expenses. But small expenses become big expenses over time. Small amounts invested periodically also become large investments over time. What if the Friends had invested their cigarette money in the stock market (index fund) during their lifetimes? How much would it have been worth? Nearly $100,000. And what if they had used their cigarette money to purchase shares in a tobacco company? What if they had purchased, reinvested all dividends, and never sold shares in Philip Morris instead of smoking Philip Morris products for forty-six years?


pages: 278 words: 70,416

Smartcuts: How Hackers, Innovators, and Icons Accelerate Success by Shane Snow

3D printing, Airbnb, Albert Einstein, Apollo 11, attribution theory, augmented reality, barriers to entry, conceptual framework, correlation does not imply causation, David Heinemeier Hansson, deliberate practice, disruptive innovation, Elon Musk, fail fast, Fellow of the Royal Society, Filter Bubble, Ford Model T, Google X / Alphabet X, hive mind, index card, index fund, Isaac Newton, job satisfaction, Khan Academy, Kickstarter, lateral thinking, Law of Accelerating Returns, Lean Startup, Mahatma Gandhi, meta-analysis, Neil Armstrong, pattern recognition, Peter Thiel, popular electronics, Ray Kurzweil, Richard Florida, Ronald Reagan, Ruby on Rails, Saturday Night Live, self-driving car, seminal paper, Sheryl Sandberg, side project, Silicon Valley, social bookmarking, Steve Jobs, superconnector, vertical integration

What he found was more dramatic than he expected. Brands with lofty purposes beyond making profits wildly outperformed the S&P 500. From 2001 to 2011, an investment in the 50 most idealistic brands—the ones opting for the high-hanging purpose and not just low-hanging profits—would have been 400 percent more profitable than shares of an S&P index fund. Why is this? The simple explanation is that human nature makes us surprisingly willing to support big ideals and big swings. That means more customers, more investors, and more word-of-mouth for the dreamers. So there’s evidence both in business and academia to support 10x Thinking. But not every big dream gains followers or comes true.


pages: 183 words: 17,571

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

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

eBook <www.wowebook.com> What is certain is that equities are a claim on future earnings, which are always subject to events and shifts in sentiment. Given that, companies that make money in transparent ways and can actually pay a dividend to shareholders are often safer bets. The virtues of diversification have been oversold because in a panic, assets tend to fall across the board, but investing in index funds that mirror whole markets or broadly diversified mutual funds is probably well advised for the average investor. One point to bear in mind is that the emerging markets are likely to grow much faster over the next several years and decades than the mature economies of the West. Direct investing in such markets can be risky and costly, but you can participate in their growth by investing in US companies with strong and growing footprints in those countries.


pages: 289 words: 77,532

The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders by Kate Kelly

"Hurricane Katrina" Superdome, Alan Greenspan, Bakken shale, bank run, Bear Stearns, business cycle, commodity super cycle, Credit Default Swap, diversification, fixed income, Gordon Gekko, index fund, light touch regulation, locking in a profit, London Interbank Offered Rate, Long Term Capital Management, margin call, oil-for-food scandal, paper trading, peak oil, Ponzi scheme, proprietary trading, risk tolerance, Ronald Reagan, side project, Silicon Valley, Sloane Ranger, sovereign wealth fund, supply-chain management, the market place

Critics from Morgan Stanley and Goldman Sachs to Cargill and the International Swaps and Derivatives Association blasted the intended curbs, complaining they were ineffective, undermining, and unnecessary. The Futures Industry Association echoed Dunn’s language, calling the limits “a ‘solution’ to a nonexistent problem.” Large commodity index fund managers were equally annoyed. The proposal would “hamper” the ability to “prudently” manage investments, argued U.S. Commodity Funds. Over time, more than fifteen thousand comment letters were dispatched. For the rulemakers, the attacks were wearying, and Chilton, whose mere appearance could often cause chatter, had become a polarizing character.


pages: 287 words: 80,180

Blue Ocean Strategy, Expanded Edition: How to Create Uncontested Market Space and Make the Competition Irrelevant by W. Chan Kim, Renée A. Mauborgne

Asian financial crisis, Blue Ocean Strategy, borderless world, call centre, classic study, cloud computing, commoditize, creative destruction, disruptive innovation, endogenous growth, Ford Model T, haute couture, index fund, information asymmetry, interchangeable parts, job satisfaction, Joseph Schumpeter, Kickstarter, knowledge economy, machine translation, market fundamentalism, NetJets, Network effects, RAND corporation, Salesforce, Skype, telemarketer, The Wealth of Nations by Adam Smith, There's no reason for any individual to have a computer in his home - Ken Olsen, Thomas Kuhn: the structure of scientific revolutions, Vanguard fund, zero-sum game

So instead of using brokers and regional branch offices, Direct Line uses information technology to improve claims handling, and it passes on some of the cost savings to customers in the form of lower insurance premiums. For more than twenty years since its inception, Direct Line’s blue ocean strategic move has been winning customers and awards including that for the best, most trusted, and most innovative motor insurance brand in the UK. In the United States, The Vanguard Group (in index funds) and Charles Schwab (in brokerage services) did the same thing in the investment industry, creating a blue ocean by transforming emotionally oriented businesses based on personal relationships into high-performance, low-cost functional businesses. Does your industry compete on functionality or emotional appeal?


pages: 333 words: 76,990

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

Alan Greenspan, asset allocation, banking crisis, banks create money, barriers to entry, behavioural economics, benefit corporation, Berlin Wall, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, book value, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, data science, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, equity risk premium, Fall of the Berlin Wall, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, forward guidance, Francis Fukuyama: the end of history, general purpose technology, gentrification, geopolitical risk, George Akerlof, Glass-Steagall Act, household responsibility system, housing crisis, index fund, invention of the printing press, inverted yield curve, Isaac Newton, James Watt: steam engine, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, Kickstarter, Kondratiev cycle, liberal capitalism, light touch regulation, liquidity trap, Live Aid, low interest rates, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, Phillips curve, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Shenzhen special economic zone , Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, tail risk, Tax Reform Act of 1986, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

Market Timing When it comes to investing, timing the best entry point is probably the most difficult factor involved, particularly in the short term. But the outcome for investors can vary significantly. For example, if we look at the period since the beginning of 2009 (shortly before the trough reached after the financial crisis), which has been rewarding for investors in general, an investor who bought and held onto an index fund would have seen the price of the fund rise by about 250% in the US (annualising at over 12%). In the real world, although no investor would have been astute, or lucky, enough to avoid all of the worst days, timing still matters a great deal even as we extend the timing phases. An investor who avoided the best month per year would have generated approximately 2% on average in equities since 1900, whereas an investor who managed to avoid the worst month would have generated nearly 18% annual returns – close to 80% higher than an investor who stayed fully invested the whole time.


pages: 290 words: 76,216

What's Wrong With Economics: A Primer for the Perplexed by Robert Skidelsky

additive manufacturing, agricultural Revolution, behavioural economics, Black Swan, Bretton Woods, business cycle, carbon tax, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, degrowth, disruptive innovation, Donald Trump, Dr. Strangelove, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mahbub ul Haq, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, Modern Monetary Theory, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, Phillips curve, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, sunk-cost fallacy, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

Thinking fast and slow Kahneman and Tversky claimed that we make choices according to two mental systems, the first intuitive, the second calculating, which they label fast and slow thinking. Slow thinking is logical; fast thinking is intuitive, and frequently irrational. They have found impressive evidence of ‘irrational’ choices – for example, investors’ preference for high-cost actively managed funds which underperform zero-cost index funds. Behavioural economists identify the following ‘systemic’ errors that people make. 1. Survivorship bias We tend to look only at what was successful. Think of a newspaper article that claims it can help you imitate Mark Zuckerberg’s morning routine. The obvious implication is that you too could become a billionaire if you just wore grey t-shirts and ate the right breakfast, but this ignores the multitudes of non-billionaires doing just that. 2.


pages: 555 words: 80,635

Open: The Progressive Case for Free Trade, Immigration, and Global Capital by Kimberly Clausing

"World Economic Forum" Davos, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, active measures, Affordable Care Act / Obamacare, agricultural Revolution, battle of ideas, Bernie Sanders, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, climate change refugee, corporate social responsibility, creative destruction, currency manipulation / currency intervention, David Ricardo: comparative advantage, Donald Trump, fake news, floating exchange rates, full employment, gig economy, global supply chain, global value chain, guest worker program, illegal immigration, immigration reform, income inequality, index fund, investor state dispute settlement, knowledge worker, labor-force participation, low interest rates, low skilled workers, Lyft, manufacturing employment, Mark Zuckerberg, meta-analysis, offshore financial centre, open economy, Paul Samuelson, precautionary principle, profit motive, purchasing power parity, race to the bottom, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, Tax Reform Act of 1986, tech worker, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transfer pricing, uber lyft, winner-take-all economy, working-age population, zero-sum game

The Reputation Institute, a firm that studies corporations’ reputations, gave GE a middling ranking of 199 on its annual RepTrak list, and the bad publicity surrounding GE’s tax avoidance was a key factor in the score. Tax avoidance also factors into others’ assessments of corporate responsibility. MSCI, an investment company that offers index funds of screened, responsible corporations, has indicated that a corporation’s tax practices will soon affect its decisions about which companies to include. Second, country by country reporting (see box) helps governments resolve cross-border tax disputes, avoid the pressures of harmful tax competition, and enforce the tax laws that are on the books.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

Abraham Maslow, accounting loophole / creative accounting, Alan Greenspan, AOL-Time Warner, Asian financial crisis, bank run, Bear Stearns, book value, Bretton Woods, business cycle, capital controls, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Glass-Steagall Act, Greenspan put, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Bogle, John Meriwether, junk bonds, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, low interest rates, market bubble, Mary Meeker, Michael Milken, minimum wage unemployment, MITM: man-in-the-middle, Money creation, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, Phillips curve, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, scientific management, shareholder value, short selling, Silicon Valley, Simon Kuznets, tail risk, Tax Reform Act of 1986, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

The creation by the federal government in 1974 of tax-advantaged Individual Retirement Accounts (IRAs) made mutual funds a still more popular investment as individuals sought places to invest for their retirement. Among the most important innovations were index funds, which provided a way to buy a piece of a stock market average, like the S&P 500. This was a way around the perennially bullish and often wrong recommendations by Wall Street professionals to buy individual stocks. Most of the new index funds, usually computer-driven, charged low management fees and eliminated the high upfront sales charges. An especially effective innovation was the money market mutual fund, which provided savers with much higher interest rates than were available at banks, ultimately circumventing Regulation Q.


pages: 270 words: 79,180

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit by Marina Krakovsky

Affordable Care Act / Obamacare, Airbnb, Al Roth, Ben Horowitz, Benchmark Capital, Black Swan, buy low sell high, Chuck Templeton: OpenTable:, Credit Default Swap, cross-subsidies, crowdsourcing, deal flow, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, information asymmetry, Jean Tirole, Joan Didion, John Zimmer (Lyft cofounder), Kenneth Arrow, Lean Startup, Lyft, Marc Andreessen, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, Metcalfe’s law, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, power law, real-name policy, ride hailing / ride sharing, Robert Metcalfe, Sand Hill Road, search costs, seminal paper, sharing economy, Silicon Valley, social graph, supply-chain management, TaskRabbit, the long tail, The Market for Lemons, the strength of weak ties, too big to fail, trade route, transaction costs, two-sided market, Uber for X, uber lyft, ultimatum game, Y Combinator

That’s how many of us regard Goldman Sachs, the Wall Street giant that the journalist Matt Taibbi famously, and to great applause, called “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”29 Indeed, a study of brand perceptions showed that people’s ratings of Goldman Sachs put the company squarely in the cold-incompetent quadrant.30 It’s not just Goldman Sachs that can evoke contempt, of course. Consider today’s typical money managers: whether they are personal financial advisors or pros managing multibillion-dollar mutual funds, most fail to beat the market—and when you take management fees into account, most actually underperform cheaper alternatives, such as index funds.31 What’s more, although there may be value to having an expert tailor a portfolio of investments right for your age and risk preferences, recent evidence suggests that financial advisors tend to create one-size-fits-all portfolios for their clients, providing off-the-rack services for bespoke-level fees.32 So when people say, as PBS economics correspondent Paul Solman has, that “most money management firms are parasites who live handsomely off innocent investors,” their strong feelings have a basis in reality.33 Consider, too, the primary middlemen in car sales in the United States: although many new-car dealers are probably skilled, honest, and customer-oriented, their trade groups are another story: the National Automobile Dealers Association and its state and local counterparts seem most concerned with lobbying for protectionist laws that benefit neither car buyers nor manufacturers.34 Middlemen who are seen as both cold (interested only in their own gain) and incompetent (creating more cost than value) will evoke contempt,35 and for them, the Parasite label is harsh but more or less apt.


pages: 330 words: 83,319

The New Rules of War: Victory in the Age of Durable Disorder by Sean McFate

Able Archer 83, active measures, anti-communist, barriers to entry, Berlin Wall, blood diamond, Boeing 747, Brexit referendum, cognitive dissonance, commoditize, computer vision, corporate governance, corporate raider, cuban missile crisis, disinformation, Donald Trump, double helix, drone strike, escalation ladder, European colonialism, failed state, fake news, false flag, hive mind, index fund, invisible hand, John Markoff, joint-stock company, military-industrial complex, moral hazard, mutually assured destruction, Nash equilibrium, nuclear taboo, offshore financial centre, pattern recognition, Peace of Westphalia, plutocrats, private military company, profit motive, RAND corporation, ransomware, Ronald Reagan, Silicon Valley, South China Sea, Steve Bannon, Stuxnet, Suez crisis 1956, technoutopianism, vertical integration, Washington Consensus, Westphalian system, yellow journalism, Yom Kippur War, zero day, zero-sum game

Washington, DC: Department of Defense of the United States of America, 2018, 1, https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf. 8. The world was safer during the Cold War: “COW War Data, 1817–2007 (v. 4.0),” The Correlates of War Project, 8 December 8, 2011, www.correlatesofwar.org/data-sets. See also Meredith Reid Sarkees and Frank Wayman, Resort to War: 1816–2007 (Washington, DC: CQ Press, 2010); The Fragile States Index, Fund for Peace, 2018, http://fundforpeace.org/fsi; Conflict Barometer 2017, The Heidelberg Institute for International Conflict Research, 31 December, 2017, https://hiik.de/2018/02/28/conflict-barometer-2017/?lang=en; David Backer, Ravinder Bhavnani, and Paul Huth, eds., Peace and Conflict 2016 (Abingdon, UK: Routledge, 2016); Therése Pettersson and Peter Wallensteen, “Armed Conflicts, 1946–2014,” Journal of Peace Research 52, no. 4 (2015): 536–50. 9.


pages: 301 words: 85,126

AIQ: How People and Machines Are Smarter Together by Nick Polson, James Scott

Abraham Wald, Air France Flight 447, Albert Einstein, algorithmic bias, Amazon Web Services, Atul Gawande, autonomous vehicles, availability heuristic, basic income, Bayesian statistics, Big Tech, Black Lives Matter, Bletchley Park, business cycle, Cepheid variable, Checklist Manifesto, cloud computing, combinatorial explosion, computer age, computer vision, Daniel Kahneman / Amos Tversky, data science, deep learning, DeepMind, Donald Trump, Douglas Hofstadter, Edward Charles Pickering, Elon Musk, epigenetics, fake news, Flash crash, Grace Hopper, Gödel, Escher, Bach, Hans Moravec, Harvard Computers: women astronomers, Higgs boson, index fund, information security, Isaac Newton, John von Neumann, late fees, low earth orbit, Lyft, machine translation, Magellanic Cloud, mass incarceration, Moneyball by Michael Lewis explains big data, Moravec's paradox, more computing power than Apollo, natural language processing, Netflix Prize, North Sea oil, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, p-value, pattern recognition, Pierre-Simon Laplace, ransomware, recommendation engine, Ronald Reagan, Salesforce, self-driving car, sentiment analysis, side project, Silicon Valley, Skype, smart cities, speech recognition, statistical model, survivorship bias, systems thinking, the scientific method, Thomas Bayes, Uber for X, uber lyft, universal basic income, Watson beat the top human players on Jeopardy!, young professional

In Europe, the picture was worse: 98.9% of domestic stock funds, 97% of emerging-market funds, and 97.8% of global stock funds underperformed, net of fees. The active fund managers in the Netherlands took the global prize: 100% of them failed to beat their benchmarks.16 The upshot is that there’s real stock-picking talent out there, but it’s hard to find. So how should these facts affect your investment strategy? Should you settle for an index fund? Or should you gamble on greatness, in the hopes that you can find one of those rare fund managers who truly can beat the market? If you decide to gamble, then you should be honest with yourself about your goal: to conduct your own Bayesian search for the next Warren Buffett. The possible “search locations” are all the different fund managers competing for your capital, and your “search data” is the information on each manager’s track record.


pages: 247 words: 81,135

The Great Fragmentation: And Why the Future of All Business Is Small by Steve Sammartino

3D printing, additive manufacturing, Airbnb, augmented reality, barriers to entry, behavioural economics, Bill Gates: Altair 8800, bitcoin, BRICs, Buckminster Fuller, citizen journalism, collaborative consumption, cryptocurrency, data science, David Heinemeier Hansson, deep learning, disruptive innovation, driverless car, Dunbar number, Elon Musk, fiat currency, Frederick Winslow Taylor, game design, gamification, Google X / Alphabet X, haute couture, helicopter parent, hype cycle, illegal immigration, index fund, Jeff Bezos, jimmy wales, Kickstarter, knowledge economy, Law of Accelerating Returns, lifelogging, market design, Mary Meeker, Metcalfe's law, Minecraft, minimum viable product, Network effects, new economy, peer-to-peer, planned obsolescence, post scarcity, prediction markets, pre–internet, profit motive, race to the bottom, random walk, Ray Kurzweil, recommendation engine, remote working, RFID, Rubik’s Cube, scientific management, self-driving car, sharing economy, side project, Silicon Valley, Silicon Valley startup, skunkworks, Skype, social graph, social web, software is eating the world, Steve Jobs, subscription business, survivorship bias, The Home Computer Revolution, the long tail, too big to fail, US Airways Flight 1549, vertical integration, web application, zero-sum game

There was no gatekeeper and I could do most of it for free using the gift of democratised knowledge and connection tools. Now it makes me antifragile. ‘Antifragility’ is a term coined by author Nassim Taleb to describe something that improves when it breaks or is disrupted by shocks so it can reconfigure and grow stronger. I have multiple sources of revenue and the relative diversification of a personal index fund of tech revolution-proof skills. It’s what both employees and employers need to do: focus less on functional departments and more on connecting seemingly disparate skills and overlaps. Industrial education All of this comes back to the education system. It’s not surprising, given our current government-funded education systems are a child of the industrial age.


pages: 251 words: 80,831

Super Founders: What Data Reveals About Billion-Dollar Startups by Ali Tamaseb

"World Economic Forum" Davos, 23andMe, additive manufacturing, Affordable Care Act / Obamacare, Airbnb, Anne Wojcicki, asset light, barriers to entry, Ben Horowitz, Benchmark Capital, bitcoin, business intelligence, buy and hold, Chris Wanstrath, clean water, cloud computing, coronavirus, corporate governance, correlation does not imply causation, COVID-19, cryptocurrency, data science, discounted cash flows, diversified portfolio, Elon Musk, Fairchild Semiconductor, game design, General Magic , gig economy, high net worth, hiring and firing, index fund, Internet Archive, Jeff Bezos, John Zimmer (Lyft cofounder), Kickstarter, late fees, lockdown, Lyft, Marc Andreessen, Marc Benioff, Mark Zuckerberg, Max Levchin, Mitch Kapor, natural language processing, Network effects, nuclear winter, PageRank, PalmPilot, Parker Conrad, Paul Buchheit, Paul Graham, peer-to-peer lending, Peter Thiel, Planet Labs, power law, QR code, Recombinant DNA, remote working, ride hailing / ride sharing, robotic process automation, rolodex, Ruby on Rails, Salesforce, Sam Altman, Sand Hill Road, self-driving car, shareholder value, sharing economy, side hustle, side project, Silicon Valley, Silicon Valley startup, Skype, Snapchat, SoftBank, software as a service, software is eating the world, sovereign wealth fund, Startup school, Steve Jobs, Steve Wozniak, survivorship bias, TaskRabbit, telepresence, the payments system, TikTok, Tony Fadell, Tony Hsieh, Travis Kalanick, Uber and Lyft, Uber for X, uber lyft, ubercab, web application, WeWork, work culture , Y Combinator

We often think that what happened to pension funds will happen to healthcare as well. It used to be that pensions were all predefined contributions and corporate plans, which shifted toward predefined employee benefits and 401(k) plans, and the providers of the shift were companies like Charles Schwab, Fidelity, and index funds. A similar thing, we believe, will happen in healthcare. The way the ACA changed the system more than all those directions helped this shift. And so it wasn’t a matter of regulatory change where you can find a new power that doesn’t create societal value. It was a unique alignment of critical societal value and shifting the system in some important ways.


pages: 338 words: 85,566

Restarting the Future: How to Fix the Intangible Economy by Jonathan Haskel, Stian Westlake

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Andrei Shleifer, Big Tech, Black Lives Matter, book value, Boris Johnson, Brexit referendum, business cycle, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, Charles Lindbergh, charter city, cloud computing, cognitive bias, cognitive load, congestion charging, coronavirus, corporate governance, COVID-19, creative destruction, cryptocurrency, David Graeber, decarbonisation, Diane Coyle, Dominic Cummings, Donald Shoup, Donald Trump, Douglas Engelbart, Douglas Engelbart, driverless car, Edward Glaeser, equity risk premium, Erik Brynjolfsson, Estimating the Reproducibility of Psychological Science, facts on the ground, financial innovation, Francis Fukuyama: the end of history, future of work, general purpose technology, gentrification, Goodhart's law, green new deal, housing crisis, income inequality, index fund, indoor plumbing, industrial cluster, inflation targeting, intangible asset, interchangeable parts, invisible hand, job-hopping, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, knowledge worker, lockdown, low interest rates, low skilled workers, Marc Andreessen, market design, Martin Wolf, megacity, mittelstand, new economy, Occupy movement, oil shock, patent troll, Peter Thiel, Phillips curve, postindustrial economy, pre–internet, price discrimination, quantitative easing, QWERTY keyboard, remote working, rent-seeking, replication crisis, risk/return, Robert Gordon, Robert Metcalfe, Robert Shiller, Ronald Coase, Sam Peltzman, Second Machine Age, secular stagnation, shareholder value, Silicon Valley, six sigma, skeuomorphism, social distancing, superstar cities, the built environment, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Uber for X, urban planning, We wanted flying cars, instead we got 140 characters, work culture , X Prize, Y2K

A catastrophic hedge fund blew up “when genius failed.”2 The people who turned an energy company into a fraudulent derivatives operation were “the smartest guys in the room.”3 But many of the most powerful features of the financial system are in fact devices that make genius unnecessary. Debt finance turns complex business judgments into simple ones (“Is this debtor able to repay me?”). Company accounts provide a simplified, standardised, and reasonably honest way for outsiders to scrutinise the financial health of a business. Simple investment strategies such as index funds and value investing allow laypeople to achieve a return on investment that often outperforms that of highly paid fund managers. Shareholder value management, the management fad of running businesses to maximise returns to stockholders, for better or for worse simplifies the complex business of corporate governance.


pages: 366 words: 94,209

Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity by Douglas Rushkoff

activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, algorithmic trading, Amazon Mechanical Turk, Andrew Keen, bank run, banking crisis, barriers to entry, benefit corporation, bitcoin, blockchain, Burning Man, business process, buy and hold, buy low sell high, California gold rush, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, centralized clearinghouse, citizen journalism, clean water, cloud computing, collaborative economy, collective bargaining, colonial exploitation, Community Supported Agriculture, corporate personhood, corporate raider, creative destruction, crowdsourcing, cryptocurrency, data science, deep learning, disintermediation, diversified portfolio, Dutch auction, Elon Musk, Erik Brynjolfsson, Ethereum, ethereum blockchain, fiat currency, Firefox, Flash crash, full employment, future of work, gamification, Garrett Hardin, gentrification, gig economy, Gini coefficient, global supply chain, global village, Google bus, Howard Rheingold, IBM and the Holocaust, impulse control, income inequality, independent contractor, index fund, iterative process, Jaron Lanier, Jeff Bezos, jimmy wales, job automation, Joseph Schumpeter, Kickstarter, Large Hadron Collider, loss aversion, low interest rates, Lyft, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, Marshall McLuhan, means of production, medical bankruptcy, minimum viable product, Mitch Kapor, Naomi Klein, Network effects, new economy, Norbert Wiener, Oculus Rift, passive investing, payday loans, peer-to-peer lending, Peter Thiel, post-industrial society, power law, profit motive, quantitative easing, race to the bottom, recommendation engine, reserve currency, RFID, Richard Stallman, ride hailing / ride sharing, Ronald Reagan, Russell Brand, Satoshi Nakamoto, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Snapchat, social graph, software patent, Steve Jobs, stock buybacks, TaskRabbit, the Cathedral and the Bazaar, The Future of Employment, the long tail, trade route, Tragedy of the Commons, transportation-network company, Turing test, Uber and Lyft, Uber for X, uber lyft, unpaid internship, Vitalik Buterin, warehouse robotics, Wayback Machine, Y Combinator, young professional, zero-sum game, Zipcar

Studies of this new population of do-it-yourself traders invariably show that increased access to trading tools and market data creates the illusion of market competency and encourages poor decision-making. Even before net access, do-it-yourself investors tended to make poorer investment decisions than those who used financial advisors or, best of all, invested in entirely unmanaged “index” funds. The main reason for DIY investors’ poor results? Amateurs trade too much. Meanwhile, online trading brokerages—whose profit comes almost solely from commissions on trading—have a stake in getting their users to make as many trades as possible. As the data shows, the same brokerage houses profit from the same trading activity in the same way they always have, while retail investors’ actual percent of profits and trading accuracy goes down.


pages: 389 words: 87,758

No Ordinary Disruption: The Four Global Forces Breaking All the Trends by Richard Dobbs, James Manyika

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, access to a mobile phone, additive manufacturing, Airbnb, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, asset light, autonomous vehicles, Bakken shale, barriers to entry, business cycle, business intelligence, carbon tax, Carmen Reinhart, central bank independence, circular economy, cloud computing, corporate governance, creative destruction, crowdsourcing, data science, demographic dividend, deskilling, digital capitalism, disintermediation, disruptive innovation, distributed generation, driverless car, Erik Brynjolfsson, financial innovation, first square of the chessboard, first square of the chessboard / second half of the chessboard, Gini coefficient, global supply chain, global village, high-speed rail, hydraulic fracturing, illegal immigration, income inequality, index fund, industrial robot, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, inventory management, job automation, Just-in-time delivery, Kenneth Rogoff, Kickstarter, knowledge worker, labor-force participation, low interest rates, low skilled workers, Lyft, M-Pesa, machine readable, mass immigration, megacity, megaproject, mobile money, Mohammed Bouazizi, Network effects, new economy, New Urbanism, ocean acidification, oil shale / tar sands, oil shock, old age dependency ratio, openstreetmap, peer-to-peer lending, pension reform, pension time bomb, private sector deleveraging, purchasing power parity, quantitative easing, recommendation engine, Report Card for America’s Infrastructure, RFID, ride hailing / ride sharing, Salesforce, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart cities, Snapchat, sovereign wealth fund, spinning jenny, stem cell, Steve Jobs, subscription business, supply-chain management, synthetic biology, TaskRabbit, The Great Moderation, trade route, transaction costs, Travis Kalanick, uber lyft, urban sprawl, Watson beat the top human players on Jeopardy!, working-age population, Zipcar

Two UK landmarks—the department store Harrods and the Shard, London’s tallest building—are now part of the Qatar Investment Authority portfolio.57 So, too, is the soccer team Paris Saint-Germain FC, which has acquired superstars like Sweden’s Zlatan Ibrahimović and Uruguay’s Edinson Cavani and has reemerged as one of Europe’s leading powers.58 Norway’s SWF, with more than $800 billion in assets, directed more than 60 percent of its capital into equity markets with an increasing focus on high-profile real estate.59 In 2013 alone, it bought 45 percent of Times Square Tower in New York and 47.5 percent of One Financial Center in Boston through a joint venture with MetLife.60 It is considering moving investments to assets like wind and solar plants, as well as other infrastructure investments. Some SWFs are adapting investment strategies that more closely resemble those of private equity funds than passive index funds. Temasek, a Singaporean SWF that manages over $170 billion, in 2014 invested $5.7 billion in the A. S. Watson health and beauty group. Since its foundation in 1974, Temasek’s portfolio has included everything from shares in shoemakers to a bird park.61 Digital platforms are also opening access to new sources of capital.


pages: 265 words: 93,231

The Big Short: Inside the Doomsday Machine by Michael Lewis

Alan Greenspan, An Inconvenient Truth, Asperger Syndrome, asset-backed security, Bear Stearns, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, facts on the ground, financial engineering, financial innovation, fixed income, forensic accounting, Gordon Gekko, high net worth, housing crisis, illegal immigration, income inequality, index fund, interest rate swap, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, medical residency, Michael Milken, money market fund, moral hazard, mortgage debt, pets.com, Ponzi scheme, Potemkin village, proprietary trading, quantitative trading / quantitative finance, Quicken Loans, risk free rate, Robert Bork, short selling, Silicon Valley, tail risk, the new new thing, too big to fail, value at risk, Vanguard fund, zero-sum game

Mike Burry couldn't see exactly who was following his financial moves, but he could tell which domains they came from. In the beginning his readers came from EarthLink and AOL. Just random individuals. Pretty soon, however, they weren't. People were coming to his site from mutual funds like Fidelity and big Wall Street investment banks like Morgan Stanley. One day he lit into Vanguard's index funds and almost instantly received a cease and desist order from Vanguard's attorneys. Burry suspected that serious investors might even be acting on his blog posts, but he had no clear idea who they might be. "The market found him," says the Philadelphia mutual fund manager. "He was recognizing patterns no one else was seeing."


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

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

Because you need a modern-day Fibonacci to free you from the shackles of “ancient,” clunky accounting-based investment analysis you learned in business school, like we did, decades ago—an analysis that focuses on the “bottom line,” comparing quarterly reported earnings with analysts’ consensus estimates, and attempting to predict future earnings and stock prices, primarily based on accounting reports and complex spreadsheets. The depressing performance of such investment analysis drove hordes of investors to give up entirely on analyzing individual companies and invest in index funds. Bye-bye accounting. A new investment analysis is obviously called for. As we have shown in Chapter 11, what determines a company’s ability to grow and sustain competitive advantage—the long-term enterprise goal—is the existence and effective deployment of strategic assets, those resources that are rare, are difficult to imitate, and generate benefits.


pages: 330 words: 91,805

Peers Inc: How People and Platforms Are Inventing the Collaborative Economy and Reinventing Capitalism by Robin Chase

Airbnb, Amazon Web Services, Andy Kessler, Anthropocene, Apollo 13, banking crisis, barriers to entry, basic income, Benevolent Dictator For Life (BDFL), bike sharing, bitcoin, blockchain, Burning Man, business climate, call centre, car-free, carbon tax, circular economy, cloud computing, collaborative consumption, collaborative economy, collective bargaining, commoditize, congestion charging, creative destruction, crowdsourcing, cryptocurrency, data science, deal flow, decarbonisation, different worldview, do-ocracy, don't be evil, Donald Shoup, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, Eyjafjallajökull, Ferguson, Missouri, Firefox, Free Software Foundation, frictionless, Gini coefficient, GPS: selective availability, high-speed rail, hive mind, income inequality, independent contractor, index fund, informal economy, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Jane Jacobs, Jeff Bezos, jimmy wales, job satisfaction, Kickstarter, Kinder Surprise, language acquisition, Larry Ellison, Lean Startup, low interest rates, Lyft, machine readable, means of production, megacity, Minecraft, minimum viable product, Network effects, new economy, Oculus Rift, off-the-grid, openstreetmap, optical character recognition, pattern recognition, peer-to-peer, peer-to-peer lending, peer-to-peer model, Post-Keynesian economics, Richard Stallman, ride hailing / ride sharing, Ronald Coase, Ronald Reagan, Salesforce, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, self-driving car, shareholder value, sharing economy, Silicon Valley, six sigma, Skype, smart cities, smart grid, Snapchat, sovereign wealth fund, Steve Crocker, Steve Jobs, Steven Levy, TaskRabbit, The Death and Life of Great American Cities, The Future of Employment, the long tail, The Nature of the Firm, Tragedy of the Commons, transaction costs, Turing test, turn-by-turn navigation, Uber and Lyft, uber lyft, vertical integration, Zipcar

In December 2012, 350.org launched its divestiture campaign, encouraging universities and other institutions to excise fossil fuel companies from their investment portfolios; this has brought about even more debate and soul-searching, as well as divestment, among wealthy individuals, universities, foundations, companies, counties, cities, religious institutions, and the press.15 In response to the new demand, financial institutions are creating new index funds and new metrics are being discussed. The whole idea of “stranded assets”—fossil-fuel assets that are counted on company balance sheets but which may prove to be worthless—stems from 350.org’s divestment push. Remember, 350.org raises the issue, provides the fact sheets, and tracks progress, but it is the participating peers at universities and in boardrooms across the country and around the world who are carrying out the discussions.


pages: 332 words: 93,672

Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy by George Gilder

23andMe, Airbnb, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, AlphaGo, AltaVista, Amazon Web Services, AOL-Time Warner, Asilomar, augmented reality, Ben Horowitz, bitcoin, Bitcoin Ponzi scheme, Bletchley Park, blockchain, Bob Noyce, British Empire, Brownian motion, Burning Man, business process, butterfly effect, carbon footprint, cellular automata, Claude Shannon: information theory, Clayton Christensen, cloud computing, computer age, computer vision, crony capitalism, cross-subsidies, cryptocurrency, Danny Hillis, decentralized internet, deep learning, DeepMind, Demis Hassabis, disintermediation, distributed ledger, don't be evil, Donald Knuth, Donald Trump, double entry bookkeeping, driverless car, Elon Musk, Erik Brynjolfsson, Ethereum, ethereum blockchain, fake news, fault tolerance, fiat currency, Firefox, first square of the chessboard, first square of the chessboard / second half of the chessboard, floating exchange rates, Fractional reserve banking, game design, Geoffrey Hinton, George Gilder, Google Earth, Google Glasses, Google Hangouts, index fund, inflation targeting, informal economy, initial coin offering, Internet of things, Isaac Newton, iterative process, Jaron Lanier, Jeff Bezos, Jim Simons, Joan Didion, John Markoff, John von Neumann, Julian Assange, Kevin Kelly, Law of Accelerating Returns, machine translation, Marc Andreessen, Mark Zuckerberg, Mary Meeker, means of production, Menlo Park, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, move fast and break things, Neal Stephenson, Network effects, new economy, Nick Bostrom, Norbert Wiener, Oculus Rift, OSI model, PageRank, pattern recognition, Paul Graham, peer-to-peer, Peter Thiel, Ponzi scheme, prediction markets, quantitative easing, random walk, ransomware, Ray Kurzweil, reality distortion field, Recombinant DNA, Renaissance Technologies, Robert Mercer, Robert Metcalfe, Ronald Coase, Ross Ulbricht, Ruby on Rails, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Singularitarianism, Skype, smart contracts, Snapchat, Snow Crash, software is eating the world, sorting algorithm, South Sea Bubble, speech recognition, Stephen Hawking, Steve Jobs, Steven Levy, Stewart Brand, stochastic process, Susan Wojcicki, TED Talk, telepresence, Tesla Model S, The Soul of a New Machine, theory of mind, Tim Cook: Apple, transaction costs, tulip mania, Turing complete, Turing machine, Vernor Vinge, Vitalik Buterin, Von Neumann architecture, Watson beat the top human players on Jeopardy!, WikiLeaks, Y Combinator, zero-sum game

As Peter Drucker said, “It is less important to do things right than to do the right things.” Effectiveness is more important than efficiency. Renaissance’s improvement in market efficiency is small compared to the yield. As a result, too much American capital is migrating to Siren Servers and shunning “Zero to One” creative investments. Computerized index funds that “buy the market” thrive while IPOs languish. No net wealth is created, but money is arbitrarily siphoned off and redistributed in a zero-sum game. I pointed out that Renaissance’s “neutral” approach benefited from the counterproductive futility of insider-trading rules and fair disclosure requirements, which hobble rivals who are using their human brains in real time.


pages: 342 words: 99,390

The greatest trade ever: the behind-the-scenes story of how John Paulson defied Wall Street and made financial history by Gregory Zuckerman

1960s counterculture, Alan Greenspan, banking crisis, Bear Stearns, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, financial engineering, financial innovation, fixed income, index fund, Isaac Newton, Jim Simons, junk bonds, Larry Ellison, Long Term Capital Management, low interest rates, margin call, Mark Zuckerberg, Menlo Park, merger arbitrage, Michael Milken, mortgage debt, mortgage tax deduction, Ponzi scheme, Renaissance Technologies, rent control, Robert Shiller, rolodex, short selling, Silicon Valley, statistical arbitrage, Steve Ballmer, Steve Wozniak, technology bubble, zero-sum game

Some mutual funds bought into the prevailing mantra that technology shares were worth the rich valuations or were unable to bet against stocks or head to the sidelines as hedge funds did. Most mutual funds considered it a good year if they simply beat the market, even if it meant losing a third of their investors’' money, rather than half. Reams of academic data demonstrated that few mutual funds could best the market over the long haul. And while index funds were a cheaper and better-performing alternative, these investment vehicles only did well if the market rose. Once, Peter Lynch, Jeffrey Vinik, Mario Gabelli, and other savvy investors were content to manage mutual funds. But the hefty pay and flexible guidelines of the hedge-fund business allowed it to drain much of the talent from the mutual-fund pool by the early years of the new millennium—--another reason for investors with the financial wherewithal to turn to hedge funds.


pages: 340 words: 100,151

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

activist fund / activist shareholder / activist investor, Airbnb, Amazon Web Services, asset allocation, barriers to entry, Ben Horowitz, Benchmark Capital, Big Tech, Blue Bottle Coffee, carried interest, cloud computing, compensation consultant, corporate governance, cryptocurrency, discounted cash flows, diversification, diversified portfolio, estate planning, family office, fixed income, Glass-Steagall Act, high net worth, index fund, information asymmetry, initial coin offering, Lean Startup, low cost airline, Lyft, Marc Andreessen, Myron Scholes, Network effects, Paul Graham, pets.com, power law, price stability, prudent man rule, ride hailing / ride sharing, rolodex, Salesforce, Sand Hill Road, seminal paper, shareholder value, Silicon Valley, software as a service, sovereign wealth fund, Startup school, the long tail, Travis Kalanick, uber lyft, VA Linux, Y Combinator, zero-sum game

A “basis point” is just a fancy way of saying 1/100th of a percentage point—so 200 basis points means 2 percentage points. What does that mean? Unfortunately, it means that if you invested in the median returning VC firm, you would have tied up your money for a long time and have generated worse investment results than if you had just stuck your money in a Nasdaq or S&P 500 index fund. And you could have bought or sold your index holdings on any given day if you decided you needed to use that money—whereas had you needed to get your money out of the VC fund, good luck! What explains this? Well, there are a few things at work here. Most significantly, VC returns do not follow a normal distribution.


pages: 391 words: 97,018

Better, Stronger, Faster: The Myth of American Decline . . . And the Rise of a New Economy by Daniel Gross

"World Economic Forum" Davos, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, American Society of Civil Engineers: Report Card, asset-backed security, Bakken shale, banking crisis, Bear Stearns, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, carbon tax, Carmen Reinhart, clean water, collapse of Lehman Brothers, collateralized debt obligation, commoditize, congestion pricing, creative destruction, credit crunch, currency manipulation / currency intervention, demand response, Donald Trump, financial engineering, Frederick Winslow Taylor, high net worth, high-speed rail, housing crisis, hydraulic fracturing, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, index fund, intangible asset, intermodal, inventory management, Kenneth Rogoff, labor-force participation, LNG terminal, low interest rates, low skilled workers, man camp, Mark Zuckerberg, Martin Wolf, Mary Meeker, Maui Hawaii, McMansion, money market fund, mortgage debt, Network effects, new economy, obamacare, oil shale / tar sands, oil shock, peak oil, plutocrats, price stability, quantitative easing, race to the bottom, reserve currency, reshoring, Richard Florida, rising living standards, risk tolerance, risk/return, scientific management, Silicon Valley, Silicon Valley startup, six sigma, Skype, sovereign wealth fund, Steve Jobs, superstar cities, the High Line, transit-oriented development, Wall-E, Yogi Berra, zero-sum game, Zipcar

Such developments may not directly boost exports or lead to significant direct employment, but they can be hugely beneficial to American companies, and to the economy at large. First and foremost, inports are good for shareholders, whose numbers include the tens of millions of Americans with pension funds or index funds. Standard & Poor’s measures the percentage of revenues that companies in the S&P 500 index say they derive from overseas. In 2010, for the firms that broke out such results separately, 46.3 percent of revenues came from outside the United States, up from 43.5 percent in 2006. The biggest growth in overseas sales has come from sectors that have tapped into the global growth boom.


pages: 332 words: 97,325

The Launch Pad: Inside Y Combinator, Silicon Valley's Most Exclusive School for Startups by Randall Stross

affirmative action, Airbnb, AltaVista, always be closing, Amazon Mechanical Turk, Amazon Web Services, barriers to entry, Ben Horowitz, Benchmark Capital, Burning Man, business cycle, California gold rush, call centre, cloud computing, crowdsourcing, don't be evil, Elon Musk, Hacker News, high net worth, hockey-stick growth, index fund, inventory management, John Markoff, Justin.tv, Lean Startup, Marc Andreessen, Mark Zuckerberg, Max Levchin, medical residency, Menlo Park, Minecraft, minimum viable product, Morris worm, Paul Buchheit, Paul Graham, Peter Thiel, QR code, Richard Feynman, Richard Florida, ride hailing / ride sharing, Salesforce, Sam Altman, Sand Hill Road, selling pickaxes during a gold rush, side project, Silicon Valley, Silicon Valley startup, Skype, social graph, software is eating the world, South of Market, San Francisco, speech recognition, Stanford marshmallow experiment, Startup school, stealth mode startup, Steve Jobs, Steve Wozniak, Steven Levy, TaskRabbit, transaction costs, Y Combinator

In 2009 and then again in 2010, the fund raised a total of $60 million from about one hundred wealthy individuals who are limited partners. For seed-stage investments, its $60 million will cover a lot of companies. With its investment of $50,000 in each company in YC’s summer batch, it has created an index fund covering the entire batch at a cost of only about $3 million. On the Tuesday that Conway will be speaking at YC after dinner, Lee, a former Google executive, and his junior associates come to YC earlier in the day to have short chats with the startups that are candidates for additional investment.


pages: 303 words: 100,516

Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork by Reeves Wiedeman

Adam Neumann (WeWork), Airbnb, asset light, barriers to entry, Black Lives Matter, Blitzscaling, Burning Man, call centre, carbon footprint, company town, coronavirus, corporate governance, COVID-19, cryptocurrency, digital nomad, do what you love, Donald Trump, driverless car, dumpster diving, East Village, eat what you kill, Elon Musk, Erlich Bachman, fake news, fear of failure, Gavin Belson, Gordon Gekko, housing crisis, index fund, Jeff Bezos, low interest rates, Lyft, Marc Benioff, margin call, Mark Zuckerberg, Masayoshi Son, Maui Hawaii, medical residency, Menlo Park, microapartment, mortgage debt, Network effects, new economy, prosperity theology / prosperity gospel / gospel of success, reality distortion field, ride hailing / ride sharing, Salesforce, Sand Hill Road, sharing economy, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, Skype, Snapchat, SoftBank, software as a service, sovereign wealth fund, starchitect, stealth mode startup, Steve Jobs, Steve Wozniak, subscription business, TechCrunch disrupt, the High Line, Tim Cook: Apple, too big to fail, Travis Kalanick, Uber for X, uber lyft, Vision Fund, WeWork, zero-sum game

Investors from Wall Street to Sand Hill Road were also primed to hope. The post-recession era ushered in an age of hypergrowth, where one well-timed hit could make a career. Low interest rates enabled speculative investors to fund risky bets that could produce outsize returns. Individual investors were putting more of their money into index funds, which broadly tracked the economy, leaving mutual fund managers seeking alternatives to prove they could beat a market that was already booming. At the end of 2014, the New York Times published an article about investors casting about for the next Uber, which was now a decacorn—a company with a $10 billion valuation.


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Black Swan, Black-Scholes formula, bonus culture, book value, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delayed gratification, diversification, Edmond Halley, facts on the ground, fear index, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, Greenspan put, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, proprietary trading, regulatory arbitrage, rent-seeking, Richard Thaler, risk free rate, risk tolerance, risk/return, Ronald Reagan, Salesforce, Savings and loan crisis, seminal paper, shareholder value, short selling, statistical model, subprime mortgage crisis, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

In other words, owning two stocks is always better than owning one, and three is better still, but once your portfolio gets large enough the benefits diminish, while the risk of a market downturn impacting the entire portfolio stays the same. It was easy to identify the systematic risk with an index of stock prices (which is just an average), an insight that spurred the development of products such as equity index funds in the 1970s. Vasicek seized upon all these ideas and applied them to credit. Exploiting Merton’s “window” to work in the Gaussian world of the stock market, he identified a parameter, called correlation, that measured how closely individual stocks tracked the index.4 Transformed back into the credit world, his model transmitted a downward swing in the index (perhaps the stock market, although he didn’t spell this out) into a wave of corporate defaults sweeping across a portfolio.


pages: 338 words: 104,815

Nobody's Fool: Why We Get Taken in and What We Can Do About It by Daniel Simons, Christopher Chabris

Abraham Wald, Airbnb, artificial general intelligence, Bernie Madoff, bitcoin, Bitcoin "FTX", blockchain, Boston Dynamics, butterfly effect, call centre, Carmen Reinhart, Cass Sunstein, ChatGPT, Checklist Manifesto, choice architecture, computer vision, contact tracing, coronavirus, COVID-19, cryptocurrency, DALL-E, data science, disinformation, Donald Trump, Elon Musk, en.wikipedia.org, fake news, false flag, financial thriller, forensic accounting, framing effect, George Akerlof, global pandemic, index fund, information asymmetry, information security, Internet Archive, Jeffrey Epstein, Jim Simons, John von Neumann, Keith Raniere, Kenneth Rogoff, London Whale, lone genius, longitudinal study, loss aversion, Mark Zuckerberg, meta-analysis, moral panic, multilevel marketing, Nelson Mandela, pattern recognition, Pershing Square Capital Management, pets.com, placebo effect, Ponzi scheme, power law, publication bias, randomized controlled trial, replication crisis, risk tolerance, Robert Shiller, Ronald Reagan, Rubik’s Cube, Sam Bankman-Fried, Satoshi Nakamoto, Saturday Night Live, Sharpe ratio, short selling, side hustle, Silicon Valley, Silicon Valley startup, Skype, smart transportation, sovereign wealth fund, statistical model, stem cell, Steve Jobs, sunk-cost fallacy, survivorship bias, systematic bias, TED Talk, transcontinental railway, WikiLeaks, Y2K

We’ve had this experience ourselves, and we’ve been tempted to opt out of such recommendations in the future or switch to a different navigation app. But are two consecutive errors enough evidence to draw conclusions about a tool you’ve been using for years? (They might not have been errors—your planned route might also have made you late.) If you happened to pick two good stocks that outperformed an index fund, do you have enough evidence that you can consistently beat the market? If you picked the winner in two Super Bowls, would you quit your job and become a professional sports bettor? Being guided by a tiny sample of recent experiences is the worst way to use data; we almost never have enough evidence for a reliable conclusion, but we always have enough to be fooled.


pages: 371 words: 107,141

You've Been Played: How Corporations, Governments, and Schools Use Games to Control Us All by Adrian Hon

"hyperreality Baudrillard"~20 OR "Baudrillard hyperreality", 4chan, Adam Curtis, Adrian Hon, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Astronomia nova, augmented reality, barriers to entry, Bellingcat, Big Tech, bitcoin, bread and circuses, British Empire, buy and hold, call centre, computer vision, conceptual framework, contact tracing, coronavirus, corporate governance, COVID-19, crowdsourcing, cryptocurrency, David Graeber, David Sedaris, deep learning, delayed gratification, democratizing finance, deplatforming, disinformation, disintermediation, Dogecoin, electronic logging device, Elon Musk, en.wikipedia.org, Ethereum, fake news, fiat currency, Filter Bubble, Frederick Winslow Taylor, fulfillment center, Galaxy Zoo, game design, gamification, George Floyd, gig economy, GitHub removed activity streaks, Google Glasses, Hacker News, Hans Moravec, Ian Bogost, independent contractor, index fund, informal economy, Jeff Bezos, job automation, jobs below the API, Johannes Kepler, Kevin Kelly, Kevin Roose, Kickstarter, Kiva Systems, knowledge worker, Lewis Mumford, lifelogging, linked data, lockdown, longitudinal study, loss aversion, LuLaRoe, Lyft, Marshall McLuhan, megaproject, meme stock, meta-analysis, Minecraft, moral panic, multilevel marketing, non-fungible token, Ocado, Oculus Rift, One Laptop per Child (OLPC), orbital mechanics / astrodynamics, Parler "social media", passive income, payment for order flow, prisoner's dilemma, QAnon, QR code, quantitative trading / quantitative finance, r/findbostonbombers, replication crisis, ride hailing / ride sharing, Robinhood: mobile stock trading app, Ronald Coase, Rubik’s Cube, Salesforce, Satoshi Nakamoto, scientific management, shareholder value, sharing economy, short selling, short squeeze, Silicon Valley, SimCity, Skinner box, spinning jenny, Stanford marshmallow experiment, Steve Jobs, Stewart Brand, TED Talk, The Nature of the Firm, the scientific method, TikTok, Tragedy of the Commons, transaction costs, Twitter Arab Spring, Tyler Cowen, Uber and Lyft, uber lyft, urban planning, warehouse robotics, Whole Earth Catalog, why are manhole covers round?, workplace surveillance

Retail investors have had access to the slot machine of the stock market for decades, but until recently, that slot machine was stuck at home on their desktop computer, it had a longer approval process, it was harder to play, you needed a larger stake, and most people didn’t talk about it. No doubt some Robinhood users have discovered the attractions of comparatively safe long-term investing via index funds thanks to the app’s simplified interface. But Robinhood’s vision of the stock market they want to democratise isn’t a world of buy-and-hold but a world of nonstop trading where leverage is easy to obtain and fortunes are to be made and lost in hours and minutes. Users trading Dogecoin cryptocurrency alone contributed a whopping 6 percent of the company’s entire revenue during the first quarter of 2021.


pages: 356 words: 106,161

The Glass Half-Empty: Debunking the Myth of Progress in the Twenty-First Century by Rodrigo Aguilera

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Anthropocene, availability heuristic, barriers to entry, basic income, benefit corporation, Berlin Wall, Bernie Madoff, Bernie Sanders, bitcoin, Boris Johnson, Branko Milanovic, Bretton Woods, Brexit referendum, Capital in the Twenty-First Century by Thomas Piketty, capitalist realism, carbon footprint, Carmen Reinhart, centre right, clean water, cognitive bias, collapse of Lehman Brothers, Colonization of Mars, computer age, Corn Laws, corporate governance, corporate raider, creative destruction, cryptocurrency, cuban missile crisis, David Graeber, David Ricardo: comparative advantage, death from overwork, decarbonisation, deindustrialization, Deng Xiaoping, Doha Development Round, don't be evil, Donald Trump, Doomsday Clock, Dunning–Kruger effect, Elon Musk, European colonialism, fake news, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, fundamental attribution error, gig economy, Gini coefficient, Glass-Steagall Act, Great Leap Forward, green new deal, Hans Rosling, housing crisis, income inequality, income per capita, index fund, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jean Tirole, Jeff Bezos, Jeremy Corbyn, Jevons paradox, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, karōshi / gwarosa / guolaosi, Kenneth Rogoff, Kickstarter, lake wobegon effect, land value tax, Landlord’s Game, late capitalism, liberal capitalism, long peace, loss aversion, low interest rates, Mark Zuckerberg, market fundamentalism, means of production, meta-analysis, military-industrial complex, Mont Pelerin Society, moral hazard, moral panic, neoliberal agenda, Network effects, North Sea oil, Northern Rock, offshore financial centre, opioid epidemic / opioid crisis, Overton Window, Pareto efficiency, passive investing, Peter Thiel, plutocrats, principal–agent problem, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, risk tolerance, road to serfdom, Robert Shiller, Robert Solow, savings glut, Scientific racism, secular stagnation, Silicon Valley, Silicon Valley ideology, Slavoj Žižek, Social Justice Warrior, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Stanislav Petrov, Steven Pinker, structural adjustment programs, surveillance capitalism, tail risk, tech bro, TED Talk, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transatlantic slave trade, trolley problem, unbiased observer, universal basic income, Vilfredo Pareto, Washington Consensus, Winter of Discontent, Y2K, young professional, zero-sum game

., “Do Asset Managers and Banks Control Share Voting Rights on Your Money?”, Oxford Law Blog, 5 Jan. 2017 https://www.law.ox.ac.uk/business-law-blog/blog/2017/06/do-asset-managers-and-banks-control-share-voting-rights-your-money 13 Fichter, J., Heemskerk, E.M., and Garcia-Bernardo, J., “Hidden Power of the Big Three? Passive Index Funds, Re-Concentration of Corporate Ownership, and New Financial Risk”, Business and Politics, Apr. 2017, https://doi.org/10.1111/jofi.1269814 14 Azar, J., Schmalz, M.C., and Tecu, I., “Anticompetitive Effects of Common Ownership”, Journal of Finance, 73(4), Aug. 2018, https://papers.ssrn.com/sol3/papers.cfm?


pages: 436 words: 114,278

Crude Volatility: The History and the Future of Boom-Bust Oil Prices by Robert McNally

"World Economic Forum" Davos, Alan Greenspan, American energy revolution, Asian financial crisis, banking crisis, barriers to entry, Bear Stearns, Bretton Woods, collective bargaining, credit crunch, energy security, energy transition, geopolitical risk, housing crisis, hydraulic fracturing, Ida Tarbell, index fund, Induced demand, interchangeable parts, invisible hand, joint-stock company, market clearing, market fundamentalism, megaproject, moral hazard, North Sea oil, oil rush, oil shale / tar sands, oil shock, peak oil, price discrimination, price elasticity of demand, price stability, sovereign wealth fund, subprime mortgage crisis, Suez canal 1869, Suez crisis 1956, transfer pricing, vertical integration

They sought oil and other commodity exposure because of weak returns on other asset classes like equities or bonds. In addition, commodities offered diversity and returns that were uncorrelated to the usual equities and bonds holdings. Banks and brokers met demand from these new financial investors by creating investment vehicles or so-called commodity index funds that gave their clients “long” exposure to the commodity markets without their having to actually own any physical commodities.43 Some commentators and market participants concluded that massive passive buying itself was causing the mammoth oil price spike, insisting that rising price could not be explained by underlying supply and demand factors in the global oil market.44 The most prominent proponent of this view was investor Michael Masters, who gave that idea considerable traction when he was featured in testimony before the Senate Homeland Security Committee in May 2008.45 Those who disagree with the view that speculators, whether traditional buy-or-sell or passive buy-only, distort oil prices make several counterpoints.


pages: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, bank run, banks create money, Basel III, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, clean tech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, Evgeny Morozov, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Glass-Steagall Act, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, independent contractor, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, John Bogle, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, low interest rates, margin call, Mark Zuckerberg, market bubble, means of production, military-industrial complex, Minsky moment, Money creation, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, Post-Keynesian economics, profit maximization, proprietary trading, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Robert Solow, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, Solyndra, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two and twenty, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, you are the product, zero-sum game

And the average holding time for equity investment, whether by individuals or institutions, has relentlessly fallen: from four years in 1945 to eight months in 2000, two months in 2008 and (with the rise of high-frequency trading) twenty-two seconds by 2011 in the US.20 Average PE holding times jumped to almost six years when stock markets froze in the wake of the 2008 global financial crash, but were on a firm downward course again by 2015.21 The ‘short-termism' which Keynes anticipated is encapsulated in index fund pioneer John Bogle's concept that institutional investors rent the shares of the companies they invest in rather than take ownership for the long term. Consider the increased turnover of domestic shares: according to the World Federation of Exchanges, which represents the world's publicly regulated stock exchanges, in the US turnover of domestic shares was around 20 per cent a year in the 1970s, rising steeply to consistently over 100 per cent a year in the 2000s.


pages: 446 words: 117,660

Arguing With Zombies: Economics, Politics, and the Fight for a Better Future by Paul Krugman

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Andrei Shleifer, antiwork, Asian financial crisis, bank run, banking crisis, basic income, behavioural economics, benefit corporation, Berlin Wall, Bernie Madoff, bitcoin, blockchain, bond market vigilante , Bonfire of the Vanities, business cycle, capital asset pricing model, carbon footprint, carbon tax, Carmen Reinhart, central bank independence, centre right, Climategate, cognitive dissonance, cryptocurrency, David Ricardo: comparative advantage, different worldview, Donald Trump, Edward Glaeser, employer provided health coverage, Eugene Fama: efficient market hypothesis, fake news, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, frictionless, frictionless market, fudge factor, full employment, green new deal, Growth in a Time of Debt, hiring and firing, illegal immigration, income inequality, index fund, indoor plumbing, invisible hand, it is difficult to get a man to understand something, when his salary depends on his not understanding it, job automation, John Snow's cholera map, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, large denomination, liquidity trap, London Whale, low interest rates, market bubble, market clearing, market fundamentalism, means of production, Modern Monetary Theory, New Urbanism, obamacare, oil shock, open borders, Paul Samuelson, plutocrats, Ponzi scheme, post-truth, price stability, public intellectual, quantitative easing, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, secular stagnation, Seymour Hersh, stock buybacks, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, universal basic income, very high income, We are all Keynesians now, working-age population

Add in deep cuts in guaranteed benefits and a big increase in risk, and we’re looking at a “reform” that hurts everyone except the investment industry. Advocates insist that a privatized U.S. system can keep expenses much lower. It’s true that costs will be low if investments are restricted to low-overhead index funds—that is, if government officials, not individuals, make the investment decisions. But if that’s how the system works, the suggestions that workers will have control over their own money—two years ago, Cato renamed its Project on Social Security Privatization by replacing “privatization” with “choice”—are false advertising.


pages: 389 words: 112,319

Think Like a Rocket Scientist: Simple Strategies You Can Use to Make Giant Leaps in Work and Life by Ozan Varol

Abraham Maslow, Affordable Care Act / Obamacare, Airbnb, airport security, Albert Einstein, Amazon Web Services, Andrew Wiles, Apollo 11, Apollo 13, Apple's 1984 Super Bowl advert, Arthur Eddington, autonomous vehicles, Ben Horowitz, Boeing 747, Cal Newport, Clayton Christensen, cloud computing, Colonization of Mars, dark matter, delayed gratification, different worldview, discovery of DNA, double helix, Elon Musk, fail fast, fake news, fear of failure, functional fixedness, Gary Taubes, Gene Kranz, George Santayana, Google Glasses, Google X / Alphabet X, Inbox Zero, index fund, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Dyson, Jeff Bezos, job satisfaction, Johannes Kepler, Kickstarter, knowledge worker, Large Hadron Collider, late fees, lateral thinking, lone genius, longitudinal study, Louis Pasteur, low earth orbit, Marc Andreessen, Mars Rover, meta-analysis, move fast and break things, multiplanetary species, Neal Stephenson, Neil Armstrong, Nick Bostrom, obamacare, Occam's razor, out of africa, Peter Pan Syndrome, Peter Thiel, Pluto: dwarf planet, private spaceflight, Ralph Waldo Emerson, reality distortion field, Richard Feynman, Richard Feynman: Challenger O-ring, Ronald Reagan, Sam Altman, Schrödinger's Cat, Search for Extraterrestrial Intelligence, self-driving car, Silicon Valley, Simon Singh, Skinner box, SpaceShipOne, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, subprime mortgage crisis, sunk-cost fallacy, TED Talk, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Tyler Cowen, Upton Sinclair, Vilfredo Pareto, We wanted flying cars, instead we got 140 characters, Whole Earth Catalog, women in the workforce, Yogi Berra

Businesses that fly at higher altitudes tend to perform better. Shane Snow summarizes the relevant research in Smartcuts: “From 2001 to 2011, an investment in the 50 most idealistic brands—the ones opting for the high-hanging purpose and not just low-hanging profits—would have been 400 percent more profitable than shares of an S&P index fund.”15 Why? Moonshots appeal to human nature and attract more investors. Poking fun at the limited ambitions of most Silicon Valley firms, the manifesto for Founders Fund—a prominent venture-capital firm—reads: “We wanted flying cars, instead we got 140 characters.”16 The firm became the first outside investor in SpaceX’s moonshots.


Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher

book value, business climate, business cycle, buy and hold, data science, El Camino Real, estate planning, fixed income, index fund, low interest rates, market bubble, market fundamentalism, profit motive, RAND corporation, Salesforce, the market place, transaction costs, vertical integration

But some could see that he was a bit like a man hanging around the ballpark with bat and glove when too old to play. His few late-in-life purchases were not successful. He would have been much better off financially if he had just quit doing anything at the age of eighty or even seventy. It wouldn't have mattered if he sold and went into index funds or just held what he owned until he died. As it was,his decisions detracted value steadily. His long-held prescription for investors had been to buy great com-panies and pretty much hold them forever. And he had owned great companies. Had he followed his own prescription late in life and not attempted to fiddle and fix past his prime, he could haveheld what he owned until death and done far better than he did.


pages: 396 words: 113,613

Chokepoint Capitalism by Rebecca Giblin, Cory Doctorow

Aaron Swartz, AltaVista, barriers to entry, Berlin Wall, Bernie Sanders, Big Tech, big-box store, Black Lives Matter, book value, collective bargaining, commoditize, coronavirus, corporate personhood, corporate raider, COVID-19, disintermediation, distributed generation, Fairchild Semiconductor, fake news, Filter Bubble, financial engineering, Firefox, forensic accounting, full employment, gender pay gap, George Akerlof, George Floyd, gig economy, Golden age of television, Google bus, greed is good, green new deal, high-speed rail, Hush-A-Phone, independent contractor, index fund, information asymmetry, Jeff Bezos, John Gruber, Kickstarter, laissez-faire capitalism, low interest rates, Lyft, Mark Zuckerberg, means of production, microplastics / micro fibres, Modern Monetary Theory, moral hazard, multi-sided market, Naomi Klein, Network effects, New Journalism, passive income, peak TV, Peter Thiel, precision agriculture, regulatory arbitrage, remote working, rent-seeking, ride hailing / ride sharing, Robert Bork, Saturday Night Live, shareholder value, sharing economy, Silicon Valley, SoftBank, sovereign wealth fund, Steve Jobs, Steven Levy, stock buybacks, surveillance capitalism, Susan Wojcicki, tech bro, tech worker, The Chicago School, The Wealth of Nations by Adam Smith, TikTok, time value of money, transaction costs, trickle-down economics, Turing complete, Uber and Lyft, uber lyft, union organizing, Vanguard fund, vertical integration, WeWork

Creditors certainly lose out—iHeartMedia’s bankruptcy restructure saw its debt reduced to $16.1 million from $5.75 billion, almost the exact amount that had been loaded onto it via the leveraged buyout. Even most of the people who actually invest don’t really win: since 2006, private equity has returned about the same as the market overall—the same as you’d get from a Vanguard index fund—despite requiring investors to tie up their money indefinitely and take on a lot more risk and pay much higher fees.16 Taxpayers are big losers from this too, since they’re increasingly left holding the bag when these investments go south. In 2020 the US Federal Reserve promised to buy corporate bonds, including the riskiest “investment-grade” debt, for the first time in history.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Alan Greenspan, Albert Einstein, American ideology, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, Blue Ocean Strategy, BRICs, Burning Man, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, classic study, Clayton Christensen, Colonization of Mars, commoditize, commodity super cycle, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Dr. Strangelove, driverless car, Elon Musk, Erik Brynjolfsson, Fairchild Semiconductor, fear of failure, financial engineering, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, general purpose technology, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, Greenspan put, Herman Kahn, high net worth, hiring and firing, hockey-stick growth, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, laissez-faire capitalism, low interest rates, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, middle-income trap, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, precautionary principle, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Robert Solow, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, subprime mortgage crisis, technological determinism, technological singularity, TED Talk, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, University of East Anglia, unpaid internship, Vanguard fund, vertical integration, Yogi Berra

To know who owns General Electric it is necessary, as a first step, to ask: who owns the Vanguard Group? That turns out to be the wrong question, because the Vanguard Group is not investing its own money. It just represents Vanguard’s different funds, and the company, which pioneered the market for mutual index funds, operates – like other funds – on a principle of diversified allocation of capital. Hence, Vanguard does not necessarily hold GE stocks because it has an idea for how to make a successful company even more successful, despite being an asset manager that is a more active owner than many other asset managers.


pages: 433 words: 125,031

Brazillionaires: The Godfathers of Modern Brazil by Alex Cuadros

"World Economic Forum" Davos, affirmative action, Asian financial crisis, benefit corporation, big-box store, bike sharing, BRICs, buy the rumour, sell the news, cognitive dissonance, creative destruction, crony capitalism, Deng Xiaoping, Donald Trump, Elon Musk, facts on the ground, family office, financial engineering, high net worth, index fund, invisible hand, Jeff Bezos, Mark Zuckerberg, megaproject, NetJets, offshore financial centre, profit motive, prosperity theology / prosperity gospel / gospel of success, rent-seeking, risk/return, Rubik’s Cube, savings glut, short selling, Silicon Valley, sovereign wealth fund, stem cell, stock buybacks, tech billionaire, The Wealth of Nations by Adam Smith, too big to fail, transatlantic slave trade, We are the 99%, William Langewiesche

Santiago also arranges kidnapping insurance and prenup lawyers. He hooks his clients up with the best investment people too. You can’t just let all that money sit there. Bloomberg built a calculator to estimate the growth of a billionaire’s investment portfolio over time. Even with a basket of generic index funds, it amazed me to see how fast a billion dollars could become two billion. This was especially true in Brazil. As in Balzac’s France, the government sustains a class of rentiers, paying high interest rates on its Treasury bonds. This helps explain why so many Brazilian names on the Forbes list—the Setubals, the Moreira Salleses, the Aguiars—belong to banking heirs.


pages: 1,373 words: 300,577

The Quest: Energy, Security, and the Remaking of the Modern World by Daniel Yergin

"Hurricane Katrina" Superdome, "World Economic Forum" Davos, accelerated depreciation, addicted to oil, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Asian financial crisis, Ayatollah Khomeini, banking crisis, Berlin Wall, bioinformatics, book value, borderless world, BRICs, business climate, California energy crisis, carbon credits, carbon footprint, carbon tax, Carl Icahn, Carmen Reinhart, clean tech, Climategate, Climatic Research Unit, colonial rule, Colonization of Mars, corporate governance, cuban missile crisis, data acquisition, decarbonisation, Deng Xiaoping, Dissolution of the Soviet Union, diversification, diversified portfolio, electricity market, Elon Musk, energy security, energy transition, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, fear of failure, financial innovation, flex fuel, Ford Model T, geopolitical risk, global supply chain, global village, Great Leap Forward, Greenspan put, high net worth, high-speed rail, hydraulic fracturing, income inequality, index fund, informal economy, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), It's morning again in America, James Watt: steam engine, John Deuss, John von Neumann, Kenneth Rogoff, life extension, Long Term Capital Management, Malacca Straits, market design, means of production, megacity, megaproject, Menlo Park, Mikhail Gorbachev, military-industrial complex, Mohammed Bouazizi, mutually assured destruction, new economy, no-fly zone, Norman Macrae, North Sea oil, nuclear winter, off grid, oil rush, oil shale / tar sands, oil shock, oil-for-food scandal, Paul Samuelson, peak oil, Piper Alpha, price mechanism, purchasing power parity, rent-seeking, rising living standards, Robert Metcalfe, Robert Shiller, Robert Solow, rolling blackouts, Ronald Coase, Ronald Reagan, Sand Hill Road, Savings and loan crisis, seminal paper, shareholder value, Shenzhen special economic zone , Silicon Valley, Silicon Valley billionaire, Silicon Valley startup, smart grid, smart meter, South China Sea, sovereign wealth fund, special economic zone, Stuxnet, Suez crisis 1956, technology bubble, the built environment, The Nature of the Firm, the new new thing, trade route, transaction costs, unemployed young men, University of East Anglia, uranium enrichment, vertical integration, William Langewiesche, Yom Kippur War

Thus for investors—whether running hedge funds or pension funds, or retail investors—the commodity play was not just about oil itself, but about the booming economies that were using more and more oil.10 TRADING PLACES And now there were a lot more people in the oil market—the paper barrel part of the market—investing with no intention nor any need of ever taking delivery of the physical commodity. There were pension funds and hedge funds and sovereign wealth funds. There were the “massive passives”—the commodity index funds, heavily weighted to oil and with all the derivative trading around them. There were also exchange-traded funds; there were high net-worth individuals; and there were all sorts of other investors and traders, some of them in for the long term, and some of them very short term. Oil was no longer just a physical commodity, required to fuel cars and airplanes.

Arrhenius and Sassure and science meets policy and shale gas and as strategic threat Sundsvall meeting and Thatcher and twenty-one questions and Tyndall and Venus and Woods Hole meeting and see also global warming Climate Change Science Program “climategate,” Climate Science Technology Program Clinton, Bill climate change and in election of 1992 Iran policy and renewables and Clinton, Hillary Club of Rome Club of Rome Report (1972) CNN effect CNOOC (China National Offshore Oil Corporation) CNPC, see China National Petroleum Corporation coal carbon and disappearance of for electricity as fuel choice high vs. low sulfur Kelvin’s fears about lignate Mitchell’s views on oil made from pollution from reduction in use of Royal Navy’s move to oil from synfuels from see also specific countries coal gas (town gas) Coalition Provisional Authority Coase, Ronald Cocconi, Al Coda Cold War end of Cole, USS Colorado Columbus, Christopher combined-cycle gas turbines “Coming Ice Age, The” (Friedan) command-and-control regulation commodity index funds Commonwealth Edison communications electricity and international Communist Party, Chinese computers cyberattack and Comsat concentrated solar power Congress, U.S. anti-Chinese sentiment and climate change and Conoco’s Iran deal and electric car and energy spending and natural gas and oil executives and renewables and Rickover and see also House of Representatives, U.S.; Senate, U.S.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

3Com Palm IPO, Alan Greenspan, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, behavioural economics, Berlin Wall, Bernie Madoff, Black-Scholes formula, book value, business cycle, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, low interest rates, market clearing, Mason jar, mental accounting, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, PalmPilot, Paul Samuelson, payday loans, Ponzi scheme, Post-Keynesian economics, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, risk free rate, Robert Shiller, Robert Solow, Ronald Coase, Silicon Valley, South Sea Bubble, Stanford marshmallow experiment, statistical model, Steve Jobs, sunk-cost fallacy, Supply of New York City Cabdrivers, systematic bias, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

And as the story about Royal Dutch Shell and LTCM shows, even when investors can know for sure that prices are wrong, these prices can still stay wrong, or even get more wrong. This should rightly scare investors who think they are smart and want to exploit apparent mispricing. It is possible to make money, but it is not easy.§ Certainly, investors who accept the EMH gospel and invest in low-cost index funds cannot be faulted for that choice. I have a much lower opinion about the price-is-right component of the EMH, and for many important questions, this is the more important component. How wrong do I think it is? Notably, in Fischer Black’s essay on noise, he opines that “we might define an efficient market as one in which price is within a factor of 2 of value, i.e., the price is more than half of value and less than twice value.


pages: 469 words: 132,438

Taming the Sun: Innovations to Harness Solar Energy and Power the Planet by Varun Sivaram

"World Economic Forum" Davos, accelerated depreciation, addicted to oil, Albert Einstein, An Inconvenient Truth, asset light, asset-backed security, autonomous vehicles, bitcoin, blockchain, carbon footprint, carbon tax, clean tech, collateralized debt obligation, Colonization of Mars, currency risk, decarbonisation, deep learning, demand response, disruptive innovation, distributed generation, diversified portfolio, Donald Trump, electricity market, Elon Musk, energy security, energy transition, financial engineering, financial innovation, fixed income, gigafactory, global supply chain, global village, Google Earth, hive mind, hydrogen economy, index fund, Indoor air pollution, Intergovernmental Panel on Climate Change (IPCC), Internet of things, low interest rates, M-Pesa, market clearing, market design, Masayoshi Son, mass immigration, megacity, Michael Shellenberger, mobile money, Negawatt, ocean acidification, off grid, off-the-grid, oil shock, peer-to-peer lending, performance metric, renewable energy transition, Richard Feynman, ride hailing / ride sharing, rolling blackouts, Ronald Reagan, Silicon Valley, Silicon Valley startup, smart grid, smart meter, SoftBank, Solyndra, sovereign wealth fund, Ted Nordhaus, Tesla Model S, time value of money, undersea cable, vertical integration, wikimedia commons

The easiest way to satisfy both stipulations is to invest in listed securities, that is, stocks and bonds listed on public exchanges. This approach offers liquidity—it is straightforward to buy or sell securities on large exchanges—and it is possible to invest large sums in a diversified portfolio. To avoid having to perform due diligence on every stock or bond in which an investor has exposure, investors can invest in index funds, which themselves are listed securities that aggregate lots of individual stocks or bonds. Overall, institutional investors invest 80–90 percent of their portfolios in listed securities.35 For the most part, solar power projects fail to meet either of the criteria that institutional investors demand.


pages: 457 words: 143,967

The Bank That Lived a Little: Barclays in the Age of the Very Free Market by Philip Augar

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Bonfire of the Vanities, bonus culture, book value, break the buck, business logic, call centre, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, family office, financial deregulation, financial innovation, fixed income, foreign exchange controls, Glass-Steagall Act, high net worth, hiring and firing, index card, index fund, interest rate derivative, light touch regulation, loadsamoney, Long Term Capital Management, long term incentive plan, low interest rates, Martin Wolf, money market fund, moral hazard, Nick Leeson, Northern Rock, offshore financial centre, old-boy network, out of africa, prediction markets, proprietary trading, quantitative easing, risk free rate, Ronald Reagan, shareholder value, short selling, Sloane Ranger, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, too big to fail, vertical integration, wikimedia commons, yield curve

A solid figure, trained in economics, with an educated Scots accent and a sometimes sharp turn of phrase, he planned to grow asset management into a substantial business. Growth would come from a new form of fund management in which computers were used to build portfolios that tracked the performance of markets. With no expensive fund managers to pay, these passive quantitative funds – also called index funds – could charge investors less than funds actively managed.fn3 By the mid-1990s, BZW Investment Management had £50 billion under management and was the European leader in passive quantitative funds. In 1995 it became the global leader with funds under management of £160 billion when it bought the West Coast-based firm Wells Fargo Nikko Investment Advisers for £275 million.


pages: 389 words: 131,688

The Impossible Climb: Alex Honnold, El Capitan, and the Climbing Life by Mark Synnott

blue-collar work, California gold rush, Google Earth, index fund, Nate Silver, Skype, South China Sea, Steve Jobs, technological singularity, The Signal and the Noise by Nate Silver, trade route, Y2K

But Alex was still living in his van, and his annual expenses were running about 15,000 dollars a year. He was now making more than ten times what he had a few years earlier, yet he wasn’t spending any more than he had back before his career took off. His financial adviser wanted to talk about index funds, real estate, and IRAs. Alex had something different in mind. Two years earlier, in the fall of 2010, Alex and I, along with a few others, including Jimmy Chin, had teamed up for an expedition to Chad, where we were the first climbers to explore a 23,000-square-mile area on the southern fringe of the Sahara called the Ennedi Plateau.


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

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

AXA Futures Campbell Global Assets Fund Chesapeake Select LLC D.QUANT Fund/Ramsey Futures Trading Dexia Systemat (Euro) Eckhardt Futures LP Epsilon Futures (Euro) Epsilon USD FTC Futures Fund SICAV Graham Global Investment Fund (Div 2XL Portfolio) Graham Global Investment Fund (Div Portfolio) Graham Global Investment Fund (Fed Policy) Graham Global Investment Fund (Prop Matrix Portfolio) Hasenbichler Commodities AG JWH Global Strategies Legacy Futures Fund LP Liberty Global Fund LP Millburn International (Cayman) Ltd.—Diversified MLM Index Fund Leveraged (Class B) Nestor Partners Quadriga Rivoli International Fund (Euro) Rotella Polaris Fund Roy G. Niederhoffer Fund (Ireland) Plc SMN Diversified Futures Fund (Euro) Sunrise Fund Systeia Futures Fund (Euro) Systeia Futures Ltd. (USD) volatility (17.29 percent per annum). On average, the index experienced 56 percent of positive months, with a better absolute performance in positive months (+2.95 percent) than in negative months (−2.30 percent).


pages: 512 words: 131,112

Retrofitting Suburbia, Updated Edition: Urban Design Solutions for Redesigning Suburbs by Ellen Dunham-Jones, June Williamson

accelerated depreciation, banking crisis, big-box store, bike sharing, call centre, carbon footprint, Donald Shoup, edge city, gentrification, global village, index fund, iterative process, Jane Jacobs, knowledge worker, land bank, Lewis Mumford, McMansion, megaproject, megastructure, Network effects, new economy, New Urbanism, off-the-grid, peak oil, Peter Calthorpe, place-making, postindustrial economy, Ray Oldenburg, Richard Florida, ride hailing / ride sharing, Savings and loan crisis, Seaside, Florida, Silicon Valley, skinny streets, streetcar suburb, the built environment, The Death and Life of Great American Cities, The Great Good Place, transit-oriented development, upwardly mobile, urban decay, urban renewal, urban sprawl, vertical integration, Victor Gruen, white flight, working poor, young professional, zero-sum game

These small governments often lack the planning and redevelopment expertise that larger municipalities have on staff; in addition, they have been locked in competition with one another to entice tax-paying residents and businesses, leading them to avoid leveraging their land-use powers. The Long Island Index is one notable effort to provide statistical and survey data at the regional level that can be used to guide decision making in an area with fractured governance. The index, funded by the nonprofit Rauch Foundation, was begun in 2002 with the premise that “good information presented in a neutral manner can move policy.” The method is to track progress on issues like housing, land use, jobs, environmental quality, and transit from year to year in order to encourage regional thinking and to inspire action.19 An example of this approach, highlighting the challenges of fractured governance, is a New York Times Op-Ed comprised of a graphic chart comparing Nassau and Suffolk counties on Long Island to the fast-growing suburban counties of northern Virginia.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, bond market vigilante , book value, borderless world, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, capital controls, Carl Icahn, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, disinformation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, Glass-Steagall Act, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, junk bonds, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, long and variable lags, Louis Bachelier, low interest rates, market bubble, Mexican peso crisis / tequila crisis, Michael Milken, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, planned obsolescence, plutocrats, Post-Keynesian economics, price mechanism, price stability, prisoner's dilemma, profit maximization, proprietary trading, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Savings and loan crisis, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, stock buybacks, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

screens As might be expected, the field is populated by a full range of people, from cynics looking for a market niche to some fine people looking to transform the world. The mainstream of the SI industry is characterized by some form of social screening. The flavor of that screening can be sampled in an ad in the May-June 1995 issue of the Utne Reader for Working Assets, the SI mutual fund giant. Working Assets touted its No-Load Citizens Index Fund thus: "Unlike the S&P 500, however, we have a low concentration in dirty, dying industries like heavy equipment, oil and chemicals, weapons, utilities, alcohol and tobacco. Instead, we've concentrated on WALL STREET clean industries of the future, such as communications, consumer products and services, business equipment, high-tech, finance, healthcare and food production."


pages: 482 words: 149,351

The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, Alan Greenspan, anti-communist, bank run, banking crisis, Basel III, Bear Stearns, benefit corporation, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, British Empire, business climate, business cycle, capital controls, carried interest, Cass Sunstein, Celtic Tiger, central bank independence, centre right, Clayton Christensen, cloud computing, corporate governance, corporate raider, creative destruction, Credit Default Swap, cross-subsidies, David Ricardo: comparative advantage, demographic dividend, Deng Xiaoping, desegregation, Donald Trump, Etonian, export processing zone, failed state, fake news, falling living standards, family office, financial deregulation, financial engineering, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global supply chain, Global Witness, high net worth, Ida Tarbell, income inequality, index fund, invisible hand, Jeff Bezos, junk bonds, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, megaproject, Michael Milken, Money creation, Mont Pelerin Society, moral hazard, neoliberal agenda, Network effects, new economy, Northern Rock, offshore financial centre, old-boy network, out of africa, Paul Samuelson, plutocrats, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, Savings and loan crisis, seminal paper, shareholder value, sharing economy, Silicon Valley, Skype, smart grid, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, special economic zone, Steve Ballmer, Steve Jobs, stock buybacks, Suez crisis 1956, The Chicago School, Thorstein Veblen, too big to fail, Tragedy of the Commons, transfer pricing, two and twenty, vertical integration, Wayback Machine, wealth creators, white picket fence, women in the workforce, zero-sum game

He chose a funds of funds, which instead of investing directly invested in more than a hundred hedge funds, which in turn invested in the markets. The results are now in: a million dollars invested with Seides would have gained $220,000 in ten years, a 2 per cent annual return. The passive, boring index fund in the meantime gained $854,000 – over 6 per cent annually. Buffett would have done better pinning a list of popular stocks to a board, getting a chimpanzee and then incentivising it with peanuts to throw darts at the board. The law of averages means the stocks selected by the chimp with the darts would almost certainly have been closer to the bigger number, and because its fees were peanuts, probably above it.


pages: 444 words: 151,136

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

Alan Greenspan, Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bond market vigilante , book value, Branko Milanovic, bread and circuses, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, carbon tax, 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, foreign exchange controls, Fractional reserve banking, full employment, German hyperinflation, Great Leap Forward, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land bank, land reform, liquidity trap, Long Term Capital Management, lost cosmonauts, low interest rates, McMansion, mega-rich, military-industrial complex, Money creation, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, proprietary trading, pushing on a string, quantitative easing, RAND corporation, rent control, rent stabilization, reserve currency, risk free rate, riskless arbitrage, Ronald Reagan, Savings and loan crisis, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, Tax Reform Act of 1986, The Great Moderation, the scientific method, time value of money, too big to fail, Two Sigma, upwardly mobile, War on Poverty, Yogi Berra, young professional

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. While the approach appears to be successful and probably improves upon the returns of individuals plunging their IRAs into hot tips heard at the country club tap room, demand for this product may be indicative of the public’s unwavering faith in equities and bonds, and buying-on-dips right up until the end.


pages: 535 words: 149,752

After Steve: How Apple Became a Trillion-Dollar Company and Lost Its Soul by Tripp Mickle

"World Economic Forum" Davos, Airbnb, airport security, Apple II, Apple's 1984 Super Bowl advert, augmented reality, autonomous vehicles, banking crisis, Boeing 747, British Empire, business intelligence, Carl Icahn, Clayton Christensen, commoditize, coronavirus, corporate raider, COVID-19, desegregation, digital map, disruptive innovation, Donald Trump, Downton Abbey, driverless car, Edward Snowden, Elon Musk, Frank Gehry, General Magic , global pandemic, global supply chain, haute couture, imposter syndrome, index fund, Internet Archive, inventory management, invisible hand, John Markoff, Jony Ive, Kickstarter, Larry Ellison, lateral thinking, Mark Zuckerberg, market design, megacity, Murano, Venice glass, Ralph Waldo Emerson, self-driving car, Sheryl Sandberg, Silicon Valley, skeuomorphism, Stephen Fry, Steve Jobs, Steve Wozniak, Steven Levy, stock buybacks, Superbowl ad, supply-chain management, thinkpad, Tim Cook: Apple, Tony Fadell, Travis Kalanick, turn-by-turn navigation, Wayback Machine, WikiLeaks, Y2K

THE FOLLOWING DAY, the Apple share price fell 10 percent and the company lost $75 billion in value. The single-day decline was Apple’s biggest in six years and sank its valuation to a level it had not seen since February 2017. It shook the U.S. economy. The company had become one of the most widely held institutional stocks, included in mutual funds, index funds, and 401(k)s. Thanks in part to Warren Buffett and Berkshire Hathaway, everyone from grandmothers in Florida to autoworkers in the Midwest had an interest in Apple’s business. They all suffered. Cook sought to turn the tide by reviving foot traffic at Apple Stores. He held a series of meetings with his executive leadership team, including head of retail Angela Ahrendts, about stores’ failure to draw customers.


pages: 561 words: 157,589

WTF?: What's the Future and Why It's Up to Us by Tim O'Reilly

"Friedman doctrine" OR "shareholder theory", 4chan, Affordable Care Act / Obamacare, Airbnb, AlphaGo, Alvin Roth, Amazon Mechanical Turk, Amazon Robotics, Amazon Web Services, AOL-Time Warner, artificial general intelligence, augmented reality, autonomous vehicles, barriers to entry, basic income, behavioural economics, benefit corporation, Bernie Madoff, Bernie Sanders, Bill Joy: nanobots, bitcoin, Blitzscaling, blockchain, book value, Bretton Woods, Brewster Kahle, British Empire, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, carbon tax, Carl Icahn, Chuck Templeton: OpenTable:, Clayton Christensen, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, computer vision, congestion pricing, corporate governance, corporate raider, creative destruction, CRISPR, crowdsourcing, Danny Hillis, data acquisition, data science, deep learning, DeepMind, Demis Hassabis, Dennis Ritchie, deskilling, DevOps, Didi Chuxing, digital capitalism, disinformation, do well by doing good, Donald Davies, Donald Trump, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, fake news, Filter Bubble, Firefox, Flash crash, Free Software Foundation, fulfillment center, full employment, future of work, George Akerlof, gig economy, glass ceiling, Glass-Steagall Act, Goodhart's law, Google Glasses, Gordon Gekko, gravity well, greed is good, Greyball, Guido van Rossum, High speed trading, hiring and firing, Home mortgage interest deduction, Hyperloop, income inequality, independent contractor, index fund, informal economy, information asymmetry, Internet Archive, Internet of things, invention of movable type, invisible hand, iterative process, Jaron Lanier, Jeff Bezos, jitney, job automation, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John Zimmer (Lyft cofounder), Kaizen: continuous improvement, Ken Thompson, Kevin Kelly, Khan Academy, Kickstarter, Kim Stanley Robinson, knowledge worker, Kodak vs Instagram, Lao Tzu, Larry Ellison, Larry Wall, Lean Startup, Leonard Kleinrock, Lyft, machine readable, machine translation, Marc Andreessen, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, McMansion, microbiome, microservices, minimum viable product, mortgage tax deduction, move fast and break things, Network effects, new economy, Nicholas Carr, Nick Bostrom, obamacare, Oculus Rift, OpenAI, OSI model, Overton Window, packet switching, PageRank, pattern recognition, Paul Buchheit, peer-to-peer, peer-to-peer model, Ponzi scheme, post-truth, race to the bottom, Ralph Nader, randomized controlled trial, RFC: Request For Comment, Richard Feynman, Richard Stallman, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, Ronald Coase, Rutger Bregman, Salesforce, Sam Altman, school choice, Second Machine Age, secular stagnation, self-driving car, SETI@home, shareholder value, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart contracts, Snapchat, Social Responsibility of Business Is to Increase Its Profits, social web, software as a service, software patent, spectrum auction, speech recognition, Stephen Hawking, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, stock buybacks, strong AI, synthetic biology, TaskRabbit, telepresence, the built environment, the Cathedral and the Bazaar, The future is already here, The Future of Employment, the map is not the territory, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Davenport, Tony Fadell, Tragedy of the Commons, transaction costs, transcontinental railway, transportation-network company, Travis Kalanick, trickle-down economics, two-pizza team, Uber and Lyft, Uber for X, uber lyft, ubercab, universal basic income, US Airways Flight 1549, VA Linux, warehouse automation, warehouse robotics, Watson beat the top human players on Jeopardy!, We are the 99%, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator, yellow journalism, zero-sum game, Zipcar

Yet REI’s growth consistently outperforms both its publicly traded competitors and the entire S&P 500 retail index. Vanguard, the second-largest financial asset manager in the United States, with more than $4 trillion under management, is owned by the mutual funds whose performance it aggregates. John Bogle, its founder, invented the index fund as a way to keep fund management fees low, transferring much of the benefit of stock investing from money managers to its customers. Despite these counterexamples, the idea that extracting the highest possible profits and then returning the money to company management, big investors, and other shareholders is good for society has become so deeply rooted that it has been difficult for too long to see the destructive effects on society when shareholders are prioritized over workers, over communities, over customers.


pages: 442 words: 39,064

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

Alan Greenspan, Asian financial crisis, asset allocation, behavioural economics, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, Brownian motion, business cycle, buy and hold, buy the rumour, sell the news, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial engineering, 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, low interest rates, 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, power law, 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

Over 1998 and 1999, stocks in the Standard & Poor’s technology sector rose nearly fourfold, while the S&P 500 index gained just 50%. And without technology, the benchmark would be flat. In January 2000 alone, 30% of net inflows into mutual funds went to science and technology funds, versus just 8.7% into S&P 500 index funds. As a consequence, the average price-over-earnings ratio (P/E) for Nasdaq companies was above 200 (corresponding to a ridiculous earnings yield of 05%), a stellar value above anything that serious economic valuation theory would consider reasonable. It is worth recalling that the very same concept and wording of a so-called New Economy was hot in the minds and mouths of investors in the 1920s and in the early 1960s, as already mentioned.


pages: 614 words: 174,226

The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society by Binyamin Appelbaum

90 percent rule, airline deregulation, Alan Greenspan, Alvin Roth, Andrei Shleifer, anti-communist, battle of ideas, Benoit Mandelbrot, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, Celtic Tiger, central bank independence, clean water, collective bargaining, Corn Laws, correlation does not imply causation, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, desegregation, Diane Coyle, Donald Trump, Dr. Strangelove, ending welfare as we know it, financial deregulation, financial engineering, financial innovation, fixed income, flag carrier, floating exchange rates, full employment, George Akerlof, George Gilder, Gini coefficient, greed is good, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, income per capita, index fund, inflation targeting, invisible hand, Isaac Newton, It's morning again in America, Jean Tirole, John Markoff, Kenneth Arrow, Kenneth Rogoff, land reform, Les Trente Glorieuses, long and variable lags, Long Term Capital Management, low cost airline, low interest rates, manufacturing employment, means of production, Menlo Park, minimum wage unemployment, Mohammed Bouazizi, money market fund, Mont Pelerin Society, Network effects, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, Paul Samuelson, Philip Mirowski, Phillips curve, plutocrats, precautionary principle, price stability, profit motive, public intellectual, Ralph Nader, RAND corporation, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Bork, Robert Gordon, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Silicon Valley, Simon Kuznets, starchitect, Steve Bannon, Steve Jobs, supply-chain management, The Chicago School, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, trickle-down economics, ultimatum game, Unsafe at Any Speed, urban renewal, War on Poverty, Washington Consensus, We are all Keynesians now

The weakest version says past price movements cannot be used to forecast future price movements. The second extends that principle to all public information. The third includes nonpublic information. Particularly in its strongest form, the theory had a number of important implications. It suggested people should buy index funds rather than trying to beat the market. Somewhat counterintuitively, it also implied that markets were subject to a kind of natural order. The distribution of truly random events is surprisingly orderly: it looks like a bell curve. And this, in turn, suggested that risks could be quantified and managed.


pages: 665 words: 159,350

Shape: The Hidden Geometry of Information, Biology, Strategy, Democracy, and Everything Else by Jordan Ellenberg

Albert Einstein, AlphaGo, Andrew Wiles, autonomous vehicles, British Empire, Brownian motion, Charles Babbage, Claude Shannon: information theory, computer age, coronavirus, COVID-19, deep learning, DeepMind, Donald Knuth, Donald Trump, double entry bookkeeping, East Village, Edmond Halley, Edward Jenner, Elliott wave, Erdős number, facts on the ground, Fellow of the Royal Society, Geoffrey Hinton, germ theory of disease, global pandemic, government statistician, GPT-3, greed is good, Henri Poincaré, index card, index fund, Isaac Newton, Johannes Kepler, John Conway, John Nash: game theory, John Snow's cholera map, Louis Bachelier, machine translation, Mercator projection, Mercator projection distort size, especially Greenland and Africa, Milgram experiment, multi-armed bandit, Nate Silver, OpenAI, Paul Erdős, pets.com, pez dispenser, probability theory / Blaise Pascal / Pierre de Fermat, Ralph Nelson Elliott, random walk, Rubik’s Cube, self-driving car, side hustle, Snapchat, social distancing, social graph, transcontinental railway, urban renewal

Malkiel’s message is a sobering one. The constant up-and-down wandering of a stock price looks like events are driving it, but it might well be as random as the mosquito’s endless flitting. Don’t waste your time trying to time the market’s ups and downs; instead, Malkiel says, park your money in an index fund and forget about it. No amount of thought can predict the mosquito’s next move and provide you an advantage. Or, as Bachelier wrote in 1900, asserting what he calls a “fundamental principle”: (“Mathematically, the expected gain of a speculator is zero.”) A VERY UNEXPECTED FACT OF SEEMING VITALITY In July 1905, the very same month Pearson was posing Ross’s question in Nature, Albert Einstein published his paper “On the Motion of Small Particles Suspended in a Stationary Liquid, as Required by the Molecular Kinetic Theory of Heat,” in the Annalen der Physik.


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, book value, 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, equity risk premium, feminist movement, Great Leap Forward, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, managed futures, mental accounting, 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 free rate, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Sharpe ratio, short selling, source of truth, statistical model, stocks for the long run, sugar pill, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra

Two of its standard bearers (read pall bearers), Eugene Fama and Kenneth French, said gains earned by stale-information strategies such as price-to-book value and market capitalization were nothing more than fair compensation for risk. Recall that EMH does not deny the possibility that stale public information can earn profits. It merely says that when those gains are adjusted for risk, they will not be better than investing in an index fund. So long as the term risk is left undefined, EMH defenders are free to conjure up new forms of risk after the fact. As Elliott wavers have proven, after-the-fact fiddling allows any prior observations to be explained or explained away. And that, it seems to me, is what Fama and French did.57 They invented a new, ad hoc risk model using three risk factors to replace the old standby, the capital asset pricing model,58 which uses only one risk factor, a stock’s volatility relative to the market index.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, book value, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, deal flow, do well by doing good, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, Jim Simons, John Bogle, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, machine translation, margin call, market bubble, market clearing, market fundamentalism, Market Wizards by Jack D. Schwager, Mary Meeker, merger arbitrage, Michael Milken, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, operational security, pattern recognition, Paul Samuelson, pre–internet, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Savings and loan crisis, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, tail risk, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule

“Of course, ‘good investing gets clocked as some investors rush for exits’ is not as catchy a story as ‘quant brainiacs follow their computers to a well-deserved doom,’ so I’m probably not going to win this battle in the media,” Asness lamented.41 If quant strategies were not as crowded as the critics suggested, and if scary amounts of leverage were therefore not inevitable, what of the charge that hedge funds increased the risk of broad systemic blowups? Here too the Lo-Bookstaber critique needed to be qualified. During the first three days of the quant quake, the signals in the traders’ models performed abysmally, but the broader market remained calm—the average American household with its nest egg in an index fund would have noticed nothing, undermining the notion that this was a crisis for the whole financial system. On the fourth day of the quant quake, the market did suffer a hard fall, but this reflected the crisis in the credit markets more than the tremors in quant land. The great thing about liquidating so-called market-neutral strategies was that the effect on the overall market was neutral: For every stock the quants sold, they covered a short position.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

It influenced how money was allocated between different investments such as cash, bonds, and equity. Portfolio returns were compared to benchmarks such as the S&P 500. Investment return was separated into β (beta), or the return on the broad market, and α (alpha), the fund manager’s outperformance. Giving up trying to beat the market, index funds purchased all the stocks in the index to match the market return. Jack Bogle’s Vanguard Group and Barclays Global Investors (BGI, now owned by Blackstone) built large businesses on the mantra of low cost indexation. Others used a core-satellite approach—the bulk of funds were invested to match the index but a small portion was used to pick winners seeking outperformance (generate alpha).


pages: 613 words: 181,605

Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees by Patrick Dillon, Carl M. Cannon

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", accounting loophole / creative accounting, affirmative action, Alan Greenspan, AOL-Time Warner, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, buy and hold, Carl Icahn, collective bargaining, Columbine, company town, computer age, corporate governance, corporate raider, desegregation, energy security, estate planning, Exxon Valdez, fear of failure, fixed income, Gordon Gekko, greed is good, illegal immigration, index fund, John Markoff, junk bonds, mandatory minimum, margin call, Maui Hawaii, McDonald's hot coffee lawsuit, Michael Milken, money market fund, new economy, oil shale / tar sands, Ponzi scheme, power law, Ralph Nader, rolodex, Ronald Reagan, Sand Hill Road, Savings and loan crisis, Silicon Valley, Silicon Valley startup, Steve Jobs, the High Line, the market place, white picket fence, Works Progress Administration, zero-sum game

Another trader, this one at Amalgamated Bank, the nation’s largest union-owned savings institution, made a series of purchases for 115,000 shares. In Oakland, California, a financial manager in the office of the treasurer of the 180,000-member University of California Retirement Fund electronically purchased 200,000 shares of Enron stock through an index fund at an average price of $73 per share. This was just months after a portfolio manager in the same office, alerted by Enron’s ebullient reports that were echoed by the analysts, had clicked on ENE, the Enron ticker symbol, and electronically purchased 1.5 million shares of Enron stock at $70 per share.


pages: 612 words: 179,328

Buffett by Roger Lowenstein

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

It is easy to lose sight of the distinction between “futures” and stocks—after all, are they not both investments? This is arguable. Futures are zero-sum bets on the market direction. They do not raise capital for business, which is the essential purpose of the stock market. They do not represent a stake in a business—merely a stake in a wager. In the eighties, money poured into futures as well as into “index funds” designed to mimic the market averages (by owning every stock or a reasonable proxy). Money managers were giving up investing for trading the market whole—thus abandoning the job assigned them by markets, which is to keep prices “right” by searching out bargains and winnowing out the overpriced.


pages: 798 words: 240,182

The Transhumanist Reader by Max More, Natasha Vita-More

"World Economic Forum" Davos, 23andMe, Any sufficiently advanced technology is indistinguishable from magic, artificial general intelligence, augmented reality, Bill Joy: nanobots, bioinformatics, brain emulation, Buckminster Fuller, cellular automata, clean water, cloud computing, cognitive bias, cognitive dissonance, combinatorial explosion, Computing Machinery and Intelligence, conceptual framework, Conway's Game of Life, cosmological principle, data acquisition, discovery of DNA, Douglas Engelbart, Drosophila, en.wikipedia.org, endogenous growth, experimental subject, Extropian, fault tolerance, Flynn Effect, Francis Fukuyama: the end of history, Frank Gehry, friendly AI, Future Shock, game design, germ theory of disease, Hans Moravec, hypertext link, impulse control, index fund, John von Neumann, joint-stock company, Kevin Kelly, Law of Accelerating Returns, life extension, lifelogging, Louis Pasteur, Menlo Park, meta-analysis, moral hazard, Network effects, Nick Bostrom, Norbert Wiener, pattern recognition, Pepto Bismol, phenotype, positional goods, power law, precautionary principle, prediction markets, presumed consent, Project Xanadu, public intellectual, radical life extension, Ray Kurzweil, reversible computing, RFID, Ronald Reagan, scientific worldview, silicon-based life, Singularitarianism, social intelligence, stem cell, stochastic process, superintelligent machines, supply-chain management, supply-chain management software, synthetic biology, systems thinking, technological determinism, technological singularity, Ted Nelson, telepresence, telepresence robot, telerobotics, the built environment, The Coming Technological Singularity, the scientific method, The Wisdom of Crowds, transaction costs, Turing machine, Turing test, Upton Sinclair, Vernor Vinge, Von Neumann architecture, VTOL, Whole Earth Review, women in the workforce, zero-sum game

Finally, hedge bettors can ­correct for standard biases in individual judgment. Individuals would have clear monetary incentives to be honest and careful in contributing to the market consensus. If the odds you believe are different enough from the market odds, you believe you will on average make money, even more than with a standard investment like a stock index fund. And compared to stocks, idea future bets are precise and modular. In stock bets one must usually bet on a combination of ideas, such as the company’s product, marketing strategy, production techniques, etc. In idea futures you can bet on exactly the issue you think you know something about. It might be fun!


The Rough Guide to New York City by Rough Guides

3D printing, Airbnb, Bear Stearns, Berlin Wall, Bernie Madoff, bike sharing, Blue Bottle Coffee, Bonfire of the Vanities, Broken windows theory, Buckminster Fuller, buttonwood tree, car-free, centre right, Chuck Templeton: OpenTable:, clean water, collateralized debt obligation, colonial rule, congestion pricing, Cornelius Vanderbilt, crack epidemic, David Sedaris, Donald Trump, Downton Abbey, East Village, Edward Thorp, Elisha Otis, Exxon Valdez, Frank Gehry, General Motors Futurama, gentrification, glass ceiling, greed is good, haute couture, haute cuisine, Howard Zinn, illegal immigration, index fund, it's over 9,000, Jane Jacobs, junk bonds, Kickstarter, Lewis Mumford, Lyft, machine readable, Nelson Mandela, Norman Mailer, paper trading, Ponzi scheme, post-work, pre–internet, rent stabilization, ride hailing / ride sharing, Saturday Night Live, Scaled Composites, starchitect, subprime mortgage crisis, sustainable-tourism, The Death and Life of Great American Cities, the High Line, transcontinental railway, Triangle Shirtwaist Factory, uber lyft, upwardly mobile, urban decay, urban planning, urban renewal, white flight, Works Progress Administration, Yogi Berra, young professional

In 2017 another permit-less bronze sculpture dubbed the Fearless Girl appeared in front of the bull – designed by Kristen Visbal, the plucky figure seemed be defiantly staring down the animal. The statue quickly became a feminist icon (despite being commissioned as part of a marketing campaign for a gender-diverse index fund), much to the irritation of Di Modica, who, apparently without irony, took legal action to have it removed. Mayor De Blasio agreed that Fearless Girl could stay for eleven months, but its future beyond 2018 was uncertain at the time of writing. Skyscraper Museum 39 Battery Place • Wed–Sun noon–6pm • $5 • 212 968 1961, skyscraper.org • Subway R, W to Whitehall St; #4, #5 to Bowling Green Given the Financial District’s love affair with soaring towers of steel and limestone, it’s fitting that the Skyscraper Museum should be located down here, just behind the Ritz-Carlton Hotel on the northern edge of Battery Park.


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, Bear Stearns, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, fear of failure, financial engineering, financial innovation, fixed income, flag carrier, full employment, Greenspan put, index fund, intangible asset, invisible hand, Joseph Schumpeter, junk bonds, land bank, locking in a profit, Long Term Capital Management, low cost airline, low interest rates, Michael Milken, moral hazard, mortgage debt, Myron Scholes, prudent man rule, Right to Buy, risk free rate, risk-adjusted returns, risk/return, secular stagnation, shareholder value, stock buybacks, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, zero-coupon bond

The term “growth stock investing” was relatively new (and in its absence, there was no need for the contrasting term “value investing”). The invention of the hedge fund had yet to be recognized, and I’m not sure the description even existed. No one had ever heard of a venture capital fund, a private equity fund, an index fund, a quant fund, or an emerging market fund. And, interestingly, “famous investor” was largely an oxymoron—the world hadn’t yet heard of Warren Buffett, for example, and only a small circle recognized his teacher at Columbia, Ben Graham. The world of fixed income bore little resemblance to that of today.


pages: 993 words: 318,161

Fall; Or, Dodge in Hell by Neal Stephenson

Ada Lovelace, augmented reality, autonomous vehicles, back-to-the-land, bitcoin, blockchain, cloud computing, coherent worldview, computer vision, crisis actor, crossover SUV, cryptocurrency, defense in depth, demographic transition, distributed ledger, drone strike, easy for humans, difficult for computers, fake news, false flag, game design, gamification, index fund, Jaron Lanier, life extension, messenger bag, microaggression, microbiome, Neal Stephenson, Network effects, no-fly zone, off grid, off-the-grid, offshore financial centre, pattern recognition, planetary scale, ride hailing / ride sharing, sensible shoes, short selling, Silicon Valley, Snow Crash, tech bro, telepresence, telepresence robot, telerobotics, The Hackers Conference, Turing test, Works Progress Administration

His money had attracted more donations, mostly from old friends of his who wanted to get in on a good thing. During the first decade, the problem had been finding responsible ways to spend the money faster than it accumulated. This was like shoveling your driveway during a blizzard. When foundation money needed to be parked, she had at first put it in simple index funds. This reassured her she wasn’t missing out on any market moves, without her paying a lot for fancy advisers. Slowly she’d begun moving money into financial bots running algorithms too complicated for any human to understand. These had performed better than the humans. In one case, a single bot had made so much money over a span of several consecutive years that it had more than doubled the foundation’s endowment.


pages: 1,336 words: 415,037

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

affirmative action, Alan Greenspan, Albert Einstein, anti-communist, AOL-Time Warner, Ayatollah Khomeini, barriers to entry, Bear Stearns, Black Monday: stock market crash in 1987, Bob Noyce, Bonfire of the Vanities, book value, Brownian motion, capital asset pricing model, card file, centralized clearinghouse, Charles Lindbergh, collateralized debt obligation, computerized trading, Cornelius Vanderbilt, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, do what you love, Donald Trump, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, Fairchild Semiconductor, Fillmore Auditorium, San Francisco, financial engineering, Ford Model T, Garrett Hardin, Glass-Steagall Act, global village, Golden Gate Park, Greenspan put, Haight Ashbury, haute cuisine, Honoré de Balzac, If something cannot go on forever, it will stop - Herbert Stein's Law, In Cold Blood by Truman Capote, index fund, indoor plumbing, intangible asset, interest rate swap, invisible hand, Isaac Newton, it's over 9,000, Jeff Bezos, John Bogle, John Meriwether, joint-stock company, joint-stock limited liability company, junk bonds, Larry Ellison, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, Marshall McLuhan, medical malpractice, merger arbitrage, Michael Milken, Mikhail Gorbachev, military-industrial complex, money market fund, moral hazard, NetJets, new economy, New Journalism, North Sea oil, paper trading, passive investing, Paul Samuelson, pets.com, Plato's cave, plutocrats, Ponzi scheme, proprietary trading, Ralph Nader, random walk, Ronald Reagan, Salesforce, Scientific racism, shareholder value, short selling, side project, Silicon Valley, Steve Ballmer, Steve Jobs, supply-chain management, telemarketer, The Predators' Ball, The Wealth of Nations by Adam Smith, Thomas Malthus, tontine, too big to fail, Tragedy of the Commons, transcontinental railway, two and twenty, Upton Sinclair, War on Poverty, Works Progress Administration, Y2K, yellow journalism, zero-coupon bond

“No. Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time. Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market. “If a cross-section of American industry is going to do well over time, then why try to pick the little beauties and think you can do better? Very few people should be active investors.”


pages: 1,737 words: 491,616

Rationality: From AI to Zombies by Eliezer Yudkowsky

Albert Einstein, Alfred Russel Wallace, anthropic principle, anti-pattern, anti-work, antiwork, Arthur Eddington, artificial general intelligence, availability heuristic, backpropagation, Bayesian statistics, behavioural economics, Berlin Wall, Boeing 747, Build a better mousetrap, Cass Sunstein, cellular automata, Charles Babbage, cognitive bias, cognitive dissonance, correlation does not imply causation, cosmological constant, creative destruction, Daniel Kahneman / Amos Tversky, dematerialisation, different worldview, discovery of DNA, disinformation, Douglas Hofstadter, Drosophila, Eddington experiment, effective altruism, experimental subject, Extropian, friendly AI, fundamental attribution error, Great Leap Forward, Gödel, Escher, Bach, Hacker News, hindsight bias, index card, index fund, Isaac Newton, John Conway, John von Neumann, Large Hadron Collider, Long Term Capital Management, Louis Pasteur, mental accounting, meta-analysis, mirror neurons, money market fund, Monty Hall problem, Nash equilibrium, Necker cube, Nick Bostrom, NP-complete, One Laptop per Child (OLPC), P = NP, paperclip maximiser, pattern recognition, Paul Graham, peak-end rule, Peter Thiel, Pierre-Simon Laplace, placebo effect, planetary scale, prediction markets, random walk, Ray Kurzweil, reversible computing, Richard Feynman, risk tolerance, Rubik’s Cube, Saturday Night Live, Schrödinger's Cat, scientific mainstream, scientific worldview, sensible shoes, Silicon Valley, Silicon Valley startup, Singularitarianism, SpaceShipOne, speech recognition, statistical model, Steve Jurvetson, Steven Pinker, strong AI, sunk-cost fallacy, technological singularity, The Bell Curve by Richard Herrnstein and Charles Murray, the map is not the territory, the scientific method, Turing complete, Turing machine, Tyler Cowen, ultimatum game, X Prize, Y Combinator, zero-sum game

If you join this group project, you’ll get more done than you could on your own, relative to your utility function. So, obviously, you should join. But wait! The anti-mugging project keeps their funds invested in a money market fund! That’s ridiculous; it won’t earn even as much interest as US Treasuries, let alone a dividend-paying index fund. Clearly, this project is run by morons, and you shouldn’t join until they change their malinvesting ways. Now you might realize—if you stopped to think about it—that all things considered, you would still do better by working with the common anti-mugging project, than striking out on your own to fight crime.