technology bubble

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pages: 333 words: 76,990

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

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

Equities bought at the peak of the bull market in the late 1960s, before the spike in global inflation and interest rates that was to occur over the life of the bond, also saw very negative returns. Exhibit 2.4 S&P 500 (10-year rolling annualised real returns) SOURCE: Goldman Sachs Global Investment Research. In an historical context, the period of the technology bubble and its collapse at the end of the 1990s is particularly striking. Equities bought at the top of the technology bubble in 2000 – and even through to 2003 – achieved over the subsequent decade some of the lowest real returns in US equities (along with the 1970s) in over 100 years. Equities bought during the period that followed have resulted in much stronger returns – in line with long-run averages. Meanwhile, investors who entered the stock market following the financial crisis in 2007/2008 (the final reading in the chart) have enjoyed strong returns.

For much of the history, the positive correlation between bond and equity prices has generally been the norm. After the technology bubble burst in the late 1990s, however, the reverse occurred. Growth expectations collapsed and easier monetary policy pushed down bond yields. But equities were at such high valuations to start with that they derated sharply despite lower bond yields, such that the price correlation turned negative. Conditions started to normalise from about 2002 as confidence began to recover and growth expectations improved. But this was a brief respite. Before long, the collapse of the US housing bubble (which was partly fuelled by the lower interest rates that followed the end of the technology bubble) heralded the start of the global financial crisis. Easier monetary policy in the wake of the crisis resulted in lower bond yields and inflation amid new worries about growth.

During the 1980s and 1990s, falling bond yields were associated with generally strong growth and lower risks – an environment that was conducive to value companies. Then, in the period running up to the technology bubble in the late 1990s, there was a sharp rotation in favour of growth stocks when low interest rates were seen as beneficial to growth companies that enjoyed long duration. Also, technology companies (and at the time telecom and media stocks) were seen as ‘new economy’ companies that would benefit from much higher future growth than those in traditional industries (often referred to at the time as ‘old economy’) where demand was mature. In the wake of the collapse of the technology bubble, many of these growth stocks (and technology stocks in particular) experienced the biggest falls in valuations. Indeed, at the time, the gap in valuations between growth and value stocks had reached record highs, leaving them exposed to a reversal as confidence in the long-term growth opportunities for these stocks, and the value that had been attributable to them, started to fade.


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

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

As the U.S. stock market and the U.S. dollar soared, the dollar returns in European and Japanese markets fell behind the United States. The advantage that U.S. investors had gained through many years of investing abroad vanished, leaving many questioning the wisdom of international investing. The New Millennium and the Technology Bubble The last three years of the twentieth century, marked by the emergence of a huge technology bubble, saw strong gains in all of the world stock markets, with the European and American markets surging to all-time highs. But this was not to last. A few months into the new millennium, the technology bubble burst and stocks fell into a severe bear market. All of the developed countries’ markets fell by at least 50 percent: from March 2000 through October 2002, the U.S. market fell by one-half, matching its record post-Depression decline in the ferocious 1972 to 1974 bear market, while European and Japanese markets, which suffered declines of 60 and 63 percent, respectively, bottomed in March 2003—five months after the U.S. market bottomed and just prior to the U.S.

Capital 137 Conclusion 138 CONTENTS CONTENTS ix Chapter 9 Outperforming the Market: The Importance of Size, Dividend Yields, and Price-to-Earnings Ratios 139 Stocks That Outperform the Market 139 Small- and Large-Cap Stocks 141 Trends in Small-Cap Stock Returns 142 Valuation 144 Value Stocks Offer Higher Returns Than Growth Stocks 144 Dividend Yields 145 Other Dividend Yield Strategies 147 Price-to-Earnings (P-E) Ratios 149 Price-to-Book Ratios 150 Combining Size and Valuation Criteria 152 Initial Public Offerings: The Disappointing Overall Returns on New Small-Cap Growth Companies 154 The Nature of Growth and Value Stocks 157 Explanations of Size and Valuation Effects 157 The Noisy Market Hypothesis 158 Conclusion 159 Chapter 10 Global Investing and the Rise of China, India, and the Emerging Markets 161 The World’s Population, Production, and Equity Capital 162 Cycles in Foreign Markets 164 The Japanese Market Bubble 165 The Emerging Market Bubble 166 The New Millennium and the Technology Bubble 167 Diversification in World Markets 168 Principles of Diversification 168 “Efficient” Portfolios: Formal Analysis 168 Should You Hedge Foreign Exchange Risk? 173 Sector Diversification 173 Private and Public Capital 177 x The World in 2050 178 Conclusion 182 Appendix: The Largest Non-U.S.-Based Companies 182 PART 3 HOW THE ECONOMIC ENVIRONMENT IMPACTS STOCKS Chapter 11 Gold, Monetary Policy, and Inflation 187 Money and Prices 189 The Gold Standard 191 The Establishment of the Federal Reserve 191 The Fall of the Gold Standard 192 Postdevaluation Monetary Policy 193 Postgold Monetary Policy 194 The Federal Reserve and Money Creation 195 How the Fed’s Actions Affect Interest Rates 196 Stocks as Hedges against Inflation 199 Why Stocks Fail as a Short-Term Inflation Hedge 201 Higher Interest Rates 201 Nonneutral Inflation: Supply-Side Effects 202 Taxes on Corporate Earnings 202 Inflationary Biases in Interest Costs 203 Capital Gains Taxes 204 Conclusion 205 Chapter 12 Stocks and the Business Cycle 207 Who Calls the Business Cycle?

262 Index Options 264 Buying Index Options 266 Selling Index Options 267 The Importance of Indexed Products 267 Chapter 16 Market Volatility 269 The Stock Market Crash of October 1987 271 The Causes of the October 1987 Crash 273 Exchange-Rate Policies 274 The Futures Market 275 Circuit Breakers 276 The Nature of Market Volatility 277 Historical Trends of Stock Volatility 278 The Volatility Index (VIX) 281 Recent Low Volatility 283 The Distribution of Large Daily Changes 283 The Economics of Market Volatility 285 The Significance of Market Volatility 286 Chapter 17 Technical Analysis and Investing with the Trend 289 The Nature of Technical Analysis 289 Charles Dow, Technical Analyst 290 The Randomness of Stock Prices 291 Simulations of Random Stock Prices 292 Trending Markets and Price Reversals 294 Moving Averages 295 Testing the Dow Jones Moving-Average Strategy 296 Back-Testing the 200-Day Moving Average 297 The Nasdaq Moving-Average Strategy 300 CONTENTS CONTENTS xiii Distribution of Gains and Losses 301 Momentum Investing 302 Conclusion 303 Chapter 18 Calendar Anomalies 305 Seasonal Anomalies 306 The January Effect 306 Causes of the January Effect 309 The January Effect Weakened in Recent Years 310 Large Monthly Returns 311 The September Effect 311 Other Seasonal Returns 315 Day-of-the-Week Effects 316 What’s an Investor to Do? 318 Chapter 19 Behavioral Finance and the Psychology of Investing 319 The Technology Bubble, 1999 to 2001 320 Behavioral Finance 322 Fads, Social Dynamics, and Stock Bubbles 323 Excessive Trading, Overconfidence, and the Representative Bias 325 Prospect Theory, Loss Aversion, and Holding On to Losing Trades 328 Rules for Avoiding Behavioral Traps 331 Myopic Loss Aversion, Portfolio Monitoring, and the Equity Risk Premium 332 Contrarian Investing and Investor Sentiment: Strategies to Enhance Portfolio Returns 333 Out-of-Favor Stocks and the Dow 10 Strategy 335 PART 5 BUILDING WEALTH THROUGH STOCKS Chapter 20 Fund Performance, Indexing, and Beating the Market 341 The Performance of Equity Mutual Funds 342 Finding Skilled Money Managers 346 xiv Persistence of Superior Returns 348 Reasons for Underperformance of Managed Money 348 A Little Learning Is a Dangerous Thing 349 Profiting from Informed Trading 349 How Costs Affect Returns 350 The Increased Popularity of Passive Investing 351 The Pitfalls of Capitalization-Weighted Indexing 351 Fundamentally Weighted versus Capitalization-Weighted Indexation 353 The History of Fundamentally Weighted Indexation 356 Conclusion 357 Chapter 21 Structuring a Portfolio for Long-Term Growth 359 Practical Aspects of Investing 360 Guides to Successful Investing 360 Implementing the Plan and the Role of an Investment Advisor 363 Concluding Comment 364 Index 367 CONTENTS F O R E W O R D Some people find the process of assembling data to be a deadly bore.


Investment: A History by Norton Reamer, Jesse Downing

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

The lesson behind financial innovation is clear: there are many benefits of socializing risk, but if we are not exceedingly careful to understand the potential nature and magnitude of that risk, we may impair an array of institutions at once. And so, we live in the age of a highly financialized economy. Now why, then, did the technology bubble not produce severe economic ramifications? After all, the disaster in the stock market surely should have caused the real economy to seize. Not necessarily. There were likely two related reasons why the technology bubble did not cause severe problems for the real economy. First, even though the risk of owning the technology enterprises was socialized through the stock market, the holders of the equity in these technology companies viewed it as being high-risk capital anyway. Economic agents knew 224 Investment: A History enough not to view the equity of technology firms as low risk, and therefore agents generally did not assemble their balance sheets in such a way so as to have their financial obligations depend fundamentally on the value of those stocks.

His poor health seemed to inspire some leniency and lighten the sentence of up to twenty-four years and five months the prosecutors pursued in the case.140 Rajaratnam spent the beginning of his career studying technology stocks, and he quickly ascended the corporate ladder at the investment bank Needham & Co., landing positions as the head of research in 1987, COO in 1989, and president by 1991. He eventually broke away from the firm, and he started Galleon Group in 1997 with several coworkers from Needham. Galleon was extremely successful despite the bursting of the technology bubble. In fact, the firm was up over 40 percent from 2000 to 2002 when the Standard & Poor’s 500 (S&P 500) was down 37.6 percent.141 And here is where Rajaratnam’s story becomes so similar to many of those of others convicted of insider trading. The striking feature of almost all inside traders is that they were either already successful or seemed poised for success. They simply did not need to engage in insider trading to prosper.

This was quite different than the highly rated tranches of mortgage debt (often having AA and AAA ratings), where agents believed in the soundness of the asset and often constructed their liabilities to depend fundamentally on their valuation not declining substantially. Agents thought, in short, that these mortgage assets involved their low-risk capital and as such could build more liabilities against them, and when that turned out not to be true, disaster struck. Furthermore, the technology bubble did not trigger a major credit event. Surely, tech companies themselves had a very difficult time accessing any form of capital in the wake of the bubble, but beyond this sector of the economy, there was not a wide seizure of credit. Potential lenders were not wary of all potential borrowers because generally there was not a massive shock to assets consumed by ostensibly low-risk capital. As a result, financial innovation here did not induce a grinding halt to the real economy.


pages: 517 words: 139,477

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

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

Index Options Buying Index Options Selling Index Options The Importance of Indexed Products Chapter 19 Market Volatility The Stock Market Crash of October 1987 The Causes of the October 1987 Crash Exchange Rate Policies The Futures Market Circuit Breakers Flash Crash—May 6, 2010 The Nature of Market Volatility Historical Trends of Stock Volatility The Volatility Index The Distribution of Large Daily Changes The Economics of Market Volatility The Significance of Market Volatility Chapter 20 Technical Analysis and Investing with the Trend The Nature of Technical Analysis Charles Dow, Technical Analyst The Randomness of Stock Prices Simulations of Random Stock Prices Trending Markets and Price Reversals Moving Averages Testing the Dow Jones Moving-Average Strategy Back-Testing the 200-Day Moving Average Avoiding Major Bear Markets Distribution of Gains and Losses Momentum Investing Conclusion Chapter 21 Calendar Anomalies Seasonal Anomalies The January Effect Causes of the January Effect The January Effect Weakened in Recent Years Large Stock Monthly Returns The September Effect Other Seasonal Returns Day-of-the-Week Effects What’s an Investor to Do? Chapter 22 Behavioral Finance and the Psychology of Investing The Technology Bubble, 1999 to 2001 Behavioral Finance Fads, Social Dynamics, and Stock Bubbles Excessive Trading, Overconfidence, and the Representative Bias Prospect Theory, Loss Aversion, and the Decision to Hold on to Losing Trades Rules for Avoiding Behavioral Traps Myopic Loss Aversion, Portfolio Monitoring, and the Equity Risk Premium Contrarian Investing and Investor Sentiment: Strategies to Enhance Portfolio Returns Out-of-Favor Stocks and the Dow 10 Strategy PART V BUILDING WEALTH THROUGH STOCKS Chapter 23 Fund Performance, Indexing, and Beating the Market The Performance of Equity Mutual Funds Finding Skilled Money Managers Persistence of Superior Returns Reasons for Underperformance of Managed Money A Little Learning Is a Dangerous Thing Profiting from Informed Trading How Costs Affect Returns The Increased Popularity of Passive Investing The Pitfalls of Capitalization-Weighted Indexing Fundamentally Weighted Versus Capitalization-Weighted Indexation The History of Fundamentally Weighted Indexation Conclusion Chapter 24 Structuring a Portfolio for Long-Term Growth Practical Aspects of Investing Guides to Successful Investing Implementing the Plan and the Role of an Investment Advisor Concluding Comment Notes Index FOREWORD In July 1997 I called Peter Bernstein and said I was going to be in New York and would love to lunch with him.

The unprecedented bull market in Treasury bonds, supported by the belief that Treasury bonds are “insurance policies” in the case of financial collapse, could end as badly as the bull market in technology stocks did at the turn of the century. When economic growth increases, Treasury bondholders will receive the double blow of rising interest rates and loss of safe-haven status. One of the prime lessons learned from long-term analysis is that no asset class can stay permanently detached from fundamentals. Stocks had their comeuppance when the technology bubble burst and the financial system crashed. It is quite likely that bondholders will suffer a similar fate as the liquidity created by the world’s central banks turns into stronger economic growth and higher inflation. Legislative Fallout from the Financial Crisis Just as the Great Depression generated a host of legislation such as the Securities and Exchange Act, which created the SEC, the Glass-Steagall Act, which separated commercial and investment banks, and establishment of the Federal Deposit Insurance Corporation, the financial crisis of 2008 spurred legislators to design laws to prevent a repeat of the financial collapse.

By 1998 the capitalization of the Nasdaq had already exceeded that of the Tokyo Stock Exchange. At the market peak in March 2000, the total market value of firms traded on the Nasdaq reached nearly $6 trillion, more than one-half that of the NYSE and more than any other stock exchange in the world. At the beginning of the millennium, Nasdaq’s Microsoft and Cisco had the two largest market values in the world, and Nasdaq-listed Intel and Oracle were also among the top 10. When the technology bubble burst, trading and prices on the Nasdaq sank rapidly. The Nasdaq Index declined from over 5,000 in March 2000 to 1,150 in October 2002 before rebounding to 3,000 at the end of 2012. Trading also fell off from an average of over 2.5 billion shares when prices peaked to approximately 2 billion shares in 2007. Despite the decline in the Nasdaq Index, the Nasdaq still trades in some of the world’s most active stocks.


pages: 490 words: 117,629

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

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

Aside from the dismal picture provided by historical experience, all but the most long-standing investors in venture partnerships face a problem in adverse selection. The highest-quality, top-tier venture firms generally refuse to accept new investors and ration capacity even among existing providers of funds. Venture firms willing and able to accept money from new sources may represent relatively unattractive, second-tier investment opportunities. Prior to the technology bubble of the late 1990s, investors in venture partnerships received returns inadequate to compensate for the risks incurred. For a few glorious years, the Internet mania allowed venture investors to share in a staggering flood of riches. Yet, the bubble-induced enthusiasm for private technology investing produced an unanticipated problem for venture investors. Indiscriminate demand allowed the managing partners of venture funds to increase the flow of management fees and take a greater share of profits.

Apologists for the venture capital industry might wish to examine a shorter time frame, allowing the concentrated impact of the bubble to exercise greater influence over the results. Trailing ten-year numbers for the Venture Economics sample clock in at 29.4 percent per annum, compared to 23.0 percent per annum for the common stock equivalent. Perhaps the 6.4 percentage points of incremental returns provide adequate recompense for the extraordinary risk of investing in start-up enterprises. Even so, the incremental return exists solely because of the technology bubble. Examine the trailing ten-year results for a period ending in the pre-bubble year of 1996. The Venture Economics sample of nearly six hundred funds produced a trailing ten-year return of 15.2 percent per annum, relative to a public market equivalent of 14.9 percent per annum. The decade ending December 31, 1996, represents a much more reasonable assessment of venture capital’s relative return-generating power than does the decade ending December 31, 2000.

A high level of co-investment by the general partner represents a sure way to align investor interests, creating a salutary symmetry in general partners’ attitudes toward gains and losses. Unfortunately, in the broader venture world, significant general partner co-investment represents the exception, not the rule. Interestingly, however, a fair number of the venture capital elite invest substantial amounts of personal funds side by side with their limited partners. Investment success allows fund sponsors to move the terms of trade in the general partners’ favor. The technology bubble of the late 1990s provides a case in point. Inspired by enormous investor demand, venture firms raised bubble-era funds in the neighborhood of ten times the size of funds raised only a decade earlier, moving from a typical 1990-vintage fund size of $100 million to $150 million to a 2000-vintage fund size of $1 billion to $1.5 billion. Along with the increase in fund size came an increase in fee income that far outpaced the growth in the size of the professional staff.


pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, business cycle, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

Michael Lewis, The Big Short, regarding American International Group (AIG) THE GLOBAL FINANCIAL crisis that broke into the open in the summer of 2007 is often ascribed to excessive mortgage lending and excessive securitization of low-quality, subprime mortgages in the United States.1 At the peak of the crisis, in October 2008, the IMF estimated that the total losses of financial institutions from subprime-mortgage-related securities amounted to $500 billion.2 When seen by itself, $500 billion seems huge, but in the context of a global financial system in which the banking sector’s assets are on the order of $80 trillion or more, it is actually not all that large. In fact, the $500 billion loss from subprime-mortgage-related securities is dwarfed by the more than $5 trillion of losses in the value of shares on U.S. stock markets in the early 2000s, when the so-called technology bubble of the late 1990s burst.3 How could this loss in the value of mortgage-related securities have such a large effect on the global financial system and on the broader economy? Why was the subprime crisis so much more damaging than the bursting of the technology bubble a few years earlier? And why has this crisis been so much more damaging to the world economy than the many banking crises of the early 1990s, including the Japanese crisis, which also involved very large losses in real estate lending?4 The one-word answer to these questions is “Contagion.”

See also equity stock exchanges, corporate debt and, 234n26 stock market, U.S.: crash of 1987 in, 262n51; technology bubble of 1990s in, 60, 61, 255n3 stock options, 214 Stout, Lynn, 285n32 strategic theory of international trade, 320n23 stress tests, 186–87; limitations of, 170, 186–87, 315n76; risk assessment with, 73, 186–87, 315n76 structured investment vehicles (SIVs): breakdown in funding for, 299n45; definition of, 159; regulation of, 161–62; risks of, 162 subprime mortgage(s): claimed to be short-term loans, 298n44; in financial crisis of 2007-2009, 60–61; interest rates on, 276n12 subprime mortgage crisis, U.S.: careless lending in, 56; contagion in, 60–61; dividends paid during, 174–75; flawed regulation as factor in, 323n38; versus technology bubble of 1990s, 60, 61 subprime-mortgage-related securities: reasons for impact of losses from, 60–61; value of losses from, 60, 255n2 subsidiaries, in resolution of failed institutions, 76–77, 262n62 subsidies, 129–47; for bank borrowing, 9, 129–30, 137–38, 139–40, 235n30; for corporate borrowing, 130, 139–40; costs of, to society, 145–47; explicit (See explicit guarantees); externalities and, 197–99; guarantees as type of (See guarantees); implicit (See implicit guarantees); and international competition, 197–99; perverse, 13, 81, 130, 139, 188, 198, 226; and size of banks, 89, 130, 270n31; tax, 139–40, 188 Sumitomo Corporation, 260n39 Summers, Lawrence, 230n7, 298n39, 331n19 Sundaresan, Suresh, 316n81 supervisors: assessment of insolvency by, 176; concern for international competitiveness, 319n8; in regulatory capture, 204–5; response to violations of capital requirements, 188–90; role in financial crisis of 2007-2009, 204, 212, 226, 336n56 Sutton, Willie, 200, 321n29 swaps: in bankruptcy, exceptions for, 236n35; use of term, 259n34.

Their attempts to deal with the situation further depressed financial markets, which then affected other financial institutions.5 When dominos are standing near one another, one piece falling can make all the others fall, too. Similarly, the initial losses on subprime-mortgage-related securities triggered a chain reaction that eventually threatened to bring down the entire financial system. This is why the final damage was much greater than the initial loss might have led one to expect. By contrast, when the technology bubble burst and stock markets declined in the early 2000s, the losses were mainly borne by final investors.6 Because of those losses, many people will end up with substantially smaller pensions, but at the time there were few defaults and bankruptcies that dragged down other institutions, and there were no furious asset sales that further stressed the system. Even the 2002 bankruptcies of Enron and WorldCom, the largest bankruptcies before the financial crisis, did not create the kind of havoc that was seen in 2007–2009, especially after the Lehman Brothers bankruptcy.


pages: 304 words: 99,836

Why I Left Goldman Sachs: A Wall Street Story by Greg Smith

always be closing, asset allocation, Black Swan, bonus culture, break the buck, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, East Village, fixed income, Flash crash, glass ceiling, Goldman Sachs: Vampire Squid, high net worth, information asymmetry, London Interbank Offered Rate, mega-rich, money market fund, new economy, Nick Leeson, quantitative hedge fund, Renaissance Technologies, short selling, Silicon Valley, Skype, sovereign wealth fund, Stanford marshmallow experiment, statistical model, technology bubble, too big to fail

It seemed like a colossal waste of money. As did the fruit. In those days, Goldman had fresh fruit, big plates of it, everywhere on the trading floor. There was so much of it that it couldn’t possibly all be eaten—I remember seeing piles of rotting fruit with clouds of tiny flies swarming around them. It was said that Goldman was spending tens of thousands of dollars a month just on fruit. When the technology bubble burst, the fruit was the first thing to go. ——— But in the summer of 2000, the bubble hadn’t burst yet: Tech was still booming. Dot-coms were all the rage. All a company had to do then was put that magic suffix .com after its name, or the prefix e- in front of it, and its value would instantly soar, to absurd, stratospheric levels. That summer on the Goldman trading floor, you saw a lot of “deal toys” (Lucite blocks commemorating tech deals) on people’s desks; you saw a lot of celebratory baseball caps bearing tech company names; you saw a lot of high-fiving.

At the time, a number of popular and forward-thinking technology companies were Israel-based, and Israel was one of the territories our sales team covered. My job was to advise Prakash on Israeli tech stocks. In the course of business, I’d call him almost every day: it felt quite surreal to be on the phone with a buddy I used to get hammered and go to Stanford Cardinal hoops games with, discussing hot tech stocks such as Check Point Software and Comverse Technology. Prakash was a hard sell. The technology bubble was still bubbling in Israel, but he took an extremely skeptical view of stocks for which many investors were willing to pay huge sums. It made him (and still makes him) extremely good at what he did. Eliot Spitzer wasn’t alone in his suspicion of investment banks. Prakash used to give me a hard time about the role Goldman had played in the Internet bubble, which had burst while we were seniors in college and before our respective careers in finance began in 2001.

It was April 2006, and the deep recession that had struck the markets after September 11 had faded, as recessions inevitably do, and been replaced by a new bubble, thanks to easy mortgages and the Federal Reserve pumping cheap money into the financial system the way Vegas pumps oxygen onto unsuspecting gamblers. The only trouble with bubbles is that it is hard to tell when you’re in one until it bursts. The technology bubble by now seemed a distant, almost ancient, memory. Bankers on Wall Street were toasting one another’s wisdom, just as homeowners were smiling as they watched their houses grow more valuable every week. The rising tide was making everyone feel smart. I was allowing myself to feel a little bit smart, too. I had survived the brutal rounds of firings that had rocked Goldman from 2002 through 2004; I had gotten promoted from analyst to associate—a bump that was meaningless to the outside world but one that only about 40 percent of analysts make.


pages: 253 words: 65,834

Mastering the VC Game: A Venture Capital Insider Reveals How to Get From Start-Up to IPO on Your Terms by Jeffrey Bussgang

business cycle, business process, carried interest, digital map, discounted cash flows, hiring and firing, Jeff Bezos, Kickstarter, Marc Andreessen, Mark Zuckerberg, Menlo Park, moveable type in China, pattern recognition, Paul Graham, performance metric, Peter Thiel, pets.com, risk tolerance, rolodex, Ronald Reagan, Sand Hill Road, selection bias, shareholder value, Silicon Valley, Skype, software as a service, sovereign wealth fund, Steve Jobs, technology bubble, The Wisdom of Crowds

Then, a town zoning inspector paid a visit. Eventually, we were chased out of Michael’s house and had to find proper office space. In our first year, we raised nearly $100 million in two rounds of financing from several blue-chip venture capital firms, hired fifty more employees, and signed a flurry of business partnerships. After many twists and turns, including surviving the bursting of the technology bubble, Upromise became a very successful company. Sallie Mae acquired it in 2006, a few years after I had left, and by 2010, the firm had $21 billion of college savings under management and 12 million households using the service. AN ENTREPRENEUR’S MAKEUP Although I spent the first ten years of my professional life as an entrepreneur, I didn’t fully understand the entrepreneur’s mind-set—my own mind-set, that is—until I went to the other side and became a venture capitalist.

From 1996 to 1999, VCs began to see exit valuations with multibillion-dollar potential, not just hundreds of millions of dollars potential. And so rather than deploy $100 million to $200 million over three or four years into start-ups at a clip of $5 to $10 million at a time, they tried to invest $1 to $2 billion over the same period by forcing $25 to $50 million at a time into their companies. And we all know how that movie ended. With the burst of the technology bubble in 2000 and 2001, things obviously have changed. Or have they? After all, the more capital under management VCs have, the more money they make in fees. So, the natural incentive for many is to keep fund sizes large, and therefore fees large, even if the fundamentals do not support it. Kleiner Perkins cut their post-bubble fund, raised in 2004, to $400 million—smaller than their 2000 fund, but still nearly three times what they raised in their first few decades as a firm.


pages: 545 words: 137,789

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

"Robert Solow", Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, 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 innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, 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, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, 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 Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

Tens of billions of dollars’ worth of investment capital was diverted into flimflam schemes that ultimately came to nothing. (At the same time, some of the dot-coms, such as Amazon and eBay, did eventually develop into profitable companies.) Chicago School economics is premised on the idea that rationality and competition prevent bad outcomes: in this case, rationality actually aggravated the market failure. “Our findings are consistent with the view that investor sentiment driving the technology bubble was predictable to some extent, and that hedge funds were exploiting this opportunity,” Brunnermeier and Nagel wrote. “Under these conditions, riding a price bubble for a while can be the optimal strategy for rational investors.” As it happened, this result had been formally demonstrated a number of years before the Internet bubble, in a series of papers that put forward what came to be known as the “noise trader” approach to financial markets.

In plans that offer a default asset allocation—a mixture of stocks and bonds, usually—about three quarters of all participants accept it. Similarly, if a plan’s default option involves investing in the parent company’s stock, many people accept that, too. “[T]his pattern of investment was unaffected by the prominent bankruptcies of Enron, WorldCom, Global Crossing, and many other firms in the aftermath of the collapse of the technology bubble,” Laibson notes. “Employees who lost their entire life savings in the Enron debacle were frequently discussed in the media at the time of the Enron bankruptcy, but American workers have not generalized that message.” Evidently, economic reasoning is not something that comes naturally to people. Maybe this is because of the way the human brain is wired. In recent years, many behavioral economists have adopted Plato’s idea that human beings have two distinct decision-making systems, one intuitive and the other deliberative.

America’s Portfolio Managers Grow More Bullish on Stocks and Interest Rates,” Barron’s, May 3, 1999, 31–38. 181 Pension fund investment in the Internet bubble: Eli Ofek and Matthew Richardson, “DotCom Mania: The Rise and Fall of Internet Stock Prices,” Journal of Finance 57, no. 3 (June 2003): 1122. 181 “From an efficient markets perspective . . .”: Markus K. Brunnermeier and Stefan Nagel, “Hedge Funds and the Technology Bubble,” Journal of Finance 59, no. 5 (October 2004): 2013–40. 182 “follow the advice of financial . . .”: Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (New York: Oxford University Press, 2000), 10. 183 “[R]ational arbitrage can . . .”: Ibid., 174. 184 “This risk comes from . . .”: Ibid., 14–15. 184 “We were too early in calling . . .”: Mitchell Pacelle, “Soros to Appoint a CEO After Firm’s Chaotic Year,” Wall Street Journal, August 10, 1999, C1. 185 Fama update on the efficient market hypothesis: Eugene G.


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, 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 Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

This might not matter if most emerging economies’ business cycles were tied to the US business cycle because, in those circumstances, Fed policy that was good for the US goose would also be good for the emerging-market gander. But emerging-market business cycles are not perfectly linked with the US. In the late 1990s, at the time of the Asian crisis, the US economy was booming. In the early years of the twenty-first century, when the US economy was struggling to cope with the consequences of the collapse in its late 1990s technology bubble, emerging markets were booming. Consider once again the linkages between US monetary policy and monetary conditions in emerging markets. If the US economy is relatively weak, the Federal Reserve will naturally have a bias towards ‘easy’ monetary policy. Indeed, in 2003, Fed funds, the key US policy rate, fell to just 1 per cent, a remarkably low number compared with earlier history. The dollar came under tremendous downward pressure as investors pulled their savings out of the US to hunt for returns elsewhere in the world.

JAPAN: AN EARLY LESSON IN AGEING The evidence to support this view is striking. In 1989, Japanese boomers believed they had made a killing. The stock market had risen dramatically through the 1980s and rising land prices seemed to be a one-way bet. Shortly afterwards, however, equity prices and then land prices began to fall, marking the beginning of a twenty-year period of persistent asset-price declines. Ten years later, at the height of the technology bubble in 1999, American and European boomers found themselves in a similar state of fervour. Even when stock prices slumped in 2000, house prices carried on rising, creating the false impression that people genuinely owned assets that would support them in their impending retirements. Other, more esoteric, assets became increasingly popular. Pension funds loaded up on asset-backed securities, which too often were linked to poor-quality loans in the US housing market.


pages: 892 words: 91,000

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

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

Although the empirical results do not fit the theoretical model perfectly, they still clearly demonstrate that the market values companies based on growth and ROIC.10 Nevertheless, there have been periods when deviations from economic fundamentals were so significant and widespread that they affected the stock market as a whole. Two recent examples are the technology bubble that burst in 2000 and the credit bubble that collapsed in 2007 (see Exhibit 5.7). The technology market boom is a classic example of a valuation bubble, in which stocks are priced at earnings multiples that underlying fundamentals cannot justify. When Netscape Communications became a public company in 1995, it saw its market capitalization soar to $6 billion on an annual revenue base of just $85 million. As investors quickly became convinced that the Internet would change the world, they sent the Standard & Poor’s (S&P) 500 index to a new peak of more than 1,500 in 2000. By 2001, the index had tumbled back to half that level. Although the valuation of the market as a whole was affected, the technology bubble was concentrated in technology stocks and certain very large stocks in other sectors (so-called megacaps).

Blume and D. Easley, “Market Selection and Asset Pricing,” in Handbook of Financial Markets: Dynamics and Evolution, ed. T. Hens and K. Hoppe (Amsterdam: Elsevier, 2009); and J. De Long, A. Shleifer, L. Summers, and R. Waldman, “The Survival of Noise Traders in Financial Markets,” Journal of Business 64, no. 1 (1991): 1–19. 68 THE STOCK MARKET IS SMARTER THAN YOU THINK cases, such as the technology bubble of the 1990s, this could take a few years, but the stock market always corrects itself to align with the underlying fundamental economics. MARKETS AND FUNDAMENTALS: THE EVIDENCE Even some of the most conventional beliefs about the stock market are not supported by the facts. For example, most growth and value indexes, like those of Standard & Poor’s, categorize companies as either “value” or “growth” based on a combination of factors, including market-to-book ratios and priceto-earnings (P/E) ratios.

Similarly, market bubbles and crises have always captured public attention, fueling the belief that the stock market moves in chaotic ways, detached EXHIBIT 5.2 Distribution of Growth Rates for Growth and Value Stocks Growth stocks do not grow materially faster . . . . . . but do have higher ROICs Value median Growth median 8.7% 10.2% Value median Growth median 15% 35% 14 35 Growth 12 30 10 Value 8 6 % of companies % of companies Growth 25 20 15 4 10 2 5 Value 0 0 –3 1 5 9 13 17 21 3-year average sales growth, % 25 –5 5 15 25 35 45 50+ 3-year average ROIC excluding goodwill, % MARKETS AND FUNDAMENTALS: THE EVIDENCE 69 EXHIBIT 5.3 Stock Performance against Bonds in the Long Run, 1801–2013 $ 100,000,000 Stocks 10,000,000 1,000,000 Stocks (inflation-adjusted) 100,000 Bonds 10,000 Bills 1,000 100 10 CPI 1 0 1801 1816 1831 1846 1861 1876 1891 1906 1921 1936 1951 1966 1981 1996 2011 Source: Jeremy J. Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies (New York: McGrawHill; 2014); Ibbotson Associates; Morningstar EnCorr SBBI Index Data. from economic fundamentals. The 2008 financial crisis, the technology bubble of the 1990s, the Black Monday crash of October 1987, the leveraged-buyout (LBO) craze of the 1980s, and, of course, the Wall Street crash of 1929 appear to confirm such ideas. But the facts tell a different story. In spite of these events, U.S. equities over the past 200 years have delivered decade after decade of consistent returns to shareholders of about 6.5 percent annually, adjusted for inflation.


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

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

Another innovation is the growing number of truly global mandates being given to fund managers. Globalization may be a cliché, but for portfolio managers it is fast becoming a reality. Access to a properly constituted and rigorously maintained international database is a sine qua non for the start of any investment process. The period since spring 2000 has come as a shock to those who had become used to the bull market conditions of previous years. The bursting of the technology bubble, the rapid decline in economic growth rates, especially in the United States, and the advent of international terrorism raised questions about what we can expect for the future. We assert in this book that the single most important variable for making investment decisions is the equity risk premium, and we argue that high long-term returns on equities, relative to bonds, are unlikely to persist.

At the depths of the Wall Street Crash, the Dow Jones Industrial Index had fallen by 89 percent. Many investors were ruined, especially those who had bought stocks with borrowed money. The crash lived on in the memories of investors—and indeed, those who subsequently chose to shun equities—for at least a generation. Yet in Figure 4-2, it features as little more than a short-term setback. The October 1987 crash, and the dramatic bursting of the technology bubble in 2000, hardly even register on this long-run graph. The setback in 2000, however, will look more severe when combined with the poor returns in 2001, including the sharp downturn in the wake of the tragic events of September 11. We should be cautious about generalizing from the United States which, over the twentieth century, rapidly emerged as the world’s foremost political, military, and economic power.

We also examine the international evidence. During historical periods for which there was a suitable database covering a reasonably long interval, the value premium was in general positive. Recent periods were more mixed. Over the last few years, different countries had value-growth premia that were sometimes positive and sometimes negative. Only after major turmoil commenced toward the end of the first quarter of 2000, when the technology bubble burst, was there a tendency for value stocks to perform internationally in unison, when they once again reasserted their performance edge over growth stocks. Chapter 11 Equity dividends In this chapter, we take a closer look at dividends. We saw in chapter 10 that dividends play a central role in equity investment and valuation. Our focus there was value investing. Our concern here is rather different.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, lateral thinking, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

I asked a Fed governor that fall: should the Fed repeatedly intervene when the market was in trouble? Well, I remember her answering, it’s a central bank’s duty to act when the financial system is threatened. In the following decades, I saw a fiscal crisis convulse interest rates and the dollar in my native Canada, an exchange rate crisis erupt in Europe in 1992, the Asian financial crisis, the near failure of Long-Term Capital Management in 1998, and then the rise and fall of the technology bubble. By 2007, I was looking for the next crisis everywhere: in home prices, leveraged buyouts, the trade deficit. I was not, however, looking for catastrophe. I had by now developed a deep respect for the authorities’ ability to counteract mayhem; I assumed that the economy, though it might get bumped around a bit, would come out okay. A similar thought process was going on in the world’s central banks.

But in those rarefied times, it was: the following year, though the company was still losing money and the Nasdaq bubble was deflating, Amazon borrowed $870 million in euros, also convertible to stock. In effect, Amazon exploited the irrational exuberance of the dot-com bubble to stay afloat long enough to become a colossus, revolutionizing not just retailing but book publishing and cloud computing. Between 2004 and 2008, it paid back all its bondholders, some at a premium, except those who had converted their bonds to shares. Dot-com stocks were the most famous players during the technology bubble, but more money was lost in a different sector. A host of existing and start-up telecommunications companies persuaded investors there was a mint to be made laying the fiber-optic networks that would carry booming Internet traffic between cities and continents. To finance the high costs of laying miles of fiber, telecommunications companies such as Global Crossing, Williams Communications, Tycom, Flag, and 360 Networks raised billions of dollars issuing stock and bonds.


pages: 351 words: 93,982

Leading From the Emerging Future: From Ego-System to Eco-System Economies by Otto Scharmer, Katrin Kaufer

Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, Asian financial crisis, Basel III, Berlin Wall, Branko Milanovic, cloud computing, collaborative consumption, collapse of Lehman Brothers, colonial rule, Community Supported Agriculture, creative destruction, crowdsourcing, dematerialisation, Deng Xiaoping, en.wikipedia.org, European colonialism, Fractional reserve banking, global supply chain, happiness index / gross national happiness, high net worth, housing crisis, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Johann Wolfgang von Goethe, Joseph Schumpeter, Kickstarter, market bubble, mass immigration, Mikhail Gorbachev, Mohammed Bouazizi, mutually assured destruction, Naomi Klein, new economy, offshore financial centre, peak oil, ride hailing / ride sharing, Ronald Reagan, Silicon Valley, smart grid, Steve Jobs, technology bubble, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, Washington Consensus, working poor, Zipcar

A disconnect between actual ownership forms and best societal use of property. The disconnect between actual ownership and best societal benefit results in a bubble in which state and private property, despite their merits, allow the overuse and mismanagement of the ecological and social commons in epic proportion. 8. A disconnect between technology and real societal needs. This disconnect generates technology bubbles that serve the well-being of a few in already overserved markets. For example, most R&D spending by the pharmaceutical industry caters to markets at the top while largely ignoring the needs at the base of the socioeconomic pyramid. FIGURE 1. The iceberg model: a surface of symptoms and structural disconnects (bubbles) below it. These bubbles and structural disconnects produce systems that are designed to not learn.

See also White Dog Café Sustainable Business Network (SBN), 219 Sustainable Food Lab, 82, 223–225 Suyoto, Bupati, 198–200 Symbiosis in nature, 81, 236 Symptoms, sources that give rise to, 16–17 Symptoms level, as a landscape of issues and pathologies, 4–5 System, exploring the edges of the, 16 System dynamics, 17 Systemic imperatives, 105 Systems thinking, 82, 121, 198 Tahir Square. See Egyptian Revolution of 2011 Technological Revolution. See Second Industrial Revolution Technologies, reclaiming our access to, 109–110 Technology, 75, 77, 120, 241 creativity and, 108 disconnect between real societal needs and, 7 evolution of, 103–105 as force of liberation vs. force of dependency, 106–107 origin of the term, 108 Technology bubble, 7 Technology disconnect, 46 Technology fix, 107 Technology-fix myth, debunking the, 107 Text messaging, 199–200 Theory U debates over agricultural sustainability and, 224 Francisco Varela and, 145 innovation infrastructures and, 187–188 Matrix of Social Evolution and, 146 overview and core ideas of, 18–20, 145, 146 presencing and, 19, 119 See also U process; U.school Theory U (Scharmer), 18, 247 Thinking, 1–2, 11 systems, 82, 121, 198 See also Economic thought; Mental models Thinley, Jigme Yoser, 250–251 Third Industrial Revolution, 75, 77, 104, 105, 132 leading the, 108 Tho Ha Vinh, 159–160, 162 Thompson, Phil, 41 Thomsen, Ole, 207, 209 Thought, suspension of old habits of, 146 Tiki-taka soccer, 125 Todmorden, West Yorkshire, 135 Tools, 103 Torvalds, Linus, 109, 110 Total football, 124–125 Town hall community meetings, 200 Toynbee, Arnold, 51, 73 Tragedy of the commons, 12, 47, 131 Transparency, 236 lack of, 10 Triodos Bank, 101 Tyrants, the toppling of, 27–29.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, plutocrats, Plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

One reason is that share prices are not set by private investors – the ‘representative household’, in the economic jargon – but by fund managers to whom savers and pension fund trustees have delegated authority for managing their money. These fund managers, the agents, may have a very different agenda to that of savers and trustees, the principals. They also have more and better information about companies and markets. So there is, as the economists put it, both a principal–agent problem and an information asymmetry problem. These lead to conflicts of interest. The technology bubble in the second half of the 1990s provides a good example of how the conflict works. Dot.com stocks rose initially on the basis of a conviction that technology had fundamentally changed the way the economy worked, so that expectations of future profits spiralled while conventional methods of company valuation were abandoned. One consequence of this was that funds invested in unglamorous ‘value’ sectors underperformed the market.

Either way, pricking involves the central banker in substantial career risk because the logic of incurring a modest recession today to avoid a deeper one tomorrow is lost on politicians. They will simply note the current loss of output and jobs and call for the central banker’s head. That, no doubt, was why Alan Greenspan was so terrified of blowing the US economy out of the water with a pre-emptive strike against the technology bubble. The central banker’s dilemma was summed up with characteristic shrewdness by J. K. Galbraith, whose politics and economics were as far removed from Alan Greenspan’s as it was possible to be, in his book The Great Crash 1929: Action to break up a boom must always be weighed against the chance that it will cause unemployment at a politically inopportune moment. Booms, it must be noted, are not stopped until after they have started.


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, banking crisis, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, index fund, Isaac Newton, Long Term Capital Management, margin call, Mark Zuckerberg, Menlo Park, merger arbitrage, mortgage debt, mortgage tax deduction, Ponzi scheme, Renaissance Technologies, rent control, Robert Shiller, Robert Shiller, rolodex, short selling, Silicon Valley, statistical arbitrage, Steve Ballmer, Steve Wozniak, technology bubble, zero-sum game

The 1998 collapse of mega–-hedge fund Long-Term Capital Management, which lost 90 percent of its value over a matter of months, also put a damper on the industry, while cratering global markets. By the end of the 1990s, there were just 515 hedge funds in existence, managing less than $500 billion, a pittance of the trillions managed by traditional investment managers. It took the bursting of the high-technology bubble in late 2000, and the resulting devastation suffered by investors who stuck with a conventional mix of stocks and bonds, to raise the popularity and profile of hedge funds. The stock market plunged between March 2000 and October 2002, led by the technology and Internet stocks that investors had become enamored with, as the Standard & Poor’'s 500 fell 38 percent. The tech-laden Nasdaq Composite Index dropped a full 75 percent.

THE HOUSING MARKET DIDN’'T SEEM LIKE AN OBVIOUS BENEFICIARY OF the age of easy money. As the World Trade Center toppled on September 11, 2001, and Osama bin Laden’'s lieutenants boasted of crippling the U.S. economy, the real estate market and the overall economy wobbled—--especially around the key New York area. Home prices had enjoyed more than five years of gains, but the economy was already fragile in the aftermath of the bursting of the technology bubble, and most experts worried about a weakening real estate market, even before the tragic attacks. But the Federal Reserve Board, which had been lowering interest rates to aid the economy, responded to the shocking September 11 attacks by slashing interest rates much further, making it cheaper to borrow all kinds of debt. The key federal-funds rate, a short-term interest rate that influences terms on everything from auto and student loans to credit-card and home-mortgage loans, would hit 1 percent by the middle of 2003, down from 6.5 percent at the start of 2001, as the Fed, led by Chairman Alan Greenspan, worked furiously to keep the economy afloat.


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

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

This means that high Sharpe ratio (SR) assets with low returns, but even lower volatility, will remain unloved by those who require high returns and can’t borrow to invest. They would rather buy high return assets with higher risk, even if the additional risk is not fully compensated for and the SR is lower. As a result undiversified portfolios are common, with equities contributing nearly all the volatility. People prefer riskier stocks, epitomised by the technology bubble in 1999. This effect also explains why short maturity bonds have historically had higher SR than longer maturity bonds.The lucky investors who can use leverage should outperform others over the long run. But beware: in a crisis a death spiral can easily develop in portfolios built on debt. Prices fall, brokers ask for more margin or restrict borrowing entirely, investors have to sell, and prices fall further.

Thank you for that, and for everything. 301 Index 2001: A Space Odyssey, 19f 2008 crash, 170 Active management, 3 AIG, 2 Algorithms, 175, 199 Alpha, 3, 37, 106, 136 Alternative beta, 3-4 Amateur investors, 4, 6, 16, 48, 177, 210 and lack of diversification, 20 and over-betting, 21 and leverage, 35 and minimum sizes, 102 as day traders, 188 Anchored fitting: see Back-testing, expanding out of sample Annual returns, 178-179 Annualised cash volatility target, 137, 139, 149, 151, 159, 161, 171, 230, 250 Asset allocating investors, 3, 7, 42, 69, 98, 116, 147, 188, 225-244, 259 and Sharpe ratios, 46 and modular frameworks, 96 and the ‘no-rule’ rule, 116, 167, 196, 225, 228 and forecasts, 122-123, 159 and instrument weights, 166, 175, 189, 198-199 and correlation, 170 and instrument diversification multiplier, 175 and rules of thumb, 186 and trading speeds, 190-191, 205 and diversification, 206 Asset classes, 246&f Automation, 18-19 Back-testing, 5, 13-15, 16, 18, 19&f, 28, 53, 64, 67, 87, 113, 122, 146, 170, 182f, 187, 197, 205 and overfitting, 20, 29, 53f, 54, 68, 129f, 136, 145, 187 and skew, 40 and short holding periods, 43 in sample, 54-56 out of sample, 54-56 expanding out of sample, 56-57, 66, 71f, 84, 89f, 167f, 193-194 rolling window, 57-58, 66, 129f and portfolio weights, 69-73 and handcrafting, 85 and correlations, 129, 167&f, 175 and cost of execution, 179 simple and sophisticated, 186 need for mistrust of, 259 See also: Bootstrapping Barclays Bank, 1-2, 11, 31, 114 Barings, 41 Barriers to entry, 36, 43 Behavioural finance, 12 Beta, 3 Bid-Offer spread, 179 Block value, 153-154, 161, 182-183, 214, 219 Bollinger bands, 109 303 Systematic Trading Bond ETFs, 226 Bootstrapping, 70, 75-77, 80, 85-86, 146, 167, 175, 193-194&f, 199, 230, 248, 250 and forecast weights, 127, 205 see also Appendix C BP, 12, 13 Braga, Leda, 26 Breakouts, 109 Buffett, Warren, 37, 42 Calibration, 52-53 Carry, 67, 119, 123, 126, 127-128, 132, 247 and Skew, 119 Koijen et al paper on, 119f Central banks, 36, 103 Checking account value, recommended frequency, 149 Clarke, Arthur C, 19f ‘Close to Open’, 120-121 Cognitive bias, 12, 16, 17, 19-20, 28, 64, 179 and skew, 35 Collective funds, 4, 106, 116, 225 and derivatives, 107 and costs, 181 Commitment mechanisms, 17, 18 Compounding of returns, 143&f Contango: see Carry Contracts for Difference, 106, 181 Contrarians, 45 Corn trading, 247f Correlation, 42, 59f, 63, 68, 70, 73, 104, 107, 122, 129, 131, 167-168, 171 and Sharpe ratios, 64 and trading subsystems, 170 and ETFs, 231 Cost of execution, 179-181, 183, 188, 199, 203 Cost of trading, 42, 68, 104, 107, 174, 178, 181, 230 Credit Default Swap derivatives, 105 Crowded trades, 45 Crude oil futures, 246f Curve fitting: see over-fitting Daily cash volatility target, 137, 151, 158, 159, 161, 162, 163, 172, 175, 217, 218, 233, 254, 262. 270, 271, 217 Data availability, 102, 107 Data mining, 19f, 26-28 Data sources, 43-44 Day trading, 188 Dead cat bounces, 114 Death spiral, 35 DeMiguel, Victor, 743f Derivatives, 35 versus cash assets, 106 Desired trade, 175 Diary of trading, for semi-automatic trader, 219-224 Diary of trading, for asset allocating investor, 234- 244 Diary of trading, for staunch systems trader, 255- 257 Diversification, 20, 42, 44, 73f, 104, 107, 165, 170, 206 and Sharpe ratios, 65f, 147, 165 of instruments rather than rules, 68 and forecasts, 113 Dow Jones stock index, 23 Education of a Speculator, 17 Einstein, 70 Elliot waves, 109 Emotions, 2-3 Equal portfolio weights, 72-73 Equity value strategies, 4, 29, 31 Equity volatility indices, 34, 246, 247 Eurex, 180 Euro Stoxx 50 Index Futures, 179-180, 181, 182, 187-188, 193, 198 Eurodollar, trading recommendation, 247 Exchange rate, 161, 185 Exchange traded funds (ETFs), 4, 106, 183-184, 189, 197, 200, 214, 225, 226-228 holding costs of, 230 daily regearing of, 230f correlations, 231 Exchanges, trading on, 105, 107 Exponentially Weighted Moving Average Crossover 304 Index (EWMAC), 117-123, 126, 127-128, 132, 247 see also Appendix B Human qualities of successful traders, 259-260 Hunt brothers, 17 Fannie Mae and Freddie Mac, 2 Fees, 3 Fibonacci, 37, 109 Forecasts, 110-115, 121-123, 159, 175, 196, 211 scaling of, 112-113, 115, 133 combined, 125-133, 196, 248, 251 weighted average of, 126 and risk, 137 and speed of trading, 178 and turnover, 185 not changing once bet open, 211 see also Appendix D Forecast diversification multiplier, 128-133, 193f, 196, 249, 251 see also Appendix D Foreign exchange carry trading, 36 Fortune’s Formula, 143f FTSE 100 futures, 183, 210 Futures contracts, 181 and block value, 154-155 ‘Ideas First’, 26-27, 52-54, 103, 146 Ilmanen, Antti, 30f Illiquid assets, 198 Index trackers, 106 Inflation, 67 Instrument blocks, 154-155, 175, 182-183, 185, 206 Instrument currency volatility, 182-183, 203, 214 and turnover, 185, 195, 198 Instrument diversification multiplier, 166, 169-170, 171, 173, 175, 201, 206, 215, 229, 232, 253 Instrument forecast, 161, 162 Instrument riskiness, 155, 182 Instrument subsystem position, 175, 233 Instrument weights, 166-167, 169, 173, 175, 189, 198, 201, 202, 203, 206, 215, 229, 253 and Sharpe ratios, 168 and asset allocating investors, 226 and crash of 2008, 244 Gambling, 15, 20 Gaussian normal distribution, 22, 32&f, 39, 111f, 113, 114, 139f German bond futures, 112, 155, 181, 198 Gold, 246f Google, 29 Gross Domestic Product, 1 ‘Handcrafting’, 78-85, 116, 167-168, 175, 194, 199, 230, 248, 259 and over-fitting, 84 and Sharpe ratios, 85-90 and forecast weights, 127, 205 worked example for portfolio weights, 231-232 and allocation for staunch systems traders, 253 Hedge funds, 3, 177 High frequency trading, 6, 16, 30, 36, 180 Holding costs, 181 Housekeeping, daily, 217 for staunch systems traders, 254 Japan, 36 Japanese government bonds, 102, 112, 114, 200 JP Morgan, 156f Kahn, Richard, 42 Kaufman, Perry, 117 Kelly, John, and Kelly Criterion, 143-146, 149, 151 ‘Half-Kelly’ 146-147, 148, 230, 260 Koijen, Ralph, 119 Law of active management, 41-42, 43, 44, 46, 129f and Sharpe ratios, 47 Leeson, Nick, 41 Lehman Brothers, 2, 237 Leverage, 4, 21&f, 35, 95f, 138f, 142-143 and skew, 44-45 and low-risk assets, 103 and derivatives, 106 and volatility targeting, 151 realised leverage, 229 Life expectancy of investor, and risk, 141 305 Systematic Trading Limit orders, 179 Liquidity, 35, 104-105, 107 Lo, Andrew, 60f, 63f Long Term Capital Management (LTCM), 41, 46 Sharpe ratio of, 47 Low volatility instruments, need to avoid, 143, 151, 210, 230, 260 Lowenstein, Roger, 41, 46f Luck, need for, 260 Lynch, Peter, 37 Markowitz, Harry, 70, 72 Maximum number of bets, 215 Mean reversion trading, 31, 43, 45, 52, 213f ‘Meddling’, 17, 18, 19, 21, 136, 260 and forecasts, 115 and volatility targets, 148 Merger arbitrage, 29 Mid-price, 179, 181 Minimum sizes, 102, 107 Modular frameworks, 93, 95-99 Modularity, 5 Momentum, 42, 67, 68, 117 Moving averages, 94, 195, 197 MSCI, 156f Narrative fallacy, 20, 27, 28, 64 NASDAQ futures, 188 Nervousness, need for, 260 New position opening, 218 Niederhoffer, Victor, 17 Odean, Terence, 13, 20f Odysseus, 17 Oil prices, standard deviation of, 211 O’Shea, Colm, 94f Online portfolio calculators, 129f Overbetting, 21 Over the counter (OTC) trading, 105, 106, 107, 183f Overconfidence, 6, 17, 19f, 54, 58, 136 and lack of diversification, 20 and overtrading, 179 306 Over-fitting, 19-20, 27-28, 48, 51-54, 58, 65, 68, 121f, 156, 259 and Sharpe ratios, 46f, 47, 146 avoiding fitting, 67-68 of portfolio weights, 68-69 possibility of in ‘handcrafting’, 84 Overtrading, 179 Panama method, 247&f Passive indexing, 3 Passive management, 3, 4 Paulson, John, 31, 41 Pension funds, 3 ‘Peso problem’, 30&f Position inertia, 173-174, 193f, 196, 198, 217 Position sizing, 94, 153-163, 214 Poundstone, William, 143f Price movements, reasons for, 103, 107 Portfolio instrument position, 173, 175, 218, 254, 256, 257 Portfolio optimization, 70-90, 167 Portfolio size, 44, 178 Portfolio weighted position, 97, 99, 101, 109, 125, 135, 153, 165, 167, 177, 267 and diversification, 170 Price-to-earnings (P/E) ratios 4 Prospect theory, 12-13, 37 and momentum, 117 Quant Quake, the, 46 Raspberry Pi micro computers, 4 Relative value, 30, 43, 44-46, 213f Retail stockbrokers, 4 Risk, 39, 137-148, 170 Risk targeting, 136 Natural risk and leverage, 142 Risk parity investing, 38, 116&f Risk premia, 31, 119 RiskMetrics (TM), 156&f Roll down: see Carry Rolling up profits and losses, 149 Rogue Trader, 41 Rounded target position, 173, 175, 218 Index Rules of thumb, 186, 230 see also Appendix C Rumsfeld, Donald, 39&f Safe haven assets, 34 Schwager, Jack, 94f Self-fulfilling prophecies, 37 Semi-automatic trading, 4, 7, 11f, 18, 19f, 37, 38, 98, 163, 169, 209-224, 259 and portfolio size, 44, 203 and Sharpe ratios, 47, 147-148 and modular frameworks, 95 and trading rules, 109 and forecasts, 114, 122-123, 159 and eyeballing charts, 155, 195, 197, 214 and diversification, 166, 206 and instrument weights, 166, 175, 189 and correlation, 169 and trading subsystems, 169 and instrument diversification multiplier, 171, 175 and rules of thumb, 186 and overconfidence, 188 and stop losses, 189, 192 and trading speeds, 190-192, 205 Sharpe ratios, 25, 31-32, 34, 35, 42, 43, 44, 46-48, 53, 58, 60f, 67, 72, 73, 112, 184, 189, 210, 214, 250, 259 and overconfidence, 54, 136, 151 and rule testing, 59-60, 65 and T-Test, 61-63 and skew, 62f, 66 and correlation, 64 and diversification, 65f difficulty in distinguishing, 74 and handcrafting, 85-90 and factors of pessimism, 90 and risk, 137f, 138 and volatility targets, 144-145, 151 and speed of trading, 178-179, 196, 204 need for conservative estimation of, 195 and asset allocating investors, 225 and crash of 2008, 240 Schatz futures: see German bond futures Shefrin, Hersh, 13&f Short option strategies, 41 Short selling, 30, 37 Single period optimisation, 71, 85, 89 Skew, positive and negative, 32-34, 40-41, 48, 105, 107, 136, 139-141, 247, 259 and liquidity, 36 and prospect theory, 37 and risk, 39, 138 and leverage, 44-45, 142 and Sharpe ratios, 47, 62f, 146 and trend following, 115, 117 and EWMAC, 119 and carry, 119 and V2TX, 250 ‘Social trading’, 4f Soros, George, and sterling, 36f Speed of trading, 41-43, 47, 48, 104, 122, 174f, 177-205, 248 speed limits, 187-189, 196, 198-199, 204, 213, 228, 251, 260 Spread betting, 6, 106, 181, 197, 214 and block value, 154-155 and UK tax, 183f oil example, 214 Spreadsheets, 218 Stamp duty, 181 Standardised cost estimates, 203-205, 210, 226, 230 Standard deviations, 21-22, 31-32, 38, 40, 70, 103, 107, 111f, 129 and skew, 105 and forecasts, 112, 114, 128 recent, 155-158 returns, 167 and standardised cost, 182, 188, 192 and stop losses, 211 Static and dynamic trading, 38, 43, 168, 188 Staunch systems trading, 4, 7, 51-68, 69, 98, 109, 117-123, 167, 245-257 and Sharpe ratios, 46, 146, 189 and forecasts, 110-114, 122-123, 189 and instrument forecast, 161 and instrument weights, 166, 175, 198-199 and correlation, 170 and rules of thumb, 186 and trading speeds, 191-192, 205 307 Systematic Trading and back-testing, 193 and diversification, 206 Stop losses, 94-5, 115, 121f, 137f, 189, 192, 214, 216f, 217, 218 and forecasts, 211-212 and different instruments, 213 and price volatility, 216 Survivorship bias, 29 Swiss franc, 36, 103, 105, 142-143 System parameters, 186 Systematica hedge fund, 26 Taking profits and losses, 13-15, 16-18, 58, 94-95, 149 and trend following, 37 see also Appendix B Taleb, Nassim, 39f, 41 Tax (UK), 106, 183f Technical analysis, 18, 29 Technology bubble of 1999, 35 Templeton, John, 37 The Black Swan, 39f The Greatest Trade Ever, 31f, 41 Thorpe, Ed, 146f Thriftiness, need for, 260 Timing, 2 Too much/little capital, 206, 246f Trading capital, 150-151, 158, 165, 167, 178, 192, 199-202 starting low, 148 reducing, 149 and turnover, 185 daily calculation of, 217 Trading rules, 3-4, 7, 16, 25-26, 78, 95, 97-98, 101, 109, 121, 125, 135, 159, 161, 187, 249, 259 need for small number of, 67-68, 193 Kaufman, Perry’s guide to, 117 and speed of trading, 178, 205 cost calculations for, 204 see also Appendix B Trading subsystems, 98-99, 116, 159, 162, 163, 165, 166, 167&f, 169, 171f, 172, 175-176, 185, 187, 230, 251-252, 260 and correlation, 170 308 and turnover, 196 cost calculations for, 204 Traditional portfolio allocation, 167 Trend following, 28, 30, 37, 45, 47f, 67, 117, 137f, 194f, 212f, 247 and skew, 105, 115, 117, 213 Turnover, 184-186, 195, 197, 198, 205, 228, 260 methods of calculation, 204 back-testing of, 247-248 Twitter, 29 V2TX index, 246, 247, 249 Value at risk, 137 VIX futures, 105 Volatility, 21, 103, 107, 116, 129, 150, 226, 229 and targets, 95, 98, 106, 158, 159, 185 unpredictability of, 45 price volatility, 155-158, 162-163, 189, 196, 197, 200, 205, 214, 228, Appendix D and crash of 2008, 240-244 instrument currency volatility, 158, 161 instrument value volatility, 161, 172, 250 scalars, 159-160, 162, 185, 201, 206, 215, 217, 218, 229 look-back period, 155, 195-197 and speed of trading, 178 Volatility standardisation, 40, 71, 72, 73, 167, 182, 185 and forecasts, 112, 121, 129 and block value, 155 Volatility standardized costs, 247 Volatility targeting, 135-151, 171f, 188, 192, 201f, 213-215, 230, 233, 250, 259 Walk forward fitting: see Back testing, rolling window Weekly rebalancing process, for asset allocating investors, 233 When Genius Failed, 40, 46f Women as makers of investment decisions, 17&f www.systematictrading.org, 234 Zuckerman, Gregory, 31f THANKS FOR READING!


pages: 121 words: 31,813

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

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

A paper by professors from Harvard University and the London School of Economics examined the performance of the stocks that represented investment managers’ very best ideas (based on holding sizes).54 To ensure their findings were robust, they focused on all the US-registered domestic equity funds that filed their quarterly holdings with the Securities Exchange Commission (SEC) over a 14-year period beginning in January 1991 and ending in December 2005. This was a period that captured both the massive technology bubble of the late 1990s and the subsequent popping of that bubble and stock market crash from 2000 to 2002. 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.


How an Economy Grows and Why It Crashes by Peter D. Schiff, Andrew J. Schiff

Bretton Woods, business climate, currency peg, hiring and firing, indoor plumbing, offshore financial centre, price stability, Robert Shiller, Robert Shiller, technology bubble

As a result, the recession of 2002-2003 was one of the shallowest contractions on record. But that benefit came with a heavy long-term cost. The United States ended that recession with greater imbalances than it had before the downturn began. That’s not supposed to happen. Instead of real growth, we kicked off an even bigger asset bubble (in housing) that temporarily overcame the drag of the busted technology bubble. The rising value of housing prices created a great many ‘benefits’ that masqueraded as economic health. But as we have seen, that vigor was illusory. The real tragedy is that six years later, when the next crash came, we had failed to learn anything from these mistakes. In diagnosing the causes and prescribing the best cures for the recession of 2008, economists and politicians are getting it dangerously wrong.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, 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, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, John Meriwether, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, Paul Samuelson, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs

“The yen, which was as liquid as water, suddenly dried up like the Sahara,” he pleaded to his investors, failing to add that liquidity had evaporated not least because of Tiger’s recklessness.5 Tiger had been short an astonishing $18 billion worth of the currency—a position almost twice as large as Druckenmiller’s famous bet against sterling.6 By trading currencies even more ambitiously than his rivals at Quantum, Robertson had baked his own Sahara.7 In the aftermath of this disaster, Robertson promised his investors that he would scale back his currency trading. But Tiger’s yen losses were just a foretaste of the troubles in store—troubles that came in the surprising guise of a technology bull market. THE TECHNOLOGY BUBBLE OF THE LATE 1990S SERVES AS a test for two views of hedge funds.8 On the one hand there is the optimistic view—that sophisticated traders will analyze prices and move them to their efficient level. On the other hand there is a darker view—that sophisticated traders lack the muscle to enforce price efficiency and that, knowing the limits of their power, they will prefer to ride trends rather than fight them.

So they just let Julian get bigger and bigger without letting him know that he was becoming the market.” 7. Michael Derchin, Tiger’s airline analyst, says Robertson “saw Soros make a lot of money on the macro side, and I think he got attracted to it. And so he made some very big macro bets that blew up on him.” Michael Derchin, interview with the author, March 18, 2008. 8. For an excellent scholarly treatment of this dilemma, see Markus K. Brunnermeier and Stefan Nagel, “Hedge Funds and the Technology Bubble,” Journal of Finance 59, no. 5 (October 2004). 9. John Cassidy, Dot.con: The Greatest Story Ever Sold (New York: HarperCollins, 2002), pp. 3–8. 10. Julian H. Robertson, letter to the limited partners, August 7, 1998. 11. Tiger’s share of US Airways fluctuated around the 20 percent level. In June 1998 it was just about exactly 20 percent, judging from SEC filings. On March 5, 1999, Bloomberg reported that Tiger owned about 19 percent of US Airways.

An academic study of hedge funds in this period confirmed that their portfolios were heavy with tech stocks, especially in the third quarter of 1999. Technology stocks went from 16 percent of their equity portfolios to 29 percent in just three months, even though the tech sector accounted for just 17 percent of all U.S. stocks at the end of September. See Brunnermeier and Nagel, “Hedge Funds and the Technology Bubble.” 30. John Griffin, interview with the author, November 29, 2007. 31. Oppel, “A Tiger Fights.” 32. Julian H. Robertson, letter to the limited partners, December 8, 1999. 33. Julian H. Robertson, letter to the limited partners, January 7, 2000. 34. Julian H. Robertson, letter to the limited partners, March 30, 2000. 35. Druckenmiller interview. The role of Celera Genomics as a trigger is suggested in a detailed reconstruction of Quantum’s last weeks, which quotes Druckenmiller as saying to a trader, “This is insane.


State-Building: Governance and World Order in the 21st Century by Francis Fukuyama

Asian financial crisis, Berlin Wall, Bretton Woods, centre right, corporate governance, demand response, Doha Development Round, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, George Akerlof, Hernando de Soto, information asymmetry, liberal world order, Live Aid, Nick Leeson, Pareto efficiency, Potemkin village, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, Washington Consensus, Westphalian system

However, there are at least three basic reasons why there can be no optimal specification of formal institutions and thus no optimal form of organization, particularly for public sector agencies. First, the goals of many organizations are unclear. Agents can carry out the will of principals only if the principals know 3 This approach has a number of drawbacks, as evidenced by the corporate scandals of Enron, Worldcom, and other companies at the end of the technology bubble of the 1990s. Stock prices reflect too many factors, many of them not under the control of managers, to be an accurate measure of the management’s individual efforts. weak states and the black hole of public administration 51 what they want the agents to do, but this is not always the case. Goals often emerge and evolve through complicated interactions between organizational players or are defined by the roles assigned to players in the organization—the so-called where you sit is where you stand rule (Allison 1971).


pages: 471 words: 124,585

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

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

Why did the Fed allow euphoria to run loose in the 1990s? Greenspan himself had felt constrained to warn about ‘irrational exuberance’ on the stock market as early as 5 December 1996, shortly after the Dow had risen above 6,000.z Yet the quarter point rate increase of March 1997 was scarcely sufficient to dispel that exuberance. Partly, Greenspan and his colleagues seem to have underestimated the momentum of the technology bubble. As early as December 1995, with the Dow just past the 5,000 mark, members of the Fed’s Open Market Committee speculated that the market might be approaching its peak.99 Partly, it was because Greenspan felt it was not for the Fed to worry about asset price inflation, only consumer price inflation; and this, he believed, was being reduced by a major improvement in productivity due precisely to the tech boom. 100 Partly, as so often happens in stock market bubbles, it was because international pressures - in this case, the crisis precipitated by the Russian debt default of August 1998 - required contrary action.101 Partly, it was because Greenspan and his colleagues no longer believed it was the role of the Fed to remove the punchbowl from the party, in the phrase of his precursor but three, William McChesney Martin, Jr.102 To give Greenspan his due, his ‘just-in-time monetary policy’ certainly averted a stock market crash.

gold standard 58 Britain and 55-6 and crisis of 1914 300 inter-war years 161 Keynes on 58 and rentes 100 spread of 294 US abandonment of 307 and Wall Street Crash 161 Gordy, Berry 250 Gore, Al 117 An Inconvenient Truth 224 government bonds 65-72, 100 Government National Mortgage Association see Ginnie Mae government sponsored enterprises (GSEs) 251 graduates 5 grain 27 Grameen (‘Village’) Bank 279-80 Gramm, Senator Phil 170 Graunt, John 188 Gray, Edwin J. 258 Great Depression 9 and home ownership 241-6 see also unemployment Great Fire (1666) 186 Great Inflation see inflation Great Scene of Folly, The 147 Greece 296 Greenspan, Alan: and Black Monday (1987) 166 on bond market 65 and Enron 168-70 on ‘irrational exuberance’ 121 and mortgage crisis 266 successes of 168-9 and technology bubble 167-8 Greenwich, Connecticut 320 Griffin, Kenneth C. 2 Grinspun, Bernardo 111 Gross, William 68 gross domestic product (GDP): financial sectors and 5 international data 210-11 growth (economic) 31 GSEs see government sponsored enterprises Gualpa, Diego 21 Guangzhou (Canton) 289-91 Guatemala 2 Guicciardini, Francesco 46 Habsburg Empire 3 Haghani, Victor 322 ‘haircuts’ 115 Haiti 275 Halley, Edmund 188 Hamburg 186n.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

"Robert Solow", 3Com Palm IPO, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, 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, 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, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, Paul Samuelson, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, Stanford marshmallow experiment, statistical model, Steve Jobs, Supply of New York City Cabdrivers, 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

Graham noted that his strategy of buying the cheapest members of the Dow Jones Industrials would not have worked over an earlier period, 1917–33, and he cautioned that “Undervaluations caused by neglect or prejudice may persist for an inconveniently long time, and the same applies to inflated prices caused by overenthusiasm or artificial stimulants.” That advice was worth heeding during the technology bubble of the late 1990s, when value investing performed spectacularly badly, since the most expensive stocks, the Internet darlings, kept increasing in price, leaving those boring value stocks behind. Many in the investment community revered Benjamin Graham, but by the early 1980s most academic financial economists considered his work passé. A simple strategy of buying “cheap” stocks was obviously inconsistent with the Efficient Market Hypothesis, and Graham’s methods were hardly state of the art.

., 191–92, 195–98, 196 calendar effects in, 174 cheap, 219–21 growth, 28, 214–15, 222, 227 October 1987 crash of, 7, 232 regression toward the mean, 222–23 value, 214–15, 220–21, 222, 227–28 variability of prices of, 230–33, 231, 367 “Stock Prices and Social Dynamics” (Shiller), 233 strikes, 372 Strotz, Robert, 99–100, 102, 108 Structure of Scientific Revolutions, The (Kuhn), 169 Stubhub.com, 18–19 stub value, 246, 246 Stulz, René, 243 Sufi, Amir, 78 suggested retail price, 61–63 Summers, Larry, 178, 239–40, 247 sunk costs, 21, 52, 64–73, 118, 180, 261 and revised Ultimatum Game, 266–67 Sunstein, Cass, 258, 260, 269, 322, 323–25, 330, 333, 343, 345 on ethics of nudging, 337n Super Bowl, 139n, 359 supermarkets, 62n supposedly irrelevant factors (SIFs), 9, 24, 315 budgets and, 74 luck on Deal or No Deal, 298 noise traders’ use of, 240 purchase location as, 61 in retirement savings, 310–11, 312, 315 and returns on investments, 196 sunk costs as, 267 tax cuts as, 350 surcharge, discount vs., 18 surge pricing, 136–38, 200n surplus value, 285–86, 285, 286, 288 Susanne (game show contestant), 299–300 Sydney, Australia, 138n Tarbox, Brian, 317–19, 321 tax cuts, 350–51 taxes, 165 compliance with, 334–36 and savings, 309–13 taxi drivers, hours worked by, 11, 199–201, 295 Taylor, Tim, 173n technology bubble, 7, 78, 220, 234, 250, 252 teenage pregnancy, 342 Teichman, Doron, 269 10% club, 277–78, 293–94 test periods, 227 texting, 190n, 342 Thaler, Alan, 14 Thaler, Jessie, 129 Thaler, Maggie, 118n theories, normative vs. descriptive, 25 theory-induced blindness, 93–94, 128 Theory of Games and Economic Behavior, The (von Neumann and Morgenstern), 29 Theory of Interest, The (Fisher), 88–89 Theory of Moral Sentiments, The (Smith), 87–88 “THERE ARE IDIOTS” paper (Summers), 240–41 Thinking, Fast and Slow (Kahneman), 38, 103n, 109, 186 Thompson, Rex, 242 Tierney, John, 327 time, value of, 21 time-inconsistency, 92–93, 99 time-shares, 71 Tirole, Jean, 307 Tobin, James, financial economics work of, 208 tokens, 149–53, 151, 263, 264–65 Tories, see Conservative Party, U.K.


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, don't be evil, fear of failure, hiring and firing, index fund, informal economy, Jeff Bezos, Joan Didion, Lao Tzu, Menlo Park, Paul Graham, place-making, Ralph Waldo Emerson, Sand Hill Road, side project, Silicon Valley, social intelligence, Steve Jobs, Steven Pinker, superconnector, technology bubble, traffic fines, Year of Magical Thinking

ComplainandResolve.com had established relationships with several dozen local government agencies in Cali- MY DOT-COM LIFE BEGINS 11 fornia and helped more than one hundred citizens resolve their issues. By this measure I considered the effort a success, despite making no money. So that summer after seventh grade I reflected on how I had gotten engrossed in something as exciting and exhausting as my own internet company, even on a small scale. I wasn’t the only one reflecting. The 1990s technology bubble had burst and there were quite a few entrepreneurs doing some serious thinking . . . only theirs was disbelief over how they could have blown through $50M in a couple years, whereas mine was whether I wanted to really be someone different or instead spend more time with school friends talking about who were the hottest girls. (If you don’t remember sixth-seventheighth grades, this is the focus of most boy-to-boy conversations.)


pages: 280 words: 73,420

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

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

He happily appeared in Washington, DC, on behalf of the industry at several events hosted by the SEC and by the Commodities Futures Trading Commission (CFTC). The good-natured Gorelick described himself as a “recovering lawyer.” During the 1990s, he migrated from a big New York legal firm to an Internet start-up, Deja.com, a shopping comparison site where he served as a corporate counsel. He transitioned into a business role, and he liked it. The technology bubble burst in 2000 before Deja.com could bring an initial public offering (IPO) to market. It sold its shopping service to EBay and its newsgroup search archive to Google.1 Gorelick spent the next six months consulting and mulling over different career options. During that hiatus, he had some discussions with a former colleague—Robbie Robinette, who had a background in physics—about using sophisticated computers to trade stocks.


pages: 270 words: 75,803

Wall Street Meat by Andy Kessler

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

After Spitzer released these emails to the press, who quickly wrote huge pieces on New York nursery schools, Jack retracted these statements by declaring he said these things to “bolster his professional importance.” Now that’s the Jack that I remember. Jack paid a $15 million fine and is now barred for life from the securities business. My guess is that is a relief to him. As a boxer, he knows how to get up from a knockout punch. · · · There are plenty of smoking guns to blame for the Internet and Telecom and Technology Bubble. None are very satisfying. Fed Chairman Alan Greenspan pumped the money supply to stave off a banking crisis based on Y2K computer problems and the excess money went into the stock market. Or how about excessive stock options led greedy management to fudge earnings numbers to pump up their stock. Yeah, maybe. It was structural problems on Wall Street that created the bubble, though excess money supply and corrupt management certainly contributed lots of the hot air.


pages: 251 words: 76,128

Borrow: The American Way of Debt by Louis Hyman

asset-backed security, barriers to entry, big-box store, business cycle, cashless society, collateralized debt obligation, credit crunch, deindustrialization, deskilling, diversified portfolio, financial innovation, Ford paid five dollars a day, Home mortgage interest deduction, housing crisis, income inequality, market bubble, McMansion, mortgage debt, mortgage tax deduction, Network effects, new economy, Paul Samuelson, plutocrats, Plutocrats, price stability, Ronald Reagan, statistical model, technology bubble, transaction costs, women in the workforce

Everyone believed that the risks associated with AAA, AA, and BBB securities were accurate. The same AAA rating given to the United States could be given, through insurance and securitization, to nearly any group of home loans. Having steadily risen since 1991, housing prices began to rise rapidly in the late 1990s. Bolstered by the low interest rates intended to stimulate the economy after the technology bubble collapse of 2000, Americans dived in headfirst. For most people, particularly of modest means, mortgages were the only kind of leverage they were able to get. Securitization provided endless capital, and investors required originators to produce more mortgages in which to invest. The traditional 20 percent down payment was no longer needed. Americans on the make could borrow large sums of money at a low cost and watch as house prices rose.


pages: 258 words: 71,880

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

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

Jimmy Cayne, the firm’s CEO until Schwartz took over, liked to put out his cigars in an ashtray he’d gotten from the Women’s Financial Club of New York. When a female visitor joined him for lunch, he was heard complimenting the view from behind her. Still, Bear’s tough-nosed approach to business had given the firm long legs through some very difficult times. Founded in 1923, Bear had survived the Great Depression, the Second World War, the recession in the 1970s, the crash of 1987, and the bursting of the technology bubble. Bear’s risk-management models used computers to test the trades it made against market conditions from a number of those turbulent periods—and they always appeared to be safe, even under adverse conditions. Only a once-in-a-century meltdown could cause the system to collapse. Bear had started as a small stock-trading house with less than $1 million in capital and just seven employees. They worked hard and stuck to their business.


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, Bernie Madoff, Big bang: deregulation of the City of London, 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, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, Hyman Minsky, index fund, intangible asset, interest rate swap, Isaac Newton, joint-stock company, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, merger arbitrage, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, 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

In the late 1990s, the institutional market was dominated by four groups: Gartmore, Schroders, Phillips & Drew and Mercury. Two of those companies have been taken over; Mercury is now part of Blackrock, a big US group. Phillips & Drew lost business in the late 1990s because it was sceptical about the dotcom boom. Although it proved right in the long term, it lost clients in the short term and was taken over by UBS, the Swiss bank. In the US, by contrast, Janus was a fund management group that rode the technology bubble and then suffered heavily when the market collapsed. TRUSTS The next main set of institutional investors comprises the trusts, divided into unit and investment trusts. Both serve roughly the same function: to channel the funds of small investors into the equity markets. An investment trust is a public company like any other company except that its assets are not buildings and machinery but investments in other companies.


pages: 444 words: 86,565

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

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

They must be viewed within the context of specific sectors and cycles (e.g., housing, steel, and technology). These conditions directly affect availability and cost of acquisition financing and, therefore, influence the price an acquirer is willing, or able, to pay. They also affect buyer and seller confidence with respect to undertaking a transaction. For example, at the height of the technology bubble in the late 1990s and early 2000s, many technology and telecommunications companies were acquired at unprecedented multiples. Equity financing was prevalent during this period as companies used their stock, which was valued at record levels, as acquisition currency. Boardroom confidence was also high, which lent support to contemplated M&A activity. After the bubble burst and market conditions adjusted, M&A activity slowed dramatically and companies changed hands for fractions of the multiples seen just a couple of years earlier.


pages: 348 words: 82,499

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

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

The fast, simple and convenient process offered by these early-day investment platforms made DIY investing attractive to an increasing proportion of the population. By the late 1990s anyone with an internet connection and a computer could access real-time dealing, live valuations of shares and funds, as well as an increasing amount of market data to help them with their investment decision making. The proliferation of the internet fuelled a rapid growth in the number of online share dealing services. It was a growth that tracked the technology bubble of the late 1990s, of which it formed a part. The number of web-based brokerages is believed to have grown from around 12 in 1994 to well in excess of 100 by the turn of the century. With share prices on a seemingly one-way upwards trajectory, there was also a significant increase in the number of online investors. Interest in investments among the UK public was also fuelled by the demutualisations that made shareholders of millions of building society savers.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

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

Third, for investors who may be confused but are trying their best to be sensible, choosing a reputable firm to manage their money, which is staffed by bright people as most investment firms are, with a seemingly strong recent track record, appears like the safest thing to do and is a convenient way of passing on their investment responsibilities to someone else. Fourth, the industry has incredible firepower to influence investors. Marketing and branding strategies are backed with big bucks. In the USA, in 2000 at the high of the technology bubble, media advertising alone came to around $1 billion (Bogle, 2001). 1.4 Reducing confusion and complexity Imagine that the top edge of the triangle in Figure 1.1 represents your current interface with the market. It is crowded, noisy, confusing and all based on the premise that if you are smart, and have access to enough information, you can beat the market, or at least choose a manager who can.


pages: 297 words: 89,820

The Perfect Thing: How the iPod Shuffles Commerce, Culture, and Coolness by Steven Levy

Apple II, British Empire, Claude Shannon: information theory, en.wikipedia.org, indoor plumbing, Internet Archive, Jeff Bezos, John Markoff, Joi Ito, Jony Ive, Kevin Kelly, Sand Hill Road, Saturday Night Live, Silicon Valley, social web, Steve Ballmer, Steve Jobs, Steve Wozniak, Steven Levy, technology bubble, Thomas L Friedman

The iPod, of course, is only the most recent, and most compelling, advance in a movement of portable cocooning that's been under way for decades. Even before personal stereos, some critics had observed the lure of isolated musical environments, which were then mostly found in the semiprivate enclosures of automobiles. In his 1974 book Television: Technology and Cultural Form, the sociologist Raymond Williams used the term "mobile privatization" to describe the phenomenon of people forming technological bubbles around themselves, isolating themselves from the scrum of human relations. "What is experienced ... in the conditioned atmosphere and internal music of this windowed shell," he wrote, is "the pursuit of self-determined private choices." Sounds good to me. But Williams was less into celebrating choice than decrying its effect. Technology, he was saying, was making us into islands, particularly in our cars.


pages: 304 words: 93,494

Hatching Twitter by Nick Bilton

4chan, Airbus A320, Burning Man, friendly fire, index card, Jeff Bezos, John Markoff, Kevin Kelly, Kickstarter, Mahatma Gandhi, Mark Zuckerberg, pets.com, rolodex, Ruby on Rails, Saturday Night Live, side project, Silicon Valley, Skype, social web, Steve Ballmer, Steve Jobs, Steven Levy, technology bubble, traveling salesman, US Airways Flight 1549, WikiLeaks

Sometimes he sat and sketched in his notepad, staring out the window as bike messengers and start-up founders streamed by. Other times he hung out in the 550-foot-long park, an ovate patch of grass that looked like it belonged in front of the royal palace in London, not in San Francisco’s warehouse district. In the center of the park was a rickety old brown swing set. South Park had played a crucial role in the late nineties as home to many of the now-defunct start-ups that quickly wilted away after the technology bubble burst. Pets.com and other start-ups that had collectively squandered hundreds of millions of dollars on ridiculous parties, asinine salaries, and expensive TV ads met their timely demise overlooking South Park. It hadn’t always been the epicenter of tech. Before the start-ups had moved in, the park had been home to brothels, drug dealers, dive bars, and sordid hotels. After the bubble had gone pop, it had almost returned to its Seedyville roots, but in mid-2005 South Park and the Web were making a comeback.


When the Money Runs Out: The End of Western Affluence by Stephen D. King

Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, business cycle, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Many of the factors that led to such scintillating rates of economic expansion in the Western world in earlier decades are no longer working their magic: the forces of globalization are in retreat, the boomers are ageing, women are thankfully better represented in the workforce,3 wages are being squeezed as competition from the emerging superpowers hots up and, as those superpowers demand a bigger share of the world’s scarce resources, Westerners are forced to pay more for food and energy. In the 1990s, it looked for a while as though new technologies might overcome these constraints. We hoped our economies would still be able to expand thanks to the impact of technology on 2 4099.indd 2 29/03/13 2:23 PM Introduction productivity. The story didn’t last. The technology bubble burst in 2000. Fearing the onset of a Japanese-­style stagnation, Western policy-­makers pulled out all the stops: interest rates plunged, taxes were cut and public spending was boosted. Yet, even before the onset of the subprime crisis in 2007, it looked as though these policies had led only to a serious misallocation of resources: too much money was pouring into housing and financial services (and, particularly across Europe, into public spending) and not enough into productive investment.


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Kickstarter, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, Plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

In The End of Alchemy, Mervyn King notes that Minsky’s periods of excess are not just in financial markets, but also in economic activity; yet, prior to the financial crisis, there was no evidence that economic growth was unusually rapid. King also notes that Minsky’s view is not helpfully predictive, relying too much on the idea that people can sometimes be irrational. Yet these arguments are not fatal to Minsky’s view: in the aftermath of the technology bubble, growth in the US only accelerated thanks to remarkably supportive monetary and fiscal policies. We now know that underlying economic performance – as measured by productivity growth – was already slowing rapidly. And an important part of Minsky’s argument is that behaviour by central bankers can encourage irrational behaviour by others. See M. King, The End of Alchemy: Money, banking and the future of the global economy, Little, Brown, London, 2016. 13.Sherman McCoy, the protagonist in Wolfe’s Bonfire of the Vanities, is a Wall Street trader whose life goes horribly wrong just when it seemed to be going so well: he was a self-styled Master of the Universe. 14.For a discussion of the effects of dysfunctional belief systems, see R.


Concentrated Investing by Allen C. Benello

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

He didn’t have to wait that long, however, because two of his positions were quickly bought out at huge premiums. TCA Cable was taken over by Cox three years later at four times Greenberg’s cost, as was US West Media Group by AT&T at four times Greenberg’s cost. He says that 196 Concentrated Investing Shaw Communications was at one point “a six- or eight-bagger but ended up being a four-bagger,” as well. It was helpful that cable stocks were caught up in the telecommunications, media, and technology bubble in the late 1990s. Eventually, the few remaining public cable companies, like Comcast, came crashing back down to Earth. Greenberg says it’s an amusing anecdote that demonstrates that a concentrated investor “better really know what you’re talking about.”70 You better really have studied things in depth because sometimes you’re going to hear people say, “Oh my gosh! How could you do that? It’s a terrible idea.”


pages: 317 words: 106,130

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

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

In the mid 1990s, the growth of new trading technologies, emerging markets and market liquidity lead to a rise of various equity and fixed income trading and arbitrage strategies. The financial crisis of 1998 exposed the risks of these strategies in terms of liquidity and transparency. Soon after however, the internet boom triggered the flood of capital into equity based strategies, including private equity. The market decline after the technology bubble in the early 2000s brought a renewed interest in risk managed products. Unfortunately, it was these very structured products that eventually failed in the 2007 and 2008 credit crisis and have focused investor and government concerns on issues related to various structured products and the use of over-the -counter derivatives in various fund products. It seems unlikely that investors will suddenly overcome the urge to invest in last year’s strategy.


pages: 313 words: 101,403

My Life as a Quant: Reflections on Physics and Finance by Emanuel Derman

Berlin Wall, bioinformatics, Black-Scholes formula, Brownian motion, buy and hold, capital asset pricing model, Claude Shannon: information theory, Donald Knuth, Emanuel Derman, fixed income, Gödel, Escher, Bach, haute couture, hiring and firing, implied volatility, interest rate derivative, Jeff Bezos, John Meriwether, John von Neumann, law of one price, linked data, Long Term Capital Management, moral hazard, Murray Gell-Mann, Myron Scholes, Paul Samuelson, pre–internet, publish or perish, quantitative trading / quantitative finance, Sharpe ratio, statistical arbitrage, statistical model, Stephen Hawking, Steve Jobs, stochastic volatility, technology bubble, the new new thing, transaction costs, volatility smile, Y2K, yield curve, zero-coupon bond, zero-sum game

Each week I went to two fixed-income risk meetings, one equities risk meeting, one firmwide risk committee meeting, at least two Derivatives Analysis group meetings, and a meeting of all the managers in Firmwide Risk. Then there were three different meetings with three different controllers for equities, fixed income, and currencies and commodities respectively, as well as the periodic meeting of all the VPs in Firmwide Risk. That was when times were good. By mid-2000, after the bursting of the technology bubble and the subsequent decline in all stock markets, I had many more meetings with discouraged young quants in my group who foresaw a very limited upside. By early 2001 I was spending a large fraction of my time trying to cheer up disgruntled but talented people. There was one real perquisite to being a senior person in Firmwide Risk-you got to participate in the firm's central risk meeting once a week and watch all the biggest big shots in action as we listened to the state of our business prospects and discussed current events and strategies.


pages: 398 words: 100,679

The Knowledge: How to Rebuild Our World From Scratch by Lewis Dartnell

agricultural Revolution, Albert Einstein, Any sufficiently advanced technology is indistinguishable from magic, clean water, Dava Sobel, decarbonisation, discovery of penicillin, Dmitri Mendeleev, global village, Haber-Bosch Process, invention of movable type, invention of radio, invention of writing, iterative process, James Watt: steam engine, John Harrison: Longitude, lone genius, low earth orbit, mass immigration, nuclear winter, off grid, Richard Feynman, technology bubble, the scientific method, Thomas Kuhn: the structure of scientific revolutions, trade route

You might even briefly entertain some fantasy of moving into a plush penthouse apartment, surveying the serene, deserted city around you through its floor-to-ceiling plate-glass windows, and cultivating all you need to eat in a dense permaculture in the roof garden. A more plausible model for post-apocalyptic city dwelling would be to live immediately adjacent to a major park and plow up the turf to cultivate crops. In some cities, the environment will quickly become uninhabitable once the technological bubble bursts. Places like Los Angeles and Las Vegas have been incongruously built in very arid or even desert locales, and will rapidly wither as maintenance fails on the aqueducts supplying them with water from afar. Washington, DC, on the other hand, will face the opposite problem, as it was built on former swampland that will begin to revert to its original state with the loss of drainage. I suspect, therefore, that you’ll find it far easier to leave the cities for good and move to a more appropriate site: a rural location with fertile, cultivable ground and older buildings better suited for off-grid habitation.


pages: 407 words: 103,501

The Digital Divide: Arguments for and Against Facebook, Google, Texting, and the Age of Social Netwo Rking by Mark Bauerlein

Amazon Mechanical Turk, Andrew Keen, business cycle, centre right, citizen journalism, collaborative editing, computer age, computer vision, corporate governance, crowdsourcing, David Brooks, disintermediation, Frederick Winslow Taylor, Howard Rheingold, invention of movable type, invention of the steam engine, invention of the telephone, Jaron Lanier, Jeff Bezos, jimmy wales, Kevin Kelly, knowledge worker, late fees, Mark Zuckerberg, Marshall McLuhan, means of production, meta analysis, meta-analysis, moral panic, Network effects, new economy, Nicholas Carr, PageRank, peer-to-peer, pets.com, Results Only Work Environment, Saturday Night Live, search engine result page, semantic web, Silicon Valley, slashdot, social graph, social web, software as a service, speech recognition, Steve Jobs, Stewart Brand, technology bubble, Ted Nelson, The Wisdom of Crowds, Thorstein Veblen, web application

That’s why they called me cyberboy. < Douglas Rushkoff > the people’s net Originally published in Yahoo Internet Life (2001). TO THOSE OF US who really love it, the Internet is looking and feeling more social, more alive, more participatory, and more, well, more Internet-y than ever before. This might sound surprising, given the headlines proclaiming the official bursting of the technology bubble. Likewise, analysts on the financial cable channels and the venture capitalists of Silicon Alley now shun any company whose name ends in .com and have moved on to more promising new buzzwords, such as wireless. But the statistics fly in the face of conventional wisdom. In terms of real hours spent online and the number of people getting new accounts every day, Internet use is up. We spent an average of 20.2 hours looking at Internet sites in March 2001, up from 15.9 hours last year and 12.8 hours the year before, according to the latest data from Jupiter Media Metrix.


pages: 353 words: 104,146

European Founders at Work by Pedro Gairifo Santos

business intelligence, cloud computing, crowdsourcing, fear of failure, full text search, information retrieval, inventory management, iterative process, Jeff Bezos, Joi Ito, Lean Startup, Mark Zuckerberg, natural language processing, pattern recognition, pre–internet, recommendation engine, Richard Stallman, Silicon Valley, Skype, slashdot, Steve Jobs, Steve Wozniak, subscription business, technology bubble, web application, Y Combinator

I also restructured the software development process, created a brand new internet-based business intelligence product and, over the next year and a half, we fixed the buggy product line which, in the end, was very attractive to customers. We started to grow again and over two years, our market cap went from $100 million to almost $5 billion. 1997 to 1999 was an amazing time for the company as we expanded into more and more countries. When the technology bubble burst, we emerged relatively unscathed because by then we were a large, stable, profitable company with thousands of customers. Our market cap dropped somewhat, but we were in good shape, and we felt that it was time to leapfrog our competition. We had been competing against Cognos for a very long time and it was head-to-head. One year they were number one, another year we were number one.


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

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

During that period, the Permanent Portfolio sailed through the event while other portfolios swooned. How many investors dropped out of the market in 1987 in panic, locking in losses only to miss solid gains later? The Permanent Portfolio was up 3.5 percent in real terms that year. Table 3.7 Comparison of Annualized Real Returns by Decade for Four Portfolios. 1990s The 1990s saw another great time for stocks as the Internet technology bubble grew. As stocks soared, so did the real returns of stock-heavy allocations. By the year 2000 though, the bubble was getting ready to pop and erase a good portion of the previous stock gains. But again the Permanent Portfolio just chugged along with its steady consistent growth. When the Internet bubble was deflating the Permanent Portfolio protected its assets when the high-flyers took a big fall. 2000s When the 2000s came along, for stock investors it felt a lot like the 1970s, with very poor real returns on stocks.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, hiring and firing, housing crisis, inflation targeting, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Robert Shiller, Rubik’s Cube, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

At the time that this paper was written, the ECB had kept policy rates at zero for six years. The stark contrast between the robust recovery in the simulation and the slow one in reality illustrates how DSGE models helped to mislead monetary policymakers into thinking that they had more influence over the economy than they actually did. This belief in the efficacy of monetary policy was reinforced by the limited economic costs of the collapse of the technology bubble in global stock markets in 2001. The US Federal Reserve, in particular, ascribed the limited impact on the US economy to its swift monetary response. Consequently, rather than viewing the collapse in prices of overvalued equities as a warning sign of the risks from financial instability, the Fed came to believe that financial risks were limited. To quote from a speech given by vice-chair Kohn in 2006: The health of the US financial system remained solid after the collapse of the high-tech boom . . .


Capital Ideas Evolving by Peter L. Bernstein

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

“Global Portfolio Optimization,” Financial Analysts Journal, September/October, pp. 28–43. Brock, Horace, 2006a. “Reconceptualizing ‘Market Risk’ from Scratch,” New York: Strategic Economic Decisions. Brock, H. W., 2006b. “The Logical Justif ication for ‘Active’ Investment Management” in Thoughts on the Bottom Line, Barclay Douglas, ed., New York: John Wiley & Sons. Brunnermeier, Markus, and Stefan Nagel, 2003. “Hedge Funds and the Technology Bubble,” Journal of Finance, Vol. 59, No 5 (October), pp. 2013–2040. Burton, Jonathan, 1998. “Revisiting the Capital Asset Pricing Model,” Dow Jones Asset Manager, May/June. Calio, Vince, 2005. “Operational Risk Back in Spotlight,” Pensions & Investments, October 4. Campbell, John, 2006. “Household Finance,” Journal of Finance, Vol. 61, No. 4 (August), pp. 1553–1604. Campbell, John, Jens Hilscher, and Jan Szilagyi, 2006.


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

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

When analysts refer to a company's "strong balance sheet," they are usually referring to the level of debt. By itself, debt isn't a bad thing. But if a company can't produce sufficient revenues to pay its debts, then it's asking for trouble. The reason so many telecom companies failed in recent years is that they took on huge amounts of debt in the late '90s to finance the building of fiber-optic networks. When the technology bubble burst and demand for network capacity withered, the telecoms had miles and miles of networks but too few paying customers. Their equipment suppliers also found that the inventory piling up in warehouses was worthless. Bankruptcies quickly followed, as the telecoms and equipment vendors were unable to make the interest payments on their debts. On the other hand, companies that took on less debt in the high-flying '90s were able to weather the downturn.


pages: 362 words: 108,359

The Accidental Investment Banker: Inside the Decade That Transformed Wall Street by Jonathan A. Knee

barriers to entry, Boycotts of Israel, call centre, cognitive dissonance, commoditize, corporate governance, Corrections Corporation of America, discounted cash flows, fear of failure, fixed income, greed is good, if you build it, they will come, iterative process, market bubble, market clearing, Menlo Park, new economy, Ponzi scheme, pre–internet, risk/return, Ronald Reagan, shareholder value, Silicon Valley, technology bubble, young professional, éminence grise

But the disturbing changes at Morgan Stanley over the past decade were not primarily the result of Phil Purcell’s leadership. Rather they, and corresponding changes at all the major investment banks, were driven by the unprecedented economic boom and bust that placed extraordinary pressures on the values that had once prevailed at these institutions. Much has already been written about the various economic “bubbles” of the late 1990s—the Internet bubble, the telecom bubble, the technology bubble and the stock market bubble. Much has also been written about the role of investment banks in fueling these ephemeral bubbles. Much less has been written, however, about the investment banks’ own bubble. While the investment banks in some ways made possible all the other bubbles—by, for example, legitimizing hundreds of speculative start-up companies for public market investors and opining as to the “fairness” of incredible values placed on these businesses—these institutions themselves were fundamentally transformed by the unprecedented number of deals the forces they unleashed created.


pages: 397 words: 112,034

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

affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, business cycle, capital controls, Cass Sunstein, central bank independence, 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, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, 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, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

Chinese official purchases could easily give a significant boost to the confidence of the gold market in 2012 or 2013, but the market will not know what is happening until the central bank makes an announcement. The price of gold has reached a new high in nominal terms, but it will not regain the inflation-adjusted peak it had in 1980 until the price rises to nearly $2,400 per ton. The price of gold began to rally in 2001 when the world economy was recovering from the collapse of the technology bubble. The price gains occurred against a backdrop of low US interest rates, record current account imbalances, and the emergence of China as a major economic power. The current economic environment will be conducive to further price gains. Interest rates are at record lows. Central banks will have to maintain accommodative monetary policies in order to protect their banking systems. The dollar benefitted from problems in Europe, but the United States is also confronting unprecedented fiscal deficits.


pages: 492 words: 118,882

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, MITM: man-in-the-middle, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

This is a seemingly logical rationale, especially when taking into consideration the way the innovation mantra is being chanted across every sector and industry today. Indeed, this has even happened in the past. In the 1980s during the savings and loans crisis (S&L crisis), 1,043 out of the 3,234 savings and loan associations ( FDIC, 2000) failed and affected millions of everyday investors. In 2000, the bursting of the technology bubble did affect investors and technology in general. Yet none of these failures posed systemic risks and came at the cost of a financial meltdown. The plumbing of the financial system and its connection to other institutions ensure that large, complex financial organisations are systemically important financial institutions (SIFI11) that pose risks to the financial system and the economy. Term borrowed from the Minneapolis Federal Reserve bank’s initiative will explore various bold and transformational solutions to address TBTF. 11 SIFI: A SIFI is an institution, activity or market considered so important to the functioning of the economy that special rules and buffers are put in place to (1) reduce the probability of failure and (2) minimize spillovers in case of failure. 10 33 Chapter 2 ■ Fragmentation of Finance It is for these reasons that the conversation of ending TBTF has been reverberating and gaining momentum in public and private anterooms.


The Future of Technology by Tom Standage

air freight, barriers to entry, business process, business process outsourcing, call centre, Clayton Christensen, computer vision, connected car, corporate governance, creative destruction, disintermediation, disruptive innovation, distributed generation, double helix, experimental economics, full employment, hydrogen economy, industrial robot, informal economy, information asymmetry, interchangeable parts, job satisfaction, labour market flexibility, Marc Andreessen, market design, Menlo Park, millennium bug, moral hazard, natural language processing, Network effects, new economy, Nicholas Carr, optical character recognition, railway mania, rent-seeking, RFID, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, six sigma, Skype, smart grid, software as a service, spectrum auction, speech recognition, stem cell, Steve Ballmer, technology bubble, telemarketer, transcontinental railway, Y2K

But perhaps the best news for the industry is that there are still plenty of opportunities in the new world of it. “If we go with the market, help our customers to realise the business value of it, then we can be a good business,” says ibm’s Mr Wladawsky-Berger. For a start, all that experi- 38 COMING OF AGE mentation during the dotcom boom actually produced some useful results. Things tried during a technological bubble tend to make a comeback. The first transatlantic cable, for example, was a disaster, but it prompted others to try again. Most business-to-business marketplaces failed dismally, because these start-ups thought technology would quickly overthrow existing power structures, explains Mr Moore. But these firms got one thing right: there are lots of assets trapped in inefficient supply chains.


pages: 400 words: 124,678

The Investment Checklist: The Art of In-Depth Research by Michael Shearn

Asian financial crisis, barriers to entry, business cycle, call centre, Clayton Christensen, collective bargaining, commoditize, compound rate of return, Credit Default Swap, estate planning, intangible asset, Jeff Bezos, London Interbank Offered Rate, margin call, Mark Zuckerberg, money market fund, Network effects, pink-collar, risk tolerance, shareholder value, six sigma, Skype, Steve Jobs, supply-chain management, technology bubble, time value of money, transaction costs, urban planning, women in the workforce, young professional

Eventually, there was an oversupply of real estate, which caused prices for real estate to drop. Lenders and developers found themselves with many empty properties, and there were many bankruptcies during this period. This just goes to show that areas where there is an abundance of capital are usually poor hunting grounds for great investments. Investors who got caught up in the hype of the 1980s real estate boom or technology bubble of the late 1990s ultimately ended up losing most of their capital. Now that you know more about how to generally look for investment ideas, the following sections of this chapter describe a few more formalized ways to begin looking for investment ideas. Using Stock Screens A stock screen is a tool investors use to filter stocks, using pre-selected criteria. For example, if you’re an investor looking for cheap stocks, you could enter a set of filters such as: “companies that have enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratios of less than five times that also have market capitalizations over $100 million.”


pages: 349 words: 134,041

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

accounting loophole / creative accounting, Albert Einstein, Asian financial crisis, asset-backed security, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, 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, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial innovation, fixed income, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Meriwether, locking in a profit, Long Term Capital Management, 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, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk-adjusted returns, risk/return, Satyajit Das, shareholder value, short selling, 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

CDOs are also massively leveraged: if you buy the 2% equity in a CDO, then you are 50 times leveraged, compared to the 10 to 12 times that a normal bank uses. Losses and leverage are not good bedfellows. Sound, highly-rated companies also found reefs. Asbestos liability and the Californian electricity deregulation claimed victims. As the credit cycle turned, the arbitrage CDOs were hard hit. They had been based on US high yield (junk) bonds. The US recession and the unwinding of the technology bubble saw record numbers of default. Contagious crises in Asia, Eastern Europe and Latin America didn’t help. The credit models failed miserably. The concept of average credit losses proved average – it seemed the worst case was much worse. If the average was made of one year of very large losses and several years of no losses, then that didn’t work well either. Some CDOs were actively managed. Managers had been appointed to trade the portfolios, the idea being that they would minimize losses by selling deteriorating credits.


pages: 487 words: 139,297

Dancing in the Glory of Monsters: The Collapse of the Congo and the Great War of Africa by Jason Stearns

Berlin Wall, business climate, clean water, colonial rule, failed state, Fall of the Berlin Wall, land tenure, Mahatma Gandhi, means of production, microcredit, Nelson Mandela, technology bubble, transfer pricing, unemployed young men, working-age population, éminence grise

Benjamin Serukiza, the former RCD vice governor of South Kivu, confirmed this: “I had to mediate between local businessmen and the Rwandan brigade commander here. He only wanted to allow one Rwandan trader, who was close to the Rwandan government, to have access to the mine. He said it was for security reasons, but we knew it wasn’t.”43 The initial profits, however, were nothing compared to what was to come. “Everything changed in 2000, when the coltan price soared,” Pierre Olivier remembered. It was a fluke. That year, the information technology bubble coincided with heightened demand for cell phones and the Christmas release of a Sony PlayStation console. Demand for tantalum, the processed form of coltan, had been rising steadily for years, but now the markets got caught up in a buying frenzy. Within months, the local market price of tantalum shot up from $10 to $380 per kilo, depending on the percentage of ore content, while the world price peaked at $600 per kilo of refined tantalum.44 Dozens of comptoirs—mineral trading houses—opened up in Bukavu and Goma to take advantage of the coltan rush.


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

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

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 D1a D1b D1c D10b D10c D10c Index Bull Market Period Mar 2000 Alpha Jan 1998– TABLE 4.12 Persistence in Performance Subperiod Analysis CTA Performance, Survivorship Bias, and Dissolution Frequencies 71 analyses are less significant.9 The table also indicates that each decile is significantly exposed to the CTA Global Index. The R2 is particularly high, especially for the upper deciles, but is generally low for the subdeciles. The central part of Table 4.12 reports the decile analysis over the April 2000 to December 2002 period. This period corresponds to a bear market since the technology bubble exploded in March 2000. It indicates that all the deciles but D6 have negative alphas. The only one significantly negative is D5. This result indicates that no group of funds offers persistent returns during the bear market that began in the first half of 2000. As expected, the top-performing subdecile (D10c) yields a positive (but not significant) alpha. Nevertheless, each decile is significantly positively exposed to the CTA Global Index.


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, Black-Scholes formula, Bonfire of the Vanities, 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, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, full employment, George Akerlof, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, John von Neumann, linear programming, Loma Prieta earthquake, Long Term Capital Management, margin call, market friction, market microstructure, martingale, merger arbitrage, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Richard Feynman, Richard Stallman, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, 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

Yet almost all the information one generates is deeply flawed, and is more likely to be flawed, the more JWPR007-Lindsey May 7, 2007 17:27 Allan Malz 303 sophisticated it is. Second, not only is it inevitable that the information is deeply flawed, but it is also not such a bad thing. I’ve been fortunate to be in at least some of the right places at the right time: at the Fed during the Golden Age of Supervision, at RiskMetrics during and after the technology bubble, and at a hedge fund during what may prove the heyday of hedge funds. Perhaps it’s the distorted perspective that comes from studying modern finance too much, but it seems to me that my career has been driven a lot more by my response to random events and larger forces than by my personal attempts to shape a path. Almost like life. JWPR007-Lindsey May 7, 2007 17:27 304 JWPR007-Lindsey May 7, 2007 17:32 Chapter 22 Peter Muller Senior Advisor, Morgan Stanley I ’ve had a fun and lucrative career as a quantitative trader.


Three Felonies A Day by Harvey Silverglate

Berlin Wall, Home mortgage interest deduction, illegal immigration, Julian Assange, mandatory minimum, medical malpractice, mortgage tax deduction, national security letter, offshore financial centre, Potemkin village, RAND corporation, Ronald Reagan, short selling, Silicon Valley, Steve Jobs, Steven Pinker, technology bubble, urban planning, WikiLeaks

On August 5, 1992, perhaps contrite from her involvement in perpetrating the myth that Milken was a criminal, Judge Wood reduced his sentence on the basis of his “substantial cooperation” with the government (which got no one convicted) to two years. He was released in March of the following year. 106 Following (or Harassing?) the Money The frothy boom-and-bust that characterized the ’80s and produced scapegoats like Milken was followed by the “technology bubble” of the ’90s. That decade saw its own series of questionable federal investigations and highly dubious prosecutions. As the clatter over new stock offerings by high-tech start-up companies grew to a crescendo, complaints emerged about how brokers were doling out their newly issued shares. These shares, for which demand substantially exceeded supply, were allegedly handed out in a way that took advantage of their scarcity.


pages: 515 words: 132,295

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

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

Arthur Goldhammer (Cambridge, MA: Belknap Press of Harvard University Press, 2014), 209. 53. Lauren Carroll, “Hillary Clinton: Top Hedge Fund Managers Make More than All Kindergarten Teachers Combined,” PolitiFact, June 15, 2015. 54. William Lazonick, “Profits Without Prosperity,” Harvard Business Review 92, no. 2 (September 2014). 55. James K. Galbraith and Travis Hale, “Income Distribution and the Information Technology Bubble,” Working Paper No. 27, University of Texas Inequality Project, January 2004. 56. Robert Frank, The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust (New York: Crown Business, 2011), 54. 57. Richard Wilkinson and Kate Pickett, The Spirit Level: Why Equality Is Better for Everyone (London: Penguin Books, 2009). 58. Rana Foroohar, “Thomas Piketty: Marx 2.0,” Time, May 19, 2014. 59.


pages: 419 words: 130,627

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase by Duff McDonald

bank run, Blythe Masters, Bonfire of the Vanities, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Exxon Valdez, financial innovation, fixed income, G4S, housing crisis, interest rate swap, Jeff Bezos, John Meriwether, Kickstarter, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, money market fund, moral hazard, negative equity, Nelson Mandela, Northern Rock, profit motive, Renaissance Technologies, risk/return, Rod Stewart played at Stephen Schwarzman birthday party, Saturday Night Live, sovereign wealth fund, statistical model, Steve Ballmer, Steve Jobs, technology bubble, The Chicago School, too big to fail, Vanguard fund, zero-coupon bond, zero-sum game

Shipley held on to the CEO slot at the combined bank until 1999, when he ceded the role to Harrison. While trying to put his own stamp on Chase, Harrison was widely criticized for overpaying in a flurry of acquisitions at the top of the bull market of the late 1990s. His timing was lousy. He snapped up the technology investment bank Hambrecht & Quist in September 1999, just a few months before the technology bubble burst, paying an overblown $1.4 billion. He followed that with the $7.7 billion acquisition of the London-based merchant bank Robert Fleming Holdings in April 2000, and then paid $500 million in July for the mergers and acquisitions boutique Beacon Group. With the last deal, he committed one of the cardinal sins of the M&A game—buying an entire company to secure the services of a single individual.


pages: 504 words: 139,137

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

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

Journal of Finance 59, 711–753. Brennan, M. J., and E. S. Schwartz (1977), “Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion,” The Journal of Finance 32, 1699–1715. Brinson, Gary P., L. Randolph Hood, and Gilbert L. Beebower (1986), “Determinants of Portfolio Performance,” Financial Analysts Journal 42(4), 39–44. Brunnermeier, Markus, and Stefan Nagel (2004), “Hedge Funds and the Technology Bubble,” Journal of Finance 59, 2013–2040. Brunnermeier, Markus, Stefan Nagel, and Lasse Heje Pedersen (2008), “Carry Trades and Currency Crashes,” NBER Macroeconomics Annual 23, 313–348. Brunnermeier, M., and L. H. Pedersen (2005), “Predatory Trading,” Journal of Finance 60, 1825–1863. Brunnermeier, M., and L. H. Pedersen (2009), “Market Liquidity and Funding Liquidity,” The Review of Financial Studies 22, 2201–2238.


pages: 468 words: 145,998

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

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

Structural differences in the economies of the world had led to what analysts call “imbalances” that created massive and destabilizing cross-border capital flows. In short, we were living beyond our means—on borrowed money and borrowed time. The dangers for the U.S. economy had been obscured by an unprecedented housing boom, fed in part by the low interest rates that helped us recover from the downturn that followed the bursting of the late-’90s technology bubble and the impact of the 9/11 attacks. The housing bubble was driven by a big increase in loans to less creditworthy, or subprime, borrowers that lifted homeownership rates to historic levels. By the time I took office in July 2006, fully 69 percent of U.S. households owned their own homes, up from 64 percent in 1994. Subprime loans had soared from 5 percent of total mortgage originations in 1994 to roughly 20 percent by July 2006.


pages: 477 words: 144,329

How Money Became Dangerous by Christopher Varelas

activist fund / activist shareholder / activist investor, Airbnb, airport security, barriers to entry, basic income, bitcoin, blockchain, Bonfire of the Vanities, California gold rush, cashless society, corporate raider, crack epidemic, cryptocurrency, discounted cash flows, disintermediation, diversification, diversified portfolio, Donald Trump, dumpster diving, fiat currency, fixed income, friendly fire, full employment, Gordon Gekko, greed is good, interest rate derivative, John Meriwether, Kickstarter, Long Term Capital Management, mandatory minimum, mobile money, mortgage debt, pensions crisis, pets.com, pre–internet, profit motive, risk tolerance, Saturday Night Live, shareholder value, side project, Silicon Valley, Steve Jobs, technology bubble, The Predators' Ball, too big to fail, universal basic income, zero day

That would help us land more deals.” It was unprincipled, I told them. “When the harsh light of reality finally shines on this, there will be no defending the action.” The sole reason senior management allowed me to renounce the practice so blatantly and not engage in it was, frankly, because I was bringing in so much M&A business that they couldn’t risk losing me. The article appeared in late 1997, as the technology bubble built toward its peak. Over the next couple of years, I became more senior, and the pressure to spin IPOs increased. But as one of the top revenue generators in the investment bank, I had more than a little leverage to continue my resistance. Robert and I spoke later that week. The bosses had already sent a handful of envoys to reprimand him. “I hope you didn’t get in too much trouble for talking to the Journal,” I said.


pages: 470 words: 148,730

Good Economics for Hard Times: Better Answers to Our Biggest Problems by Abhijit V. Banerjee, Esther Duflo

"Robert Solow", 3D printing, affirmative action, Affordable Care Act / Obamacare, Airbnb, basic income, Bernie Sanders, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, charter city, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, endowment effect, energy transition, Erik Brynjolfsson, experimental economics, experimental subject, facts on the ground, fear of failure, financial innovation, George Akerlof, high net worth, immigration reform, income inequality, Indoor air pollution, industrial cluster, industrial robot, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Jean Tirole, Jeff Bezos, job automation, Joseph Schumpeter, labor-force participation, land reform, loss aversion, low skilled workers, manufacturing employment, Mark Zuckerberg, mass immigration, Network effects, new economy, New Urbanism, non-tariff barriers, obamacare, offshore financial centre, open economy, Paul Samuelson, place-making, price stability, profit maximization, purchasing power parity, race to the bottom, RAND corporation, randomized controlled trial, Richard Thaler, ride hailing / ride sharing, Robert Gordon, Ronald Reagan, school choice, Second Machine Age, secular stagnation, self-driving car, shareholder value, short selling, Silicon Valley, smart meter, social graph, spinning jenny, Steve Jobs, technology bubble, The Chicago School, The Future of Employment, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, trickle-down economics, universal basic income, urban sprawl, very high income, War on Poverty, women in the workforce, working-age population, Y2K

Ryan painstakingly explained to a journalist why all of these things lined up to make tax increases look good and tax decreases look bad: I wouldn’t say that correlation is causation. I would say Clinton had the tech-productivity boom, which was enormous. Trade barriers were going down in the Clinton years. He had the peace dividend he was enjoying.… The economy in the Bush years, by contrast, had to cope with the popping of the technology bubble, 9/11, a couple of wars and the financial meltdown.… Some of this is just the timing, not the person.… Just as the Keynesians say the economy would have been worse without the stimulus [that Mr. Obama signed], the flip side is true from our perspective.53 Paul Ryan is right about one thing. Just looking at the variations over time, it is hard to conclude whether there is any causal effect of tax rates on growth.


pages: 526 words: 158,913

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America by Greg Farrell

Airbus A320, Apple's 1984 Super Bowl advert, bank run, banking crisis, bonus culture, call centre, Captain Sullenberger Hudson, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, glass ceiling, high net worth, Long Term Capital Management, mass affluent, Mexican peso crisis / tequila crisis, Nelson Mandela, plutocrats, Plutocrats, Ronald Reagan, six sigma, sovereign wealth fund, technology bubble, too big to fail, US Airways Flight 1549, yield curve

And with that introduction, Fleming reminded the employees that the company’s underlying business remained sound. He said the story in the morning’s paper was “nonspecific” and “relied on unidentified sources.” He pointed to Cribiore and assured everyone that the search for a new CEO was proceeding “with speed and careful deliberation.” “This is not the first time that our firm has faced challenges,” Fleming continued. “The crash of 1987, the credit crisis of 1998, the bursting of the technology bubble in 2000, and the terror attacks of 9/11. In many ways we can better navigate this challenge because it does not call for an overhaul of our strategy or a resizing of our business. “We have accomplished a great deal in the past five years. Following the bursting of the tech bubble and 9/11, we pulled together as a firm and embarked on a new strategy to create a truly global, diversified financial services company.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

., 131, 132, 285, 317, 318, 350 Sweden, 366 economic mobility in, 18 financial crisis response in, 168, 169, 361 financial stability in, 220 GDP of, 183 inequality in, 23, 127 labor in, 230 tax system in, 22 Switzerland, 183 tariffs, 50, 61, 325 taxes: alternative minimum, 394 on capital gains, 71–72, 87, 88, 115, 211, 274, 330, 361, 378, 395 corporate, 62, 73–74, 95, 115, 142, 179, 214, 215, 221–22, 224, 225, 270, 272, 273–74, 278, 283, 296, 331 economic growth and, 22–23, 84, 86, 88 and economic stimulus, 216, 217, 218, 221 estate, 73, 76, 88, 166, 167, 274, 361, 395 on financial sector, 213–14, 215, 247, 248 globalization and, 62, 63, 142, 278 income distribution and, 30, 31, 72 loopholes in, 42–43, 72, 115, 212, 214, 215, 221, 222, 272, 273 market correction through, 34 middle-class deductions in, 222–24, 379 and national debt, 207, 376 on natural resources, 39–40, 213 on pollution, 213, 215, 224 on poor, 74, 88, 218 progressive, 5, 31, 107, 114–16, 142, 212, 218, 273–74, 379, 395 Reagan’s revision of, 5, 71, 114, 221 regressive, 38, 74, 77, 79, 157, 208, 214, 237, 251, 299 on rent seeking, 39, 115, 212–14, 215, 274, 395 Right’s view of, 216 state, 74 on wealthy, 5, 38, 42–43, 62, 71–73, 74, 76, 77, 84, 86, 87–88, 114, 115, 116, 138, 142, 159, 167, 208, 209, 211, 212, 214–15, 218, 221, 223, 224, 225, 226, 256, 274, 275, 294, 312, 335, 344, 360, 383, 394 technology: bubble in, 85, 87, 88, 89, 211, 243, 391, 396 economic impact of, 30, 79, 80 government investment in, 15, 93, 115, 155, 174, 217, 267, 281, 283 idea-shaping and, 156 labor demand and, 53, 54–56, 63, 79, 80, 277, 280, 283, 334 monopolies in, 42, 44, 45–46, 96 and stock trading, 165 telecommunications: government auction of, 50 monopolization in, 44, 97, 98 see also technology TEPCO, 189 Thaler, Richard, 161 Thatcher, Margaret, 316 Thucydides, 29 Tingbergen, 392 T-Mobile, 44, 203 tobacco industry, xviii, 151, 160, 354, 357 Tocqueville, Alexis de, 288 Townes, Charles, 41 Toxic Asset Relief Program (TARP), 362 trade: agreements on, 140, 141, 324–25, 326 austerity and, 231 globalization of, 61–64, 144, 324–25, 326 imbalances in, 279–80, 396 Treasury bills, 177, 208, 217, 396 Treasury Department, U.S., 61, 246, 253, 258, 353, 369 Tremonti, Giulio, 389 trust, 115, 120, 121–26, 134, 346 Turing, Alan, 41 Turkey, 22, 23 unemployment, xii, xv, 11–12, 13, 74, 89, 91, 179, 207, 393 extent of, 1, 10–11, 15, 75, 301, 302 macroeconomic policies affecting, 38, 61, 62, 64, 82, 85, 86, 230, 231, 236, 237, 238, 239, 240, 241, 242, 251, 259, 260, 261, 262, 263, 379 in manufacturing, 54, 56, 57, 232–33, 285, 321 political importance of, 251–52 stimulus package’s effect on, 232, 236 underreporting of, 11, 15, 291, 304–5 of youth, x, xviii–xix, 12, 265 unemployment insurance, xv, 11–12, 16, 23, 74, 210, 211, 218, 229, 242, 276, 291, 301, 355, 381, 384, 385 Unequal Democracy: The Political Economy of the New Gilded Age (Bartel), xxiv Union Carbide, 189 United Automobile Workers (UAW), 57 United Kingdom, 21, 129, 214 austerity in, 220, 231 economic mobility in, 18, 19 financial crisis response in, 171, 362–63 privatization in, 176, 316, 364 United Nations Development Program (UNDP), 22 United States: alternative futures of, 289 average tax rate in, 72–73 battle of ideas in, 154–55, 157–59, 162–86 changing social patterns in, 14–15 class distinctions in, xvi–xvii, 20, 180, 292 consumption in, 13, 54, 84–85, 86, 89, 104–6, 183, 233, 234, 235, 244, 311, 380, 385 cost of living in, 366 crime in, 15 economic history of, 4–5, 6 economic mobility in, xv, 4, 5, 18–19, 25, 94, 117, 147, 265, 267, 307 educational attainment in, 55 family stresses in, 10, 14, 26, 95, 106, 169–70 global influence of, xii, 137–38, 143–44, 145, 155, 254, 277–78 globalization’s effect in, 62, 63, 64, 184 income inequality in, 2, 3, 4, 7–8, 9, 22, 24, 25, 26, 27, 29, 30, 53, 54, 55, 56, 57, 71, 72, 77, 79–80, 81, 85, 86, 127, 153, 178, 183, 202, 233, 240, 241, 267, 294–95, 296, 297, 298, 299, 300, 311, 328, 332, 335 inequality cycle in, xi, xii, xiv, xx, xxii, 3–4, 18, 31, 76, 77, 82, 86–89, 91, 267 infant and maternal mortality in, 14, 302, 303 international comparisons to, 21–24, 25, 52, 73, 97, 98, 183, 309, 366 labor force polarization in, 8–9, 56, 79, 80, 133, 277 liberty in, 190 life expectancy in, 14, 303 lifetime inequality in, 26, 311 living standards in, xii, 14–15, 16, 24, 25, 26, 95, 98, 99, 183–84, 240, 266, 267, 268 median income in, 22, 295–96, 297, 299, 300 neighborhood segregation in, 75–76 opportunity in, xv, 3, 4, 17–20, 25, 75–76, 94–95, 108, 116, 117, 126, 127, 160, 265, 266, 268, 273, 275, 282, 287, 290 poverty in, 16–17, 26, 27, 38, 84, 298, 305, 306, 311, 332; see also poor value system of, xv, xvii, xx, 144, 187, 266, 288, 289, 292 wealth distribution in, 2, 3, 7, 8, 13–14, 24, 25, 32, 38, 56, 70, 72, 73, 76, 80, 82, 91, 93, 108, 147, 167, 171, 172, 202, 275, 295, 384 see also economy, U.S.; government, U.S.; politics, U.S.


Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America) by Louis Hyman

asset-backed security, bank run, barriers to entry, Bretton Woods, business cycle, card file, central bank independence, computer age, corporate governance, credit crunch, declining real wages, deindustrialization, diversified portfolio, financial independence, financial innovation, fixed income, Gini coefficient, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, late fees, London Interbank Offered Rate, market fundamentalism, means of production, mortgage debt, mortgage tax deduction, p-value, pattern recognition, profit maximization, profit motive, risk/return, Ronald Reagan, Silicon Valley, statistical model, technology bubble, the built environment, transaction costs, union organizing, white flight, women in the workforce, working poor, zero-sum game

Always the choice to lend was at the same time a choice to borrow, and that choice was determined by a combination of risk and return—that is, yield on the investment. This process of investment is not unique to debt, it is the foundation of our capitalist system. The current financial crisis stems from the same source as the large capital poured into consumer credit: a frantic drive for yield. Capital sloshed about in the past few years from the technology bubble to the housing bubble, as investors sought safe (but always better than average!) returns on their money. Money poured into the riskiest tranches of mortgage-backed securities, not from malice, but for a simple increase in return over a treasury bond. As this book goes to press, the world’s great capital reserves have fled the equity markets for American federal debt. If this crisis is going to end, there must be more productive places to invest than in the U.S. federal government’s debt.


pages: 575 words: 171,599

The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund by Anita Raghavan

airport security, Asian financial crisis, asset allocation, Bernie Madoff, British Empire, business intelligence, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, delayed gratification, estate planning, Etonian, glass ceiling, high net worth, kremlinology, locking in a profit, Long Term Capital Management, Marc Andreessen, mass immigration, McMansion, medical residency, Menlo Park, new economy, old-boy network, Ponzi scheme, risk tolerance, rolodex, Ronald Reagan, short selling, Silicon Valley, sovereign wealth fund, stem cell, technology bubble, too big to fail

Unlike Kumar, whose speech was clipped and who rarely engaged in pointless small talk, Goel enjoyed an easy camaraderie with Rajaratnam. Their conversations were freewheeling and they kidded each other like brothers. While Rajaratnam and Goel had stayed in touch intermittently during the eighties and nineties, their friendship blossomed after Goel started working at Intel’s Treasury department in January 2000. In 2003, reeling from the aftershocks of the collapse in the technology bubble, Galleon closed its California office. Rajaratnam asked Goel to do him a favor: could he keep an eye out for the happenings in Silicon Valley? He told Goel he was interested in learning about the ups and downs of the real estate market and getting a sense of people’s moods. The questions seemed innocuous enough. Goel was happy to oblige an old friend he admired. He promised to keep his eyes peeled.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, beat the dealer, Bernie Madoff, Black-Scholes formula, British Empire, business cycle, buy and hold, Claude Shannon: information theory, 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, Edward Thorp, family office, financial independence, fixed income, Flash crash, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, quantitative easing, quantitative trading / quantitative finance, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

See Russian financial crisis of 1998 Spear, Leeds & Kellogg (SLK) Specialists Special situation investing Spinoffs. See also Special situation investing Static hedging Statistical arbitrage strategy Statistical prediction Sticky businesses Stops Subprime mortgages/bonds Systematic trend-following strategy Systematic value approach TABX index Tangible book value (TBV) Tangible common equity Taylor, Martin Technical Analysis (Edwards and McGee) Technology bubble. See also Dot-com bubble TED spread Thames River Capital Management Thorp, Edward firsts achieved by gambling experiments and strategies option pricing model statistical arbitrage strategy warrant pricing model Time arbitrage Time horizons Time value Trade implementation Traders, hiring Trade size. See also Kelly criterion Trading around a position Trading book rules Trading pits, changes since electronic trading Trading rules vs. guidelines Trading style development Trend following Trend-neutral model Trend vs. countertrend methodologies Trinity Industries 200-day moving average Tyco Value and Special Situation Investing course Value at Risk (VAR) Value investing Value Investors Club Value-weighted indexes Vidich, Joe Volatility Volatility assumption Volatility vs. risk Warburg Securities Warrants Weighted indexes Wells Fargo Williams, Greyson Wolfe, Tom Woodriff, Jaffray on data mining on fund capacity statistical prediction research Woodriff Trading Worst of option XLP index You Can Be a Stock Market Genius (Greenblatt)


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, business cycle, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Meriwether, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, MITM: man-in-the-middle, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, 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

It is worth summarizing the list of such crises we have already discussed: the defaults on Third World debt in 1982; the stock market crash of 1987; the thrifts failures and junk bond collapse culminating in 1989 and 1990; the Mexican debt crisis in 1994; the Asian financial crisis in 1997; the Russian default in 1998; the collapse of Long-Term Capital Management, also in 1998; and the bursting of the high-technology bubble beginning in 2000. Even given this list, the 2008 crisis, as noted, was much worse. Partly it had to do with excess dollars around the world. There was a rapidly rising flow of capital from overseas countries like China, which had increased its reserves of dollars to several trillion dollars, making funds available for borrowing in the United States at low rates. A high savings rate in China and several other nations, where business and consumers spent less than they could on goods from outside their borders, contributed to huge trade surpluses as local companies took more dollars in than they paid out.


pages: 650 words: 204,878

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

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

By 1865, after studying the fi ner points of his business and realizing the great potential to service the unsettled Northwest interior, Hill became an agent of the Northwest Packet Co. before becoming a representative of the St. Paul and Pacific Railroad. In 1869, he started his own transportation and fuel firm, notable for being the first to bring coal to the St. Paul area. This was period of intense growth for the railroad industry. The promise of a new technology encouraged overinvestment not unlike the Internet technology bubble of the late 1990s. At the time, St. Paul was having its first experience with railroads. It was unsuccessful, with 100 miles of track built “into space which were said to begin and end nowhere,”5 according to one account. After the venture went bankrupt for debts of $30 million and “a few streaks of rust and a right of way” as its only assets, Hill swooped in and acquired the property in 1878 for $100,000.6 So was born the railroad that would eventually become the Great Northern.


pages: 1,373 words: 300,577

The Quest: Energy, Security, and the Remaking of the Modern World by Daniel Yergin

"Robert Solow", addicted to oil, Albert Einstein, Asian financial crisis, Ayatollah Khomeini, banking crisis, Berlin Wall, bioinformatics, borderless world, BRICs, business climate, carbon footprint, Carmen Reinhart, cleantech, 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, Elon Musk, energy security, energy transition, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, fear of failure, financial innovation, flex fuel, global supply chain, global village, high net worth, hydraulic fracturing, income inequality, index fund, informal economy, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), James Watt: steam engine, John von Neumann, Kenneth Rogoff, life extension, Long Term Capital Management, Malacca Straits, market design, means of production, megacity, Menlo Park, Mikhail Gorbachev, Mohammed Bouazizi, mutually assured destruction, new economy, Norman Macrae, North Sea oil, nuclear winter, off grid, oil rush, oil shale / tar sands, oil shock, Paul Samuelson, peak oil, Piper Alpha, price mechanism, purchasing power parity, rent-seeking, rising living standards, Robert Metcalfe, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, Silicon Valley startup, smart grid, smart meter, South China Sea, sovereign wealth fund, special economic zone, Stuxnet, 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, William Langewiesche, Yom Kippur War

Vinod Khosla, a prominent cleantech venture capitalist has said that venture capital will do to energy what it did to the old IBM-dominated computer industry and the old AT&T-dominated phone business: undermine the established companies, redefine the business model, and spawn a host of major new competitors. (To be sure, the U.S. Justice Department helped that “undermining” with its far-reaching antitrust cases against both companies.) Others have a different perspective. Robert Metcalfe sees the possibility of a green tech and global-warming bubble that will end with a crash. But from a big-picture perspective, that will accelerate the development of new technologies. “Bubbles accelerate innovation,” said Metcalfe. And one spin-off from innovation is “surprises.”17 Actual experience has been mixed. There have been some strategic sales and some high-profile IPOs that rival Internet or information-technology start-ups. But the general learning for members of the venture community is that energy is a harder road than they had thought from their experience in other sectors.


pages: 1,202 words: 424,886

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

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

In June 1999, the Federal Reserve embarked on a campaign to raise interest rates in order to quell the rapid pace of economic growth and the rampant pace of speculative fervor building up in the equity market (the Fed did not target the stock market per se, but the market’s impact on economic growth). The Fed continued to raise interest rates for many months, and in early 2000 the Fed’s actions began to work their way into the U.S. financial system, transmitting through a number of channels, causing financial conditions to tighten dramatically. Indeed, the technology bubble of 1999–2000 burst, sending technology stock prices sharply lower and inducing so-called negative wealth effects. This resulted in a weakening of consumer spending. In addition to the stock market decline, the yield spread between corporate bonds and Treasury bonds began to widen sharply, particularly the spread between low-grade corporate bonds and Treasuries. In response, credit became scarcer as lenders tightened lending standards and investors refrained from investing in all but the best and most creditworthy companies.